- Expansion (1976 to the early 1980s): Islamic banking spread from the Gulf eastward
to Malaysia, and westward to the UK. More than 20 Islamic banks were established,
including international and intercontinental institutions. Islamic banking associations
or consultancy bodies also broadened their operations.
- Maturity (1983 to date): The Arab world was confronted by economic setbacks, including
slowdowns in oil revenues, the relative strength of the US dollar, higher interest
rates, and capital outflows. At the same time, Arab banks opened branches in the
United States and Islamic banking practices were implemented in both Pakistan and
Iran.
The earliest theoretical model for Islamic banking was based on two-tier Mudarhaba,
with profit-sharing replacing interest in bank-depositor as well as bank-borrower
relationship. Islamic banks would be financial intermediaries, like conventional
commercial banks, only they would purge interest from all their operations, relying
on partnership and profit-sharing instead. During 1980s Islamic banking and finance
received broad-based academic and professional attention. Several universities started
teaching the subject and encouraged research resulting into hundreds of PhD dissertations,
some of them in the universities in Europe and America. Numerous seminars and conferences
were held in places as wide apart as Kuala Lumpur, Dhakka, Islamabad, Bahrain, Jeddah,
Cairo, Khartoum, Sokoto (Nigeria), Tunis, Geneva, London and New York.
A number
of research centres made Islamic
economics their field, paying special attention
to money and banking. Some of these launched academic journals providing forums
for exchange of views and dissemination of information on a worldwide scale. The
original model was further developed and refined and the liabilities side saw frameworks
put in place for handling trust funds, venture capitals, and financial papers based
on Ijara leasing Salam forwards and Murabaha mark-up. The special techniques
for launching Sharia’ah compatible mutual funds were also developed in this period.
This involved selecting companies whose shares could be traded as they did not violate
any Sharia’ah norms. Islamic banks, led by DIBPL, are now becoming
fully competitive in all areas of banking activity as they shed their image of being
in existence only for Muslims and to meet religious obligations. In the process,
Islamic banking is being increasingly recognised as a fairer alternative to traditional
commercial banking and is consequently attracting many non-Islamic customers – motivated
by the perceived superiority of the system.
Despite Islamic Banking’s early beginnings, it has progressed to become one of the
fastest growing economic sectors in the world. Over the last three decades Islamic
banking and finance has developed into a full-fledged system and discipline reportedly
growing at the rate of 15 percent per annum. Today, Islamic financial institutions,
in one form or the other, operate in over 75 countries of the world. Already there
are more than 300 institutions representing the fast growing industry of Islamic
Finance. Together, they account for an estimated worth of over $250 billion in assets.
Besides individual financial institutions operating in many countries, efforts have
been underway to implement Islamic banking on a country wide and comprehensive basis
in a number of countries. The instruments used by them, both on assets and liabilities
sides, have developed significantly, making it possible for these institutes to
participate in money and capital market transactions. In Malaysia, Bahrain, Pakistan
and a few other countries of the Gulf, Islamic banks and financial institutions
are working as a system parallel with the conventional system.
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