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Islamic finance today is recognized as one of the fastest growing segments of the financial industry. The growth of Islamic Banking, for one, has outpaced conventional banking over the past decade and now accounts for more than 20% of banking system assets in 10 countries: Saudi Arabia and the United Arab Emirates included. While the Islamic finance industry is fairly young; the core concepts date back to the birth of Islam in the 6th century. These include the prohibition of Interest (Riba), steering clear of Uncertainty based transactions (Gharar) and avoiding Gambling (Maysir).
Modern day Islamic finance, as is known today, emerged as an industry only in the 1960’s and 1970’s, in large part because of the efforts by early 20th century Muslim economists who envisioned alternatives to conventional Western economics aiming to address global economic issues. This defines the philosophy being committed to social justice, equitable distribution of wealth, and concern for the poor.
The first Islamic bank was established in Egypt in 1964 – Mit Ghamr, incorporated as a savings project in Egypt. Mit Ghamr was a co-operative organisation in which the depositors also had a right to take out small loans for productive purposes. In addition, the project attracted funds to invest in projects on a profit-sharing basis. This led to the founding of Nasser Social Bank.
Dubai was one of the first hubs that responded to this Islamic finance movement and in 1975, the Dubai Islamic Bank was established. This bank was a modern Islamic bank that was privately owned and operated. It was followed by the setting up of the Kuwait Finance House in 1977 which was majorly owned by Government ministries. Two additional banks were founded in 1977, the Faisal Islamic Banks of Sudan and the Faisal Islamic Bank of Egypt.
During the 1980s, Iran and Sudan initiated reforms in their respective countries resulting in the removal of all forms of interest from their national banking systems. At the same time, Southeast Asia saw the establishment of Bank Islam Malaysia, founded in 1983. This worked on the principles established by The Muslim Pilgrims Savings Corporation (1963) which helped pilgrims in Malaysia perform Haj (later renamed Tabung Haji).
Malaysia has since played a fundamental role in the modernization of Islamic banking practices. It also initiated the first modern Sukuk, issued by Shell MDS in 1990. An important agreement was signed in 2001 between institutions in Bahrain, Indonesia, Sudan, Saudi Arabia, and Malaysia to create the International Islamic Financial Market (IIFM). The main goal of the IIFM was to support the creation of an international secondary market for trading of Sukuk and other Islamic financial instruments.
The last few years, following the global credit crisis and economic slowdown, bought Islamic Finance to the fore with many believing it to be a viable parallel, one which avoids excesses within the system. This has been a major reason for the sector to find favour beyond Islamic nations – 2014 saw the issuance of a Sukuk by the United Kingdom, the first Sovereign Sukuk issued by a non OIC country. The UK was very quickly followed by Luxembourg and South Africa.
The Islamic Finance movement has been revolutionary and it remains to be seen over the coming years, how the sector shapes up in the wake of increasing regulatory challenges and a strive for a wider reach.