The first instance of Islamic banking came into the picture in Egypt in 1963. The pioneering efforts by Ahmad El Najjar brought this bank into existence, whose key principle was profit sharing (non-interest based philosophy of Shariah). By the end of 1976 there were 9 such banks in the country. These banks neither charged nor paid interest but their activities were mostly limited to trade and industries where these banks invested directly or as partners of depositors. Hence, functionally these banks were working more as financial institutions rather commercial banks. In 1971, Nazir Social Banks is known to be the first commercial bank in Egypt, though its charter never made references to Shariah. The first bank explicitly based on Shariah principles was established by the Organization of Islamic countries (OIC) in 1974, called Islamic Development Bank (IDB). This bank was primarily engaged in intergovernmental activities for providing funds for development projects running into member countries. Its business model involved fees for financial services and profit sharing financial assistance for projects.

With time, during the 1970s several Islamic banks came into existence, including the Dubai Islamic Bank (first Islamic private commercial bank, 1975), the Faisal Islamic bank of Sudan (1977) and the Bahrain Islamic bank (1979). Others from the Asia Pacific region include the Philippine Amanah Bank (PAB), formulated under presidential decree. Pakistan also had an established Islamic banking system at the time which unfortunately didn’t survive.

Within a decade of the first private bank coming into existence in Dubai, the global industry had more than 50 such banks in the same country. Most banks were a result of private initiatives, whereas the first concrete government initiative was taken by the Iranian government, when in 1985 no bank was permitted to give or take interest. Interests was replaced with service charges of 4-8% and guaranteed minimum profits.

The true phase of development of Islamic financial institutions actually occurred in the 1980s. Earlier initiatives were more inclined towards interest free Islamic banking, but the emergence of financial systems has evolved in the 80s. However, non payment of interest still remains the pivotal part of Islamic banking, whereas principles of Islamic finance such as property rights, sanctity of contracts and the rules of sharing risk are also supported. In 1985, the High Council of OIC (Organization of Islamic Conference) declared takaful /Islamic insurance as Shariah compliant. The new, wider spectrum of Islamic finance covers not only banking activities but also capital markets, capital formation and other financial instruments and intermediaries.

The biggest change in terms of adaptability came in 1991 when the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was established to advise on Islamic finance standards all over the world. Later, the development of uniform standards was supported by other organizations such as Islamic Financial Services Board (IFSB) in Malaysia in 2002.

Since then, Islamic finance is spreading all over the world at a tremendous pace from virtual anonymity to becoming a powerful competitive force in the world today.

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Comments (9)

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• 2011-12-02 19:34:45 | Shahpoor fazily

  Alhamdulillah now a days Islamic banking growing very fast in the world, these are because of hard working of Ulamas.

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• 2011-10-15 01:36:45 | SULEIMAN ABDULKAREEM DARULIMAN  - MALLAM

  ISLAMIC BANKING IS THE BEST WAY AND THE SOLUTION FOR FINICIAL CRISES AS IF WE PRACTICE USURY {RIBA} THEN WE MUST BE READY FOR FIGHT A FIGHT THAT WE MUST LOSE FUHGTING YOUR CREATOR
  JAZAKUMULLAH ALL OF YOU
  WASSALAMU ALAA MANIT TABAAL HUDA AMEEN
  

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• 2011-10-07 13:52:14 | abdulrazaq busari bello  - ISLAM IS THE BEST

  Islamic is the best religious in on heaven and earth.

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• 2011-09-26 05:32:42 | Abu Zaki  - History Of Islamic Banking

  After almost half century of Islamic Banking Development, the Islamicity of the products are still being question. This is actually due to the fact that the Islamic Banker still could not free them from the concept of "cost of fund". Cost of Fund implicate the price of money. Then money is being traded . There is no different with conventional banking. Price of money is "interest". Islamic Banks are financial intermediaries not trader of money. They bridges those who have excess money and those who needs money.

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• 2011-08-28 08:26:21 | fathima

  still the interest and profit is not clear in the islamic finance
  

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