Islamic banking and finance
Islamic banking, Islamic finance, or Sharia-compliant finance is banking or financing activity that complies with Sharia and its practical application through the development of Islamic economics. Some of the modes of Islamic finance include mudarabah, wadiah, musharaka, murabahah, and ijarah.
Sharia prohibits riba, or usury, generally defined as interest paid on all loans of money. Investment in businesses that provide goods or services considered contrary to Islamic principles is also haram.
These prohibitions have been applied historically in varying degrees in Muslim countries/communities to prevent un-Islamic practices. In the late 20th century, as part of the revival of Islamic identity, a number of Islamic banks formed to apply these principles to private or semi-private commercial institutions within the Muslim community. Their number and size has grown, so that by 2009, there were over 300 banks and 250 mutual funds around the world complying with Islamic principles, and around $2 trillion was Sharia-compliant by 2014. Sharia-compliant financial institutions represented approximately 1% of total world assets, concentrated in the Gulf Cooperation Council countries, Bangladesh, Pakistan, Iran, and Malaysia. Although Islamic banking still makes up only a fraction of the banking assets of Muslims, since its inception it has been growing faster than banking assets as a whole, and is projected to continue to do so.
The Islamic banking industry has been lauded by devout Muslims for returning to the path of "divine guidance" in rejecting the "political and economic dominance" of the West, and noted as the "most visible mark" of Islamic revivalism; its advocates foresee "no inflation, no unemployment, no exploitation and no poverty" once it is fully implemented. However, it has also been criticized for failing to develop profit and loss sharing or more ethical modes of investment promised by early promoters, and instead merely selling banking products that "comply with the formal requirements of Islamic law", but use "ruses and subterfuges to conceal interest", and entail "higher costs, bigger risks" than conventional banks.
History
Usury in Islam
Islamic finance is based upon the belief that "all forms of interest are riba and hence prohibited". The word "riba" literally means "excess or addition", and has been translated as "interest", "usury", "excess", "increase" or "addition".According to Islamic economists Choudhury and Malik, the elimination of interest followed a "gradual process" in early Islam, "culminating" with a "fully fledged Islamic economic system" under Caliph Umar.
Other sources, do not agree, and state that the giving and taking of interest continued in Muslim society "at times through the use of legal ruses, often more or less openly," including during the Ottoman Empire.
Still another source states that during the "Islamic Golden Age" the "common view of riba among classical jurists" of Islamic law and economics was that it was unlawful to apply interest to gold and silver currencies, "but that it is not riba and is therefore acceptable to apply interest to fiat money—currencies made up of other materials such as paper or base metals—to an extent."
In the late 19th century Islamic modernists reacted to the rise of European power and influence and the European colonization of Muslim countries by reconsidering the prohibition on interest and whether interest rates and insurance were not among the "preconditions for productive investment" in a functioning modern economy. Syed Ahmad Khan, argued for a differentiation between sinful riba "usury", which they saw as restricted to charges on lending for consumption, and legitimate non-riba "interest", for lending for commercial investment.
However, in the 20th century, Islamic revivalists, Islamists, and other Islamic activists worked to define all interest as riba, to enjoin Muslims to lend and borrow at "Islamic banks" that avoided fixed rates. By the 21st century this Islamic banking movement had created "institutions of interest-free financial enterprises across the world". Loans are permitted in Islam if the interest that is paid is linked to the profit or loss obtained by the investment. The concept of profit acts as a symbol in Islam of equal sharing of profits, losses, and risks.
The movement started with activists and scholars such as Anwar Qureshi, Naeem Siddiqui, Abul A'la Maududi, Muhammad Hamidullah, in the late 1940 and early 1950s.
They believed commercial banks were a "necessary evil," and proposed a banking system based on the concept of mudarabah, where shared profit on investment would replace interest. Further works specifically devoted to the subject of interest-free banking were authored by Muhammad Uzair, Abdullah al-Araby, Mohammad Najatuallah Siddiqui, al-Najjar and Muhammad Baqir al-Sadr.
Since 1970
The involvement of institutions, governments, and various conferences and studies on Islamic banking were instrumental in applying the application of theory to practice for the first interest-free banks. At the First International Conference on Islamic Economics, "several hundred Muslim intellectuals, Sharia scholars and economists unequivocally declared... that all forms of interest" were riba.By 2004, the strength of this belief was demonstrated in Pakistan—when a minority member of the Pakistani parliament questioned it, pointing out that a scholar from Al-Azhar University, had issued a decree that bank interest was not un-Islamic. His statement resulted in "pandemonium" in the parliament, a demand by members of the leading Islamist political party to immediately respond to these allegedly derogatory remarks, followed by a walkout when they were denied it. When the upset members of parliament returned, their leader, stated that since the Pakistan Council of Islamic ideology had decreed that interest in all its forms was haram in an Islamic society, no member of parliament had the right to "negate this settled issue".
The council's decree notwithstanding, over the years a minority of Islamic scholars have questioned whether riba includes all interest payments. Others have questioned whether riba is a crime like murder and theft, forbidden by Sharia and subject to punishment by human beings, or simply a sin to be inveighed against, with the reprimand left to God, since "neither the Prophet nor the first four caliphs nor any subsequent Islamic government ever enacted any law against riba."
With an increase in the Muslim population in Europe and the current lack of supply, opportunities will arise for the important role which Islamic finance plays in Europe's economy. In particular, Luxembourg is emerging as a leader and hub for Islamic funds.
Banking
While revivalists like Mohammed Naveed insist Islamic banking is "as old as the religion itself with its principles primarily derived from the Quran", secular historians and Islamic modernists see it as a modern phenomenon or "invented tradition".Early example: [Zubayr ibn al-Awwam]
It is argued that in practice the fundraising business of Zubayr ibn al-Awwam was banking with zero interest. Zubayr pioneered this practice by technically modifying the money-keeping service to be a loan which Zubayr was obligated to pay off, while he also got privilege to manage the money he kept to do his business. Zubayr's practice of accepting deposits while not charging any interest meant Zubayr died with an inflated debt of 2,000,000 Dinar. However, Zubayr invested his clients' deposits in his own lucrative businesses, so his inheritors managed to settle his debts while still leaving an inheritance for his family. After his death, his son Abdullah ibn Zubayr sold the property for 1.600.000 dinar. This practice was allowed according to classical scholar consensus, such as Ibn Taymiyyah in his Majmu Fatawa.Early banking
According to Timur Kuran, by "the tenth century, Islamic law supported credit and investment instruments" that were "as advanced" as anything in the non-Islamic world, but prior to the 19th century there were no "durable" financial institutions "recognizable as banks" in the Muslim world. The first Muslim majority-owned banks did not emerge until the 1920s.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, and forms of capital, capital accumulation, cheques, promissory notes, trusts, transactional accounts, loaning, ledgers and assignments. Muslim traders are known to have used the cheque or ṣakk system since the time of Harun al-Rashid of the Abbasid Caliphate. 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.
20th century
In the middle of the 20th century, some organizational entities were found to offer financial services complying with Islamic laws. The first, experimental, local Islamic bank was established in the late 1950s in a rural area of Pakistan. It charged no interest on its lending.In 1963, the first modern Islamic bank on record was established in rural Egypt by economist Ahmad Elnaggar to appeal to people who lacked confidence in state-run banks. The profit-sharing experiment, in the Nile Delta town of Mit Ghamr, did not specifically advertise its Islamic nature for fear of being seen as a manifestation of Islamic fundamentalism, which was anathema to the Gamal Nasser regime. Also in that year the Pilgrims Saving Corporation was founded in Malaysia. Although not a bank, it incorporated basic Islamic banking concepts.
The Mit Ghamr experiment was shut down by the Egyptian government in 1968. Nonetheless, it was considered a success by many, as by that time there were nine similar banks in the country. In 1972, the Mit Ghamr Savings project became part of Nasr Social Bank, which as of 2016 was still in business in Egypt.