From a humble beginning in the 1960's in Egypt, Islamic banking has witnessed a significant development in terms of growth and size. With 15 per cent -20 per cent growth annually, Islamic banking has widened its horizons to all major parts of the world. Islamic banking is now operating in more than 75 countries of the world.
THE THEORETICAL WORK: With Islamic resurgence throughout the Muslim world in the 1940s and 1950s, a serious attention was given to the social, political and economic dimension of Islamic system and the idea of Islamic banking or interest-free banking arose.
In the pre-Islamic era financing principles were either riba-based or mudarabh and musharakah-based. Since Interest (riba) is prohibited in Islam, the jurists of the early-Islamic period closely examined the feature of mudarba and mushraka and developed a detailed framework of juridical opinion in regard to these two types of arrangement to make them fully compatible with shariah. The abundance of juridical opinions of these two types of arrangement actually laid the foundation of the modern Islamic banking theory.
Among the earliest proposal for Islamic banking, one was made by Qureshi (1946) in his book Islam and Theory of Interest. He suggested that both Islamic bank and entrepreneur can create partnership. However, his notion of partnership was unclear as he suggested that capital will be provided by one party and work will be done by the other while profit and loss will be borne by two parties. Ahmed (1952) in his book Economics of Islam, reiterated the same view with a proposal for establishing Islamic banks on the basis of joint stock company with limited liabilities. He held the view that customer could deposit their capital on the basis of partnership. Later contributions such as Uzair's (1955), Irshad (1964) Al- Arabi (1966) also suggested that mudrabah should be the main principle for Islamic banking.
Siddki (1985 - in Urdu language published in 1968) provided elaborate theoretical foundation of Islamic banking and detailed framework of financial intermediation. His proposed Islamic banking mode on the basis mudaraba and musharakha classified the operations of Islamic bank into three categories: Service-based on fees, commission and other fixed charges, financing on the basis of mudarbah and partnership and service provided free of charge
Chapra (1985) proposed the concept of Islamic banking on the same PLS (profit and loss sharing) basis and for the first time he promoted the idea that Islamic financial institutions are investment institutions rather than typical financial institutions. His idea of banking was in line with the proposal of earlier scholars and provided a much more fertile ground for profit and loss sharing arrangements in the banking models. He further developed the idea that Islamic banks should serve the public interest rather than individual or group interest.
Hence, they should play a social-welfare-oriented role rather than a profit maximising role. Contemporary writings also emphasised that Islamic banking should participate activities towards achieving the socio-economic objectives of poverty eradication, equal distribution of wealth and income and crediting ample employment opportunities which can best be achieved thorough PLS techniques
PLS-based models, such as two-tier mudaraba, were the fundamental principle for banking in the earliest theory. Under this theory, Islamic banks as intermediaries would avoid interest from all their operations and rely on partnership and profit-sharing instead. They can operate demand deposits like their conventional counterparts and like banks, offer other services against fees.
However, practitioners of Islamic banks, especially, in the Arab world did not see much scope in this model. It was also challenged by scholars as regards its application in modern banking system as it lacked ability to provide financing for consumer goods and goods supplied to government and industry etc. Therefore, during the 1970's and 80's, a significant development occurred in terms of proposing other principles that are shariah-complaint in one hand and are capable of meeting the demands of growing customers who wanted the same sort of products they used to get from conventional banks, on the other. The most significant development during that period was the introduction of sale-based principals. Based on the Quranic verses (2:275) which clearly distinguished bai (trade) and riba (interest), the Fiqh scholars mentioned following five forms of deferred sales which became the cornerstone of non-PLS-based principles in Islamic banking and granted added capacity to Islamic finance to offer liability creating financing or debt-based financing :
1. Salam Sale - In this type of sale, the price is paid at the time of contract and the object of sale becomes due as debt in kind.
2. Muajjal Sale - The object of sale is delivered at the time of contract but the price becomes due as debt.
3. Istisna Sale - The price is paid at the time of contract and the object of sale is manufactured and delivered later.
4. Ijarah Sale - Sale of the usufruct of the assets in exchange of periodic rentals.
5. Murabaha - Sale with known profit which may or may not create debt.
FROM THEORY TO REALITY: While the first theoretical work began in the 1940s, the experimental work in this regard did not start until 1960. In 1963, the Mit-Ghamr Islamic Savings Bank (MGISB) started in Egypt which is regarded as the first Islamic bank in the world.
However, a number of scholars, such as Wilson, Traute and Siddiki, pointed out that a number of interest-free saving and loan societies are reported to have been established in the Indian subcontinent during 1940s. According to Traute (1983) and Wilson (1983), an attempt was made to establish an Islamic bank in the late 1950s in a rural area in Pakistan, though this had no lasting impact.
On July 25, 1963, a pioneering experiment, the Mit-Ghamr Islamic Savings Bank (MGISB), started in the county of Mit-Ghamr in Egypt. The purpose was to mobilise the idle savings of the majority of the Muslim Egyptian population without violating the laws of the Shari'ah and to provide them with halal returns on their savings as well. The experiment proved quite successful and the savings mobilisation was impressive. It came to an end in February 1967 after only three and a half years due to political reasons beyond its control.
In 1963, Malaysia established Pilgrims Fund Corporation or Tabung Haji, which started operation with the objective of enabling Malay Muslims to save gradually for expenditure during Hajj (pilgrimage), facilitating active and effective participations in investment activities that are permissible in Islam through their savings. In 1973, The Phillipine Amanah Bank was also established to enable Muslims to meet some of their financial needs without involving interest.
Institutional involvement began in 1970s and the Islamic Development Bank (IDB) was established. It was founded in 1973 by the Finance Ministers at the first summit of the Organisation of the Islamic Conference with the support of the king of Saudi Arabia at the time and began its activities on October 20, 1975 at Jeddah, Saudi Arabia. It's initial share capital was supplied by its member countries. The main objective of IDB is to foster economic development and social progress of the member countries and Muslim communities individually as well as jointly in accordance with the principles of shariah.
The first private commercial Islamic Bank 'Dubai Islamic Bank' was established in 1975 by a group of Muslim businessmen from several countries. In 1977, Faisal Islamic Bank was established in Egypt and Sudan. During the same year Kuwait Finance House was set up by the Kuwaiti Government.
Within ten years since the establishment of Dubai Islamic Bank, more than 50 Islamic banks came into being not only in Muslim countries but also in some of the Europe countries. Islamic banking has spread its horizon to all major parts of the world. Islamic banking is now operating in more than 75 countries of the world. The countries which are witnessing higher growth of this sector are: Malaysia, Iran, Bangladesh, Pakistan, and Indonesia, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates. Moreover, a number of Western countries are now concentrating on Islamic banking. In the UK, along with Islamic windows, a full-fledged Islamic bank named 'Islamic Bank of Britain' has been set up. To tap into this growing market, large conventional banks that have opened Islamic windows include HSBC, Barclays, BNP Paribus, Citi Group, Deutsche Bank, Standard Chartered, and the Royal Bank of Scotland.
Efforts have also been made to introduce Islamic bank at state level as well. Islamisation of banking system in Pakistan started in 1979 and continued until 1985 through a series of ordinances issued by the central government and a number of circulars issued by the State Bank of Pakistan. Iran introduced usury-free banking laws in 1983 and nationalised all banks in the country.
Sudan launched Islamic banking in 1984 and made entire financial sector Islamic in 1989. Malaysia introduced Islamic banking in 1983 by introducing Islamic Banking Act. Malaysia's effort in this regard is unique as it introduced dual banking system which was first of its kind. Indonesian government established Bank Muamalat, first Islamic bank in the country, in 1994.
ISLAMIC BANKS IN BANGLADESH: The first Islamic bank in Bangladesh was set up in 1983. In fact, it is the first Islamic bank in the South East Asia region. Since then, this sector has grown significantly in the country. There are eight full-fledged Islamic banks, 19 Islamic banking branches of eight conventional commercial banks and 25 Islamic banking windows in seven conventional commercial banks.
According to Bangladesh Bank, growth of deposits is more in Islamic banks than in conventional banks. In 2013, Islamic banks' deposit growth was 25.83 per cent compared to 20.58 per cent in conventional banks. At the end of July-September 2014 quarter, deposits, investments and surplus liquidity of Islamic banking industry grew by 3.58 per cent, 2.90 per cent and 26.24 per cent respectively.
The author, a banker, has a
post-graduate degree in Islamic Banking, Finance and Management from the
United Kingdom.
akbar.chowdhury@yahoo.com
© 2026 - All Rights with The Financial Express
