In order to understand the Islamic banking framework, it is paramount to look first to the historical background of Islamic banking. It all started in the early Arab period in which during this time, most of Arabian residents, particularly in Makkah and Madinah, earned their living through commercial dealings and transactions. Makkah and Madinah were respectively the centre of international trade and agriculture in the region. Most of the people earned their living through commercial activities as traders and merchants. Thus, the practice of speculation was rampant, e.g on the rates of exchange, the load of a caravan which one tried to purchase, the yield of harvests.
Fictitious associations were formed and sale were contracted on which loans were made. It was during this time that oppression and manipulation were rampant. The wealthy merchants took advantage of the weaker traders and as a result, wealthy only circulated in the hands of the rich. The practice of riba, iktinaz (hoarding), ihtikar (monopoly), and the practice of some transactions which is associated with gambling such as bay' al-mulamasah, and bay' al-munabazah were present. Bay' al-mulamasah is a sale which is concluded by the buyer touching the asset, whereas bay' al-munabazah is a sale which is concluded when the buyer throws the stone on the subject matter. Both are prohibited due to the element of uncertainty in the contract. The people in the weaker position or the less fortunate were constantly cheated and oppressed.
Thus, what was seen during this time was the rich become richer and the poor continued to be poorer. The coming of Islam had imposed certain regulations in the conduct of their daily commercial transactions. Islam does not prohibit trade but encouraged Muslims to work hard without violating any Islamic teachings. Islam had changed the perception of the society about the concept of the creation, management and distribution of wealth. Islam teaches that the real ownership belongs to Allah the Almighty alone. The concept of wealth as a trust and amanah from God imposing certain accountability factors and both moral and religious conscience are instilled in every individual. However, Islam also recognizes the de facto ownership of a persons over things (private ownership) and the temptation to create wealth as part and parcel of human nature. Therefore, Islam promotes honesty, transparency, justice, and fairness in acquiring ownership and it is vital to safeguard the rights of others while at the same time, protect the rights of the community and the state at large.
In order to harmonise between safeguarding the rights of an individual and at the same time, protecting the interest of the community at large, Islam has introduced certain reforms in the form of trade and commerce such as establishing general principles of contract which are in accordance with the Shariah principles. This was done by scrutinising the existing contracts and eliminating any elements which are not in line with the Islamic principles and declares such contracts to be permissible. In the event where a contract applying or practising any elements which are contrary to Shariah principles and it is not modifiable, then such contracts are declared as not permissible and void. Some examples of permissible contract would be sale, mudharabah, musharakah, hawalah, and istisna' and examples of a prohibited contract would be contracts with the elements of riba.
Islamic Banking and Finance was initiated more than forty years ago during an earlier Arab period. However, the modern experience with Islamic banking only started in the early 1960s in Egypt. The pioneer for the first modern experiment with Islamic banking was the Mit-Ghamr Islamic Savings Bank pioneered by Ahmad El-Najjar. The whole experiment was done on the quiet without projecting any Islamic image for fear of being seen as a manifestation of Islamic fundamentalism, which could be associated with certain political regimes. The whole experiment started with a form of savings bank based on profit-sharing in the Egyptian town of Mit-Ghamr in 1963 and only lasted until 1967. It was model after the German savings banks adapted to the rural environment of an Islamic developing country.
The major objective of this bank is to mobilise the idle savings of the majority of the Muslim Egyptian population and provide them with returns without having to breach any teachings of the Shariah. Between this time, there were nine banks in Egypt that did not charge nor paid interest and most of the investors were engaged in trade and industry directly or in partnership with others, and shared profits with their depositors. In February 1967, the bank's operation came to an end due to political reasons. However, during the short period of the operation, the problems of rural indebtedness were reduced and borrowers no longer relied o the local moneylenders and the non-Islamic banks which charger on agreed amount of high interest which is not in line with the Islamic teachings.
Another successful experiment on Islamic banking and finance can be seen in Malaysia with the introduction with of the Pilgrims Fund Corporation or Lembaga Urusan Tabung Haji (LUTH) in 1963. The main purpose of this fund is to enable the Muslims in Malaysia to save gradually in order to support their expenditure during Hajj (pilgrimage). Other than that, LUTH also allows Muslims to have active and effective participation in investment activities that are permissible in Islam through their savings. LUTH takes up the responsibility to safeguard the interest and welfare by providing numerous facilities to pilgrims during the pilgrimage.
The Nasser Social Bank was later established in Egypt in 1971, not as a profit-oriented institution but as a social bank to serve the previously "unbankable" low group of people. This was followed by the establishment of Islamic Development Bank (IDB) in 1973 by the Organisation of Islamic Countries (OIC) as an intergovernmental bank aimed at providing funds for development projects in member countries. The IDB provides fee-based financial services and profit-sharing financial assistance to member countries. The Islamic Bank of Dubai became the first Islamic commercial bank in 1975 and in the following years, a number of Islamic banks were established mainly in the Middle East such as the Islamic Bank of Faisal in Egypt (1977), the Islamic Bank of Faisal Jordan (1978), Bank of Islamic Finance and Investment in Jordan (1978) and Islamic Investment Company Ltd. in UAE (United Arab Emirates) (1979).
In July 1996, Citibank marked a major advance in Islamic banking into the mainstream of high finance in expanding its operations by being the first international bank to open an Islamic bank in Bahrain, making it the first money-centred bank to set upon Islamic institutions. With an initial capitalisation of $20 million, the Citibank's Islamic banking facility, known as Citi Islamic Investment intermediaries with a range of products and services developed in compliance with the Islamic Shariah and sound banking practices. It was reported that CIIB had allowed Citibank to develop an internal Islamic banking expertise which can be put to use not only in the Gulf, but in South Asia, Europe and as well as in North America. http://www.articlearchives.com/banking-finance/banking institutions-system/1477712-1.html
The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was established in 1991 as an international autonomous not-profit corporate body. AAOIFI is responsible for developing accounting, auditing, ethics, governance and Shariah standards for the international Islamic banking and finance industry. With its corporate office in Bahrain, the AAOIFI is supported by over 160 financial institutions in over 40 countries. AAOFI Governance Standard 5 .
The AAOIFI played an important role in the development of Islamic banking and financial institutions due to established international standards for the industry. As at 2008, it had issued a total of sixty-eight standards for the industry which includes the Shariah standards, auditing standards, six governance standards and code of ethics. Also, among the sixty-seven standards issued by the AAOIFI include recommendation on Tawarruq (monetisation), indices and banking services, accounting standards on consolidation, governance standard on the independence of the Shariah supervisory board and governance principles for the Islamic financial institutions. It is said that AAOIFI's position in the industry is explicable. They are not only responsible for the physical growth of the Islamic banking industry but, at the same time, accountable to God to their decision. AAOIFI had taken proper initiatives to maintain the international standards used in the industry.
The standards issued by AAOIFI had been made mandatory as part of the Islamic banking an finance regulatory requirements in jurisdiction such as Bahrain, Dubai International Financial Centre, Jordan, Sudan, Syria, Qatar and Qatar Financial Centre. Although it is not made mandatory in other countries, but more and more countries such as Malaysia, Pakistan, Lebanon, Indonesia, UAE and Saudi Arabia have opted to adopt those standards.
Bank Islam Malaysia Berhad (BIMB) was the full- fledged Islamic bank in Malaysia established in 1983. The success of LUTH had enabled its contribution of 12.5% of BIMB's initial paid-up capital of RM80 million. The establishment of BIMB was made possible by virtue of Islamic Banking Act 1983 (Act 276/ which came into force in 1983. This Act allows for setting up and licensing of "Islamic banks". Islamic banks are defined as "any company which carries on Islamic Banking business and holds valid licence". "Islamic banking business" was further defined in Section 2 of the Islamic Banking Act 1983 as "banking business whose aims and operations do not involve any elements which are not approved by the religion of Islam".
BIMB carries out banking business similar to other commercial banks without breaching any Shariah principles. The banks offers deposit-taking products such as current and savings deposits under the concept of Al-Wadiah Yad Dhamanah (guaranteed custody) and investment deposits under the concept of Al-Wadiah Yad Dhamanah (guaranteed custody) and Al-Mudharabah (profit-sharing). The bank also grant financing under Al -Murabahah (cost plus), house financing under Bai' Bithaman Ajil (deferred payment sale), leasing under Al-Ijarah (leasing) and project financing under Al-Musharakah (profit and loss-sharing). At present, BIMB's total assets rose from RM325.5 million in 1984 to RM27.48 billion. Bank Islam Malaysia Berhad and its subsidiaries. Financial statements for the financial year ended 30 Jue 2009. As of April 2009, it was reported that the assets of the global Islamic finance industry were estimated to grow to around $ 1.6 trillion by 2012. Islamic finance assets seen at $ 1.6 trln by 2012.
Reference: Rusni Hassan. (2011). Islamic Banking and Takaful. : Pearson Malaysia Sdn Bhd 2012.
The origins and development of Islamic Banking and Finance
note: jazakillahu khayran kathira and thank you so much ma'am, dr rusni hassan for your auspicious and thorough guidances towards us in the whole learning sessions for Islamic Banking and Takaful course. May Allah bless you. amiin. Hopefully, this will reminds and instructs me and the rest for the next course of al-mu'amalat al-maliyah wal masrafiah al-islamiah and henceforth inshaallah.
Wallahu a'lam bissowab.