Transcription of Development of the Islamic Banking System
1 Journal of Islamic Banking and Finance June 2015, Vol. 3, No. 1, pp. 12-25 ISSN 2374-2666 (Print) 2374-2658 (Online) Copyright The Author(s). 2015. All Rights Reserved. Published by American Research Institute for Policy Development DOI: URL: Development of the Islamic Banking System Ahmad Alharbi1 Abstract This paper will illustrate the historical Development of Islamic Banking industry. In addition, it will provide information about the Islamic Banking Development in many countries around the world. This information provides important context for understanding modern-day financial practices. Keywords: Development , Historical, Islamic banks, Regulators, Region JEL Classification: G21; F37; P120 1.
2 introduction Islamic banks can be defined as a financial institution that (a) abides by shariah principles in all of its activities through its role as a financial intermediary between savers and investors;(b) provides Banking services within the framework of legitimate contracts; and (c) achieves a balance between economic and social return. And the beginnings of Islamic Banking , in its wider sense, date back to the early days of Islam and the rise of the Islamic Empire. The boom in the internal and external trades in the dawn of Islam led to the creation of Islamic financial tools such as deposits, money transfers, checks, bills of exchange, and so forth to cope with these commercial developments.
3 Later, the Europeans adopted these Muslim practices and continued to evolve them until modern days. In Islamic countries, Islamic financial practices withered gradually due to the weakening of the Islamic empire, until these practices were replaced by the Western financial model in the early 20th century. However, Islamic financial practices emerged again in the middle of the of the same century. In this paper we try to track the Development of the Islamic Banking industry and to see if there are a real boom in the industry worldwide. 2. Historical Development of Islamic Banks The origin of Islamic finance dates back to the dawn of Islam 1,400 years ago.
4 Historical books written during the early years of Islam indicated that during the 1stcentury of Islam (AD 600), some forms of Banking activities existed that were similar to modern Banking transactions. Furthermore, these ancient books revealed that Al-Zubair bin Al-Awam, one of the most famous personalities in Islam, was accepting deposits from people as loans and investing that money. At the time of his death, his debt had reached 2,200,000 dinar2, as counted by his son Abduallah. Also, he had several branches in different parts of the Islamic 1 La Trobe University, Bundoora, Melbourne, Australia, 3086.
5 Email: 2 The dinar was in the era of the Prophet, peace be upon him, equal to 12 dirham s. The dinar at present time equals to four grams and a quarter of gold (24 carat). branches Al-Zubair Bank. This form of Banking transaction took place5 centuries prior to the first documented Banking transactions in Italy, which many researchers consider the origin of modern Banking . In addition, during the rule of Marwan bin Al-Hakam (the fourth Umayyad caliph) in the 1stcentury of Islam (8th century AD) goods sukuk were widely used as a method of payment to the state s soldiers and employees (Al-Marwyne 1985; Nasser 1996, ). Ahmad Alharbi 13 Empire to return deposits to their owners some contemporary scholars call this collection of Furthermore, the writings of Al-Djahshiyari (1938), Al-Kubaisi (1979), Al-Ali (1953, 1981), Al-Duri (1986, 1995), Fischel (1992), and Al-Hamdani (2000) show that there were bankers called sarraffeen or sayarifah (singular sarraf) or jahabidhah (banks called dawawin al- jahabidhah) in the Islamic Empire.
6 (Chachi 2005). in the Islamic Empire. Also, according to Chachi (2005), during the Abbasid-caliphs period (from the 8th century) the term sarraffeen was used to refer to financial clerks, experts in matters of coins, skilled money examiners, treasury receivers, government cashiers, money changers, or collectors to designate the well- known, licensed merchant bankers in those times. In addition, the first check in history was drawn by a sarraf in Baghdad in the 4th century AH (10th century AD), and it was cashed by the prince of Aleppo, Saif Al-Dawla Al-Hamadani. Perhaps De Roover (cited in Chachi 2005) says it most clearly: There can be no Banking where there are no banks (p.)
7 10). Indeed, the historical records indicate that there were banks in those days. Nasser (1996, pp. 15 16) argues that Muslims contributed greatly to the Development of Banking practices because, during the Islamic empire, there was 1. a legislative System , which included firm rules and regulations to govern all transactions; 2. a strong judicial System , which was capable of enforcing all legitimate contracts; 3. different kinds of commercial papers and banknotes that were widely accepted, such as promissory notes (reqaah al-sayarifah), bills of exchange (suftaja), and goods sukuk; and 4. licensed bankers, who had offices or agencies in different parts of the Islamic Empire and accepted deposits, assigned debt(hawalah), exchanged money, issued banknotes, and performed many other services.
8 Udovitch (cited in Chachi 2005) discussed some of these transactions as well: The suftaja always and the hawala usually occurred as a written obligation, and were thus the first and most important forms of commercial credit papers in the Medieval Near East (p. 12). Beginning with the decline of the Islamic Empire from about the 12th Century BC, the rule of the sarraffeen began to weaken. Their loss of power within society can be attributed to several internal and external factors. This allowed Western influence to increase throughout Islamic countries, especially through colonization. Under European influence, many Islamic countries began to adopt a Western Banking model in the 19th century.
9 This started by opening branches of foreign banks or by establishing banks within countries. For instance, in Egypt, the first conventional bank opened its doors in 1856 under the name Bank of Egypt. This bank was a branch of an English bank but was closed in 1911. The National Bank of Egypt was established in 1898 by Ralph Suarez and Constantine Salvagos (Jewish businessmen) with an English partner; the bank is still in operation today(Nasser 1996; National Bank of Egypt 2009). This trend continued in all Islamic countries until the middle of the 20th century, when the calls to establish Islamic financial institutions gained momentum with the independence of some colonized Islamic countries.
10 In Islamic societies, scholars have three opinions regarding the European Banking model (Nasser 1996, pp. 23 24): 1. All bank activities are halal (adhere to shariah). Supporters of this opinion, such as the founders of Bank of Egypt, use weak arguments to present their points of view. 2. Bank activities are haram (contradictory to shariah principles) but necessary. Some scholars argue that banks play an important role in the economy and therefore they see no harm in establishing banks based on the European Model, even though some of their activities are haram. This argument is strong because it is based on one of the basic Islamic juristic rules:al-drurat tubeah al-mahdurat (necessity knows no law).
