History of Modern Islamic Banking

The qualifier ‘modern’ is necessary for the above heading as the commercial legal principles and rules summarised in UKIslamicfinancelaw.com long pre-date the modern era, some originating during the earliest years of Islam and with the writing and compilation of the Qur’an as well as the example of the founding figure of the faith, Muhammad. Islamic jurisprudence was further elaborated by diverse legal schools and jurists across the Muslim world through the classical and medieval periods as these are classified by historians.

Islamic Law and Modern Economic Life

While pledging fealty to these same rules and system of law, morals and directives, commercial activity including trade, banking and a variety of forms of finance in the twentieth and twenty-first centuries has grown up and continues to evolve and innovate within the context of modern life. The subject of UKIslamicfinancelaw.com is squarely within that context together with its subject. Within that subject retail banking provided the first distinctive impetus to commercial activity consistent with the Islamic faith.

The First Islamic Banks

Scholars differ concerning the first attempt that should earn the sobriquet ‘Islamic bank.’ However a plausible starting point is the short-lived Mith Ghamr, founded in 1963 in Egypt and Tabung Hajj in Malaysia since 1967. Dubai Islamic Bank was established in 1975. A second attempt appears in Egypt with the Faisal Islamic Bank of Egypt (1976), followed by the Jordan Islamic Bank and Faisal Islamic Bank of Sudan in 1978, the Kuwait Finance House in 1979 and Bank Islam Malaysia Berhad (1983).

The Ongoing Projects of Standardisation and Harmonisation

In parallel with the development of Islamic financial institutions although chronologically later, efforts have been made and organisations created to begin to create standards and to harmonise procedures and practices in Islamic banking.

Why UK Islamic Finance Law References Islamic Law Rather than Shari’a

The qualifiers ‘Islamic’ and shari‘a-compliant for the financial institutions and transactions that are the subject of this webpage are treated as interchangeable and synonymous. Certainly each turn of phrase appears in actual usage, and probably in close to equal proportions depending upon the time and place. There is a difference in connotation, however. The former suggests a more robust and total adherence to a religion taken in its entirety. The latter suggests a more rules based or legal approach. The difference is conceptually significant although for present purposes the practical differences are not. Whilst at times in this webpage it will be convenient to refer to shari‘a and to consistency or compliance or compatibility with shari‘a where possible these distinctions and reference to ‘shari‘a’ will be omitted in favour of the qualifier ‘Islamic.’

The reason for this is that Islamic banking, finance and commerce as such betokens an open-ended enterprise with scope for change and development under rules and strictures but also guided by broader principles of prudence and fair dealing, risk-sharing and tangible economic development and growth.

Sources

Asutay, Mehmet, ‘Conceptualising and Locating the Social Failure of Islamic Finance: Aspirations of Islamic Moral Economy vs the Realities of Islamic Finance’ Asian and African Area Studies 11(2): 93-113 2012

Grassa, Rihab, ‘Shari ‘ah Governance System in Islamic Financial Institutions: New Issues and Challenges’ in Arab Law Quarterly 27 (2013) 171-187 at 174 citing B.H. Malkawi, “Shari’ah Governance of Islamic Financial Institutions: Issues and Challenges,” Working Paper (2010)

Hasan, Zulfikli, Shari‘ah Governance in Islamic Banks (Edinburgh: Edinburgh Guides to Islamic Finance, 2012)

Warde, Ibrahim, Islamic Finance in the Global Economy (Edinburgh University Press, 2010)

Wilson, Rodney, ‘Islamic Banking in the United Kingdom’ in M. Fahim Khan and Mario Porzio, eds., Islamic Banking in Europe (Edward Elgar, 2010), 212-221.