Islamic Banking
The practice of Islamic financial activity, such as acceptance of deposits and the rejection of interest, dates back to the days of Prophet Muhammad (PBUH). People entrusted their money to the Prophet himself, or Abu Bakr Seddique, the first Caliph of Islam.
But, a modern Islamic banking system as we have come to know it only began to evolve towards the end of 1960s when several Muslim countries started to put the idea into practice.
The early models of seventies struggled to ensure full compliance with Islamic principles. During the same period, Islamic accounting - an essential tool for the success of Islamic banking, was being developed. In 1973, the first meeting of the Islamic Organisation Conference (IOC) held in Jeddah, discussed the desirability of abolishing fixed interest rates and creating financial systems based on Islamic beliefs.
Dubai Islamic Bank was established in 1975, as the first full-fledged Islamic bank. The success of DIB challenged the much perceived notion that Islamic finance was unsuitable for the modern banking needs. And, ever since many more Islamic banks have been founded under the profit - loss sharing system. Today, Islamic finance counts amongst the fastest growing global industries. This has prompted many conventional banks, both local and international to offer Sharia complaint finance services. These services are offered either within the broader framework of conventional banking or through subsidiaries and in some cases by full conversion to the Islamic mode.
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 acted as financial intermediaries like the 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. finance. Hundreds of PhD dissertations, some of them in the universities of Europe and America facilitated an extensive study of various dimensions of Islamic finance.
Numerous seminars and conferences were held in places as wide apart as Kuala Lumpur, Dhaka, Islamabad, Bahrain, Jeddah, Cairo, Khartoum, Sokoto (Nigeria), Tunis, Geneva, London and New York. A number of research centres focused exclusively on Islamic economics, paying special attention to money and banking. Publication of research in various academic journals and research papers created a broad platform for exchange of views and dissemination of information at a global level.
The original model was further fine refined. 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 processes for launching Sharia 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 norms.
Islamic banks, led by Dubai Islamic Bank, are becoming increasingly competitive in all the aspects of modern banking activity. Contrary to the stereotypes that consigned Islamic finance to some sort of religious obligation for Muslims, the Sharia compliant framework is increasingly being recognised as a fairer and a superior alternative to conventional banking. This understanding has been instrumental in attracting many non-Muslim customers