Historical Development Of Islamic

Finance

1/28/2024 BY MR. THABITI 1

 Historical Development Of
Islamic Finance
 650 AD - 750 AD
Islam was revealed unto the Prophet Muhammad (Peace be upon
Him) and spread through the cities of Mecca and Madina. Earlier,
these cities prospered through local business and international
trade. Interest based loans were the major source for the financial
needs. The businessmen of Mecca and agricultural farmers of
Madina met their financial requirements by participating in the
interest based loans
 After the emergence of Islam, there was a significant change in
the financial set up of these cities.
 These principles were practiced successfully in the two cities and
also spread to other parts of the world for centuries. The evidence
that proven the existence of Islamic financial system is Baitul-mal
started during that time.

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 Historical Development Of
Islamic Finance
 650 AD - 750 AD
 Mosque of Madina was used as the treasury by the Prophet
Muhammad (Peace be upon Him). But Omar (May Allah be
pleased with Him), the second caliph, established and operated
Baitul-mal as a separate entity. Zakat, land tax or Kharaj, poll tax or
Jizia, donations, property with no ownership and estates of
deceased persons who had no legitimate heirs were the major
sources of revenue for Baitul-mal.

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 Historical Development Of
Islamic Finance
 750 AD - 1900 AD
 Unfortunately there is no significant literature available on how
Islamic economics and finance had developed during 750 AD to
1900 AD. Particularly, detailed information about the financial
system during Ottoman Emperor in Turkey, Moghals in India and
Damascus is not available. One can say that there was a massive
expansion in regional, national and international trade, which was
spread over Rome, Tunisia, Turkey, India and Sumatra. It was
mostly carried on Musharaka (profit & loss sharing) basis. In
addition, the financial instruments like Sak or Sukuk, Saftija, Bai al-
wafa and Bai al-nuqud were also used and practiced.

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 Historical Development Of
Islamic Finance
 1900 AD - 2000 AD
 Now let us move on to the development of Islamic finance in
modern times. By this we mean the developments in the 19th
century.
 There was a massive expansion of the interest based banking
system after the industrial revolution in the early period of 19th
century.
 The Muslim scholars of the time took this expansion of interest
based banking seriously and called for an alternative financial
mechanism within the Shariah norms for Muslim society
 in the 1950s a local Islamic bank, which is said to be the first
modern Islamic financial institution established in Pakistan. By the
end of the 1950s the Muslim society had successfully developed
an interest-free bank based on trust financing or Mudarabah and
agency or Wakalah

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 Historical Development Of
Islamic Finance
 The demand for Shari’ah-compliant banking was met by the
establishment of Mit Ghamr Local Savings Fund in Egypt in 1963
by noted social activist Ahmad-al-Najjar and is widely considered
to be the first modern Islamic bank.
 During the same period, there were efforts in Malaysia to develop
a savings scheme for Muslims to perform the Pilgrimage which
resulted in the Pilgrims’ Savings Corporation. It was later
incorporated into the Pilgrims’ Management and Fund Board,
which was popularly known as Tabung Haji in 1969.

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 Historical Development Of
Islamic Finance
 2000 AD TILL DATE
 The rapid growth and expansion of Islamic financial institutions
raised the need of a regulatory framework at the local and
international level. Therefore, the period of 1990s and the early
period of the 21st century saw the development of international
standard setting and benchmarking institutions and agencies.
 Prominent institutions like International Islamic Financial Market
(IIFM) were established in 2001. The Accounting and Auditing
Organization for Islamic Financial Institutions (AAOIFI),
International Accounting Standards Board (IASB), the Islamic
Financial Services Board (IFSB), and Islamic International Rating
Agencies (IIRA), were established in 2002

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 Historical Development Of
Islamic Finance
 Following to the introduction and development of Islamic finance,
several financial institutions were established in various locations
to facilitate the intermediation and strengthening Islamic
financial system. The following are some of those banks and other
institutions:
i. Mit Ghamr savings project in Egypt in 1963.
ii. Tabung Haji institution in Malaysia in 1963.
iii. Bank Islam Malaysia in Malaysia in 1983
iv. Islamic development bank in Jeddah (KSA) in 1975
v. Dubai Islamic bank in UAE in 1975

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