A history of Islamic finance
The concepts that lie behind Islamic finance are as old as the Islamic religion itself, but it wasn’t until as recently as the late twentieth century that Islamic banking developed into a distinctive financial practice that allowed both Muslims and non-Muslims to carry out banking activities in accordance with core tenets of Islamic beliefs.
Islamic banking is founded on Shariah principles, and the first financial institution to take this approach was the Social Bank in Egypt in the 1960s. It was the Egyptian Mit Ghamr savings project that established the concept of interest-free banking that would be central to Islamic finance thereafter, allowing depositors to benefit from small, short-term loans without being penalised by fines, as is often the case in financial systems based on interest.
This savings project was very successful in Egypt, being particularly noted for its effective risk management, but changing politics would ultimately lead to its closure. Nevertheless, investors and financial experts in the Islamic world had seen that the practice of interest-free commercial banking, as demonstrated by the Mit Ghamr savings project, could be viable if implemented in other countries.
Major financial institutions such as the Islamic Development Bank followed in the 1970s, aided by the oil boom in several Middle East nations, and the next few decades saw Islamic finance growing at a substantial rate – calculated by analysts at two digits growth per year since 1990. As Islamic finance spread beyond the Islamic world into Western counties and beyond, a number of major international banks have also adopted the principles, offering Islamic banking arms to customers in various countries.
With the continuing growth of Islam, as well as continuing profits from oil, interest in Islamic finance is expected to grow year upon year for the foreseeable future. The current size of assets owned is already estimated at around one trillion US dollars, and due to the rapid growth of Islamic finance, assets are expected to exceed the two trillion dollars mark within a mere five years.
The importance of assets in Islamic finance is one of the factors that helps differentiate it from other methods of banking, which tend to be primarily based on currency. This is due to the Islamic belief that money holds no intrinsic value, and is rather a means of measuring value – a principle that saw Islamic banking institutions weathering the global financial crisis better than many currency-based financial systems.
The author of this article is a part of a digital blogging team who work with brands like Fidomes. The content contained in this article is for information purposes only and should not be used to make any financial decisions.