History of Islamic finance
The
financial industry has historically played an important role in the economy of
every society. Banks mobilize funds from investors and apply them to
investments in trade and business. The history of banking is long and varied,
with the financial system as we know it today directly descending from
Florentine bankers of the 14th – 17th century. However, even before the
invention of money, people used to deposit valuables such as grain, cattle and
agricultural implements and, at a later stage, precious metals such as gold for
safekeeping with religious temples.
Around
the 5th century BC, the ancient Greeks started to include investments in their
banking operations. Temples still offered safe-keeping, but other entities
started to offer financial transactions including loans, deposits, exchange of
currency and validation of coins. Financial services were typically offered
against the payment of a flat fee or, for investments, against a share of the
profit.
The
views of philosophers and theologians on interest have always ranged from an
absolute prohibition to the prohibition of usurious or excess interest only,
with a bias towards the absolute prohibition of any form of interest. The first
foreign exchange contract in 1156 AD was not just executed to facilitate the
exchange of one currency for another ata forward date, but also because profits
from time differences in a foreign exchange contract were not covered by canon
laws against usury.
In
a time when financial contracts were largely governed by Christian beliefs
prohibiting interest on the basis that it would be a sin to pay back more or
less than what was lent, this was a major advantage.
Islamic banking is
banking or banking activity that is consistent with the principles of sharia (Islamic law) and its practical
application through the development of Islamic economics. As such, a more
correct term for Islamic banking is sharia compliant finance.
Sharia prohibits acceptance
of specific interest or fees for loans of money (known as riba, or
usury), whether the payment is fixed or floating. Investment in businesses that
provide goods or services considered contrary to Islamic principles (e.g. pork
or alcohol) is also haraam
("sinful and prohibited"). Although these prohibitions have been
applied historically in varying degrees in Muslim countries/communities to
prevent unIslamic practices, only in the late 20th century were a number of
Islamic banks formed to apply these principles to private or semi-private
commercial institutions within the Muslim community.
As of 2014, sharia compliant financial institutions
represented approximately 1% of total world assets By 2009, there were over 300
banks and 250 mutual funds around the world complying with Islamic principles
and as of 2014 total assets of around $2 trillion were sharia-compliant.
According to Ernst & Young, although Islamic Banking still makes up only a
fraction of the banking assets of Muslims,
it has been growing faster than banking assets as a whole, growing at an
annual rate of 17.6% between 2009 and 2013, and will grow by an average of
19.7% a year to 2018
Islamic Finance and banking is as old as the religion itself with its principles primarily derived from the Quran. An early market economy and an early form of mercantilism, sometimes called Islamic capitalism, was developed between the eighth and twelfth centuries. The monetary economy of the period was based on the widely circulated currency the gold dinar, and it tied together regions that were previously economically independent.
A number of economic concepts and techniques were applied in early Islamic banking, including bills of exchange, partnership (mufawada, including limited partnerships, or mudaraba), and forms of capital (al-mal), capital accumulation (nama al-mal), cheques, promissory notes, (Muslim traders are known to have used the cheque or ṣakk system since the time of Harun al-Rashid (9th century) of the Abbasid Caliphate., trusts, transactional accounts, loaning, ledgers and assignments. Organizational enterprises independent from the state also existed in the medieval Islamic world, while the agency institution was also introduced during that time. Many of these early capitalist concepts were adopted and further advanced in medieval Europe from the 13th century onwards.
Usury
in Islam
The word "riba" has been defined as interest, usury, excess,
increase or addition, which according to Shariah terminology, implies any excess
compensation without 