Banks are considered among the vital arteries of the present societies and one of the main pillars of the contemporary economy. The modern banking was started in the late of 18th century in Europe. Interest (riba), whose validity and invalidity had been disputable among philosophers and economists for a long time, finally became a basic part of the Western economy by the defense of Adam Smith (1723-1790) in the book of “The Wealth of Nations”; it is known as the holy book of the economy of investment.
Western banks entered the Muslim world alongside colonialism and dispersed widely over there. The first bank in Ottoman Empire was founded in Istanbul by the wealth of English investors during financial crises of this empire in 1856.
Those banks carried plenty of economic and social damages which had roots in the theory of materialism, economic liberalism and ignoring the religious values in the West.
Following the spread of Islamic awakening, there was a vital need of financial foundations which deal with consideration of religious values and the economic principles of Islam. Despite massive defense from the prevalent banking system derived from the West –even by some prominent Muslim figures-, this system was never welcomed by the Muslim masses. The expert jurists and pious sharp-eyed scholars made clear the incompetence and damages of the Western banking system by invincible and firm reasons and proofs, establishing the theoretic foundation of Islamic banking.
Due to this mounting demand, the first efforts were made in India, then in Pakistan, Egypt and Malaysia in the shape of small finance houses. They were striving to protect the legal restrictions and fulfill the financial needs of their customers, then saving them from the wide nets of usurers and traditional banks.
Usually, the Savings Fund of Mit Ghamr (a city in the north of Egypt) is introduced as the first modern Islamic bank which was founded by a famous social activist, Dr. Ahmad an-Najjar in 1963. Few years later, the Islamic Development Bank was founded by the Organization of Islamic Cooperation (OIC) in 1975. Then various Islamic banks and financial institutions were established in the Arab states of the Persian Gulf and Southeast Asia. Islamic banking had a surprising increase standing firmly before the common banking system.
After 2000, institutions like the International Islamic Financial Market (IIFM) and the Islamic Financial Services Board (IFSB) emerged which aim to coordinate Islamic banks and standardize them. It paved the way for the development of Islamic banking more than past. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) is also one of the reputable organizations that has played a major role in growth of Islamic banking by designing and formulating legal standards and auditing for banks and financial institutions.
Meanwhile, when the Muslims of the Western countries saw the development of Islamic financial institutions in the East and they demanded Shar’ee banking system more strongly. Subsequently, universities and institutions of higher education in the West began teaching Islamic economy and finance and researching on this topic.
After the 2008 global financial crisis, the industry of Islamic banking remained safe to a great amount from the damages and aftershocks of the crisis. It directed the attention of the Western world and the organizations of the International Monetary Fund applauded the power and capability of Islamic banking system; they established departments for Islamic banking in their institutions and increased their researches on the topic.
Although it cannot be claimed that all attentions to Islamic banking in the West are the results of the satisfactory of those societies with the excellence of Islamic banking system, rather some of them just follow mere financial purposes and they want to preserve the competition and their predominance on the trustable financial market of Muslims, as a great number of them lives in the West. But there is no doubt that a big part of this attention is due to realization of the potential capability of Islamic banking and finance.
However, the industry of Islamic banking faces many challenges yet. This new-fangled industry needs more advancement and assimilation with the requirements of the current era. As well as its empowerment for pure competition with the common banks, gaining public trust and fulfilling the needs of the society is so necessary. One of the other challenges that has been faced by Islamic banking system since its birth until now, is the practical and theoretical objects on some products and services of such banks. In the view point of some contemporary jurists and scholars, all services of Islamic banks which are claimed to be according to the Shar’ee principles cannot be declared in accordance with the rulings of Islamic jurisprudence completely; therefore these Ulama and experts are vacillated to call interest-free banks ‘Islamic’.
Apart from it, there are some products of those banks which can be correct from a juridical viewpoint, but doubtlessly these products are in accordance with the financial intentions of Islamic Shar’eeah as they cannot fulfil the great objectives of peaceful and Islamic economy. This is against the opinion of those Ulama and scholars who support Islamic banking and have played a key role in its development.
Supervision and controlling the operation of bank system and application of juridical laws in Islamic finance, in a way to ensure its safety, is another important challenge before Islamic banking system. Fortunately, some serious and good steps have been taken to rebuff the errors. Drafting and designing the standards of Islamic audit and formation of consulting and Shar’ee supervision boards in central banks and centers of banks which control approbation and execution of regulations; they have decreased the anxiety to a great amount.
Mohammad Imrân Bani-Kamâl
Alumnus of Fiqh & Fatwa Specialization of Darululoom Karachi