History of Islamic Banking and Finance
Background
The history of Islamic banking goes back to the earliest reference point of Islam in the 7th century. The first spouse of prophet Muhammad’s (PBUH), Khadija, was a businesswomen, and the Prophet Mohammad (PBUH) went about as a specialist for her business, utilizing a significant number of similar standards utilized as a part of contemporary concepts.
In the Middle Ages, exchange and business activity in the Muslim world depended on Islamic rules as account standards, and these thoughts spread all through Spain, Baltic States, and Mediterranean, giving a portion of the premise to western standards. From the 1960s to 1970s, the modern world accepted the system.
A large number of the teachings of Islam deal with economic affairs. One of the five questions Muslims will face on Judgement Day will be: “How did you earn your wealth and how did you spend it?” Our earnings must come from halal means (permissible according to Islamic Law), and must be spent on halal categories of expenditure. The necessities of governing an expanding empire led early Muslim writers to discuss halal methods for raising revenues for the state, as well as the obligations of the state (according to Islamic law) to spend on the public. Thus, public finance is a sophisticated and well developed field within Islamic scholarship. Modern Islamic economics is based on this history of Islamic banking and on these early Islamic teachings. Islamic banking history has also been strongly shaped by the colonization of Islamic lands, struggles for independence, and the need to respond to assertions of the superiority of Western knowledge.
A video on historical perspectives of Islamic banking and finance is presented in figure 1.
Fig 1: History of Islamic banking and finance. Credit: AIMS, UK
Islamic banking is a modern financial system that follows the principles of Islamic or Sharia law. It also known as ethical banking and halal financing. It is an alternative system of finance that operates in accordance with Islamic religious principles. Since the emergence of Islam as a new universal religion about 1400 years ago, it has been practiced by more than 2 billion people across the world. In many respects, Islamic Law goes beyond conventional norms for other religions because its practices must align with certain rules set out in the Quran. These rules are called Sharia or ‘God’s Law’ and form part of the framework for social conduct that Muslims must follow in their everyday lives.
Fundamental Elements
Knowledge of permanent and enduring value is that which permits us to realize our potential as human beings. This is recorded in the Quran and translated into human experience by the Prophet Muhammad (s.a.w.) as captured in the Hadeeth (records of the sayings and actions of the Prophet or his companions). Other knowledge can be relevant and important in particular historical circumstances. For example, knowledge of castle building, trolabes and sailing ships was important in an earlier era. In contemporary times, the development of Islamic economics represents a Muslim response to the challenge created by the ascendance of the West. Increasing materialism, changing attitudes towards poverty, and other effects of the development of capitalism are aptly summarized in the transition from the Biblical “love of money is the root of all evil” to Shaw’s “lack of money is the root of all evil”. Since the economic system (capitalism, communism, socialism) is a major feature of Western identity, engagement requires a Muslim response in these terms. This is complicated by the fact that economics is not a high priority in Islam. As put by Mufti Shafi (1978):
There is no doubt that Islam is opposed to monasticism and considers economic activities to be permissible, desirable, and even necessary and required at times in the history of Islamic banking. Economic progress is desirable for men, and the earning of a Halal livelihood is required after the religious requirements. At the same time, it is equally self evident that in Islam the fundamental problem of man is not economic and economic progress is not a goal or objective of life for humans. Mufti Shafi goes on to explain that in Islam, economic activity is a means to an end, and not an end in itself. This difference in purpose is fundamental, and is the basis for all other differences between Islamic and Western views on economic affairs. There is no doubt that many Islamic teachings relate to economic affairs, and there exists a vast literature on many aspects of economic affairs, starting from the earliest periods of Islamic history. A survey and summary of the economic thought of early Muslims is given. In Sadeq and Ghazali (1992) and Islahi (2008) provides an excellent literature survey of Muslim economic thought in general. Nonetheless, economics was never considered in isolation, as a separate subject, since it is always a means to an end, and never an end in itself. Numerous specific goals or ends for economic activity will be discussed in what follows. As a broad general principle, Islamic systems in all spheres are built with the goal of promoting community feeling and cooperation among all members of society:
Other verses (Q8:62, 63) state that all the treasure in the world cannot purchase love between hearts. This prioritization of community feeling over material wealth differentiates Islamic systems from the competitive self-interest based individualistic systems at the heart of modern economic theory.
Concept of Halal and Haram
Islam has introduced concept of Halal (lawful) and Haram (unlawful) in its economic system. In fact the foundations of the Islamic economy have been laid on this concept. This concept reigns supreme in the realm of production as well as consumption. Certain means of earning livelihood and wealth have been declared unlawful such as interest, bribery, gambling and games of chance, speculation, short weighing and short measuring, business malpractices, etc. Unlawful means of earning are strictly forbidden and a follower of Islam is permitted to earn through lawful and fair means. Similarly in the field of consumption certain items of food are unlawful such as dead animals, blood, swine flesh and animals slaughtered in the name other than that of Allah. Even expenses on certain items such as drinks, narcotics, debauchery, prostitution, pornography, things that promote obscenity and vulgarity, lotteries and gambling are strictly inadmissible.
Now let us glance through relevant verses of the Quran and Ahadith of Muhammad (PBUH), the Prophet of Islam, to highlight in brief the concept of halal and haram.
Verses from the Qur’an
From Taditionns of the Prophet (PBUH)
1.Unlawful Earnings
2. Bribery
3. Pristitution and Soothsayer
4. Wine, Fresh of Pig and Carcass
5. Usury
6. Intoxicants and Gambnling
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