Academic journal article UTMS Journal of Economics

Banking without Interest

Academic journal article UTMS Journal of Economics

Banking without Interest

Article excerpt


The rapid growth of Islamic banking and finance, as a financial system that respects the Islamic standards, has captured much interest (Daily, Frigha, and McMillan 2016). The Islamic finance industry has grown considerably over the last two decades and Islamic financing transactions today often have a global reach (Balz 2004). According to Banker the first Top 500 Islamic Financial Institution (TIFI) listing shows that the total of Shariah-compliant assets, based on the latest official figures, have grown by 29.7% over the past year (2011) to reach $500,482 m (Daly and Frikha 2016). This unconventional form of banking is based on that fundamental standing of Sharia2 (Islamic law) with a 131

great emphasis of its ethical and spiritual values as well as religious dimension with the aim of achieving equality in society, for the benefit of society as a whole. In view of the above, the objectives of Islamic banking are to promote, foster and develop the application of Islamic principles, law and tradition to the transaction of financial, banking and related business affairs services and to promote products based on Islamic principles (Ahmad, and Kabir 2007) Hence, the principles of Islamic banking and finance enshrined from alQur'an and Prophetic Sunnah are quite simple and can be summed up as follows:

• Any predetermined payment over and above the actual amount of principal is prohibited;

• The lender must share in the profits or losses arising out of the enterprise for which the money was lent;

• Making money from money is not Islamically acceptable;

• Gharar (deception) and Maisir (gambling) are also prohibited;

• Investments should only support practices or products that are not forbidden or even discouraged by Islam (Ibid).

While these principles were used as the basis for a flourishing economy in earlier times, it is only in the late 20th century that a number of Islamic banks were formed to provide an alternative basis to Muslims although Islamic banking is not restricted to Muslims (Institute of Islamic Banking and Insurance 2017). In particular, Islamic banks were founded to fund trading activity and in this regard, the first modern Islamic banking institutions were farmer credit unions founded in Pakistan in the 1950s and a small rural institution founded in Egypt in 1963 (Esposito 2002). This so called Mid Ghamr Saving Bank did not charge interest but has invested in trade and industry, either directly or in partnership. In other words, the bank applied the PLS principle in its work, which according to the Islamic theologians has been recognized as halal method of banking (i.e. in accordance with the Qur'anic approach). Although existed in a very short period of time, due to political reasons and under the Egyptian Government and Central Bank3 pressures to convert into conventional type of banks, the Mid Ghamr Saving Bank succeeded to attain remarkable results in its work. Islamic banking expanded in the 1970s with the founding of the Dubai Islamic Bank (1975), the Faysal Islamic Banks in Egypt and Sudan and the Kuwait Finance House (1977), the Jordan Islamic Bank (1978), and the Bahrain Islamic Bank (1978) and then spread to Malaysia and Indonesia (Ibid). Since the 1970s, some commercial banks in Europe, such as Great Britain, Luxembourg and Switzerland started Islamic banking services, through so called "Islamic-windows".

The liberalization of financial regulations, financial globalization, changes in technology, product innovation, the birth of several new Islamic markets, and the most notable of them is the financial crises stimulate the spread of the IF (Mohsin and Azmi 2016).

Nowadays, Sharia based banking and investment services are executed in several ways (Ibid):

• Islamic Bank provides services in the Muslim countries markets;

• Islamic bank is established in the west and offers its clients the services of Islamic Banking and investment;

• Islamic Bank through the western conventional banks offers its clients Islamic banking services. …

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