HISTORICAL DEVELOPMENT OF ISLAMIC BANKING

DEFINITION

1. Bank.

The word banking is the word derived from the word “bank”. Dictionary defines bank is by as an institution offering financial services. For example saving money, money exchange , lending and receive the exchange bill.

According to “Qamus al-Munjid fi al-Lughah wa al-A’lam”, has defined the bank as the place to put the property. Its for a specific job purpose under a specific maintenance. In addition, the Qamus also defines bank as a financial institution that conducts banking activities. It can be as accepting deposits from the public; lending to customers carry on the business of exchange bills, make equity investments and carry out the government’s financial foundation.

2. Islamic Banking.

Islamic banking means banking that is free from the practice of usury. Also, based on the principles of Islam. The emergence of Islamic banking and financial institutions, in countries majority Muslim, has created a new dimension in the economic model.

The main factor that distinguishes between Islamic banking and conventional banking is that banking should be conducted with Shariah.

HISTORY OF DEVELOPMENT IN ISLAM BANKING.

It was in the 19th century that Muslims started realize that current system of banking and economy was based on riba that is interdicted in Islam. Also, Islam forbids any form of commercial or non-commercial nature; and there should be an alternate system where its operations, products and services conforms to the principles of Shariah. For that reason, the Islamic banks had emerged in the middle of 1970s. Islamic bank have undergone into three phase of development which are Pre Islamic Era, Islamic Era and Modern Islamic Era.

PRE ISLAMIC ERA

Before the coming of Islam, banking activities has begun in the Arab but its operation has the element of riba. ecca of that time used the money either giving it to another party to trade it through alQirad or mudarabah. Then the profits is share by both party or lending the money to gain benefits which consider as riba. However, the coming of Islam has resulted in complete prohibition of all activities that involve riba. This prohibition did not prevent the development of trade that took place either nationally or internationally cited in. Then, the origin of Islamic finance dates back to the dawn of Islam 1,400 years ago. Prophet Muhammad before the time of his prophet hood had applied the concept of trust. Due to his noble conducts, the Arabs of his had appointed him as their wealth keeper.

During the time of Prophet there was also a man by the name al-Zubayr alAwwam took the role as bank. He also kept the deposits for other people. However, he modifies this form of money keeping to loans. Abd Allah bin Al-Zubayr, the son of Al- Zubayr narrated that when people brought their money to be kept by his father, he will tell that person that the money is being borrowed. Instead of deposite, as his father was worried that he might lose the money.

Al-Zubayr’s action resulted in two main objectives:

  1. By taking the deposit as loans, he has the right to use the money.
  2. If they do not use the deposit, the owner will be at a loss. So if they consider it a loan, it is safer because the borrower is responsible for repaying the money

Other than that, there were evidences that the Islamic banking foundation had started since the time of the Prophet :

  • The development of Bayt al Mal, which the central bank for Islamic countries and played a role in aiding the poor. Especially the Muslims . There is clear broad structure of principles practice by Prophet Muhammad. For example contract of mudarabah between Khadijah and Prophet , musyarakah whereby Al Sa’ib Ibn Abi Al-Sa’ib became a partner of the Prophet before his prophethood. The people practiced Bay ‘al-salam in the Medina agricultural sector in the time of the Prophet and good loans (qard hasan). That also encouraged the public to use it as a form of financing at that time.

ISLAMIC ERA IN BANKING.

The beginnings of Islamic banking, 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 creation of Islamic financial tools. Such as deposits, money transfers, checks, bills of exchange, and so forth to cope with these commercial developments. 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, Western financial models replaced this practice in the early 16th century. However, Islamic financial practices emerged again in the middle of 19th century.

MODERN ISLAMIC ERA IN BANKING.

1849.

The 19th and early 20th century societies now recognize it as the beginning of the Islamic revival era.Some of those responsible for this resurgence are Muhammad Abduh (1849); Rashid Reda (1865); Muhammad Iqbal (1975); Abul Aala Maudud (1937); Hasan AlBanna (1939); Hifz Al-Rahman (1942); Muhammad Hamidullah (1944); Anwar Qureshi (1946); Naiem Siddiqi (1948); Mohammad Yousuf Al-Dean (1950) and Muhammad Uzair (1955). Their thoughts became the impetus for Muslims to apply Islamic teachings in all aspects of life. Its including political, social and economic. Since Islam prohibits riba, the economic and banking system became the most popular topic among contemporary Islamic scholars.

1960’s.

Islamic banking system can be seen through setting of banking basic principle and Islamic finance that are to be practiced. The endeavor took place in Egypt from 1963-1967. Through the establishment of Mit Ghamr Savings Bank in the town of Mit Ghamr led by Ahmad El Najjar. In the area of the Nile River Delta, which is 40 kilometers from Cairo. Its functioned essentially as saving- investment institutions rather than as commercial banks. Although the services considered basic banking services, it was nevertheless sufficient to meet the banking needs of the surrounding community.

However, the existence of the bank was shortlived. National Bank of Egypt and Egypt Central Bank takes over the operation of Mit Ghamr Bank in mid-1967. That changed the whole bank operation to the riba system. But, the establishment of Mit Ghamr Saving Bank marked new milestone in the revolution of the modern Islamic banking system. Masyarakat menganggap bank ini eksperimen yang paling inovatif dan berjaya dengan perbankan tanpa faedah.

1970”s.

After Mit Ghamr converted into conventional system, the Nasir Social Bank was established in Egypt in 1971. It was declared as an interest-free commercial bank, although its charter made no reference to Islam or Shariah. In 1974, all finance ministers of Islamic countries held a convention on establishment Islamic Development Bank (IDB). IDB was considered to be the first international Islamic bank that was established with founding member of 22 Islamic countries. The bank’s principal office was located in Jeddah, Saudi Arabia. Also has two regional offices in Rabat, Moroco and Kuala Lumpur, Malaysia.

The purpose of the bank is to foster the economic development and social progress of member countries (OIC) and Muslim communities individually. As well as jointly in accordance with the principles of shariah. This was a landmark in the history of Islamic banking. The establishment of IDB 1974 paved the way for the establishment of other Islamic banks in various Muslim countries. During the 1970s, several parties established Islamic banks, mostly in the Arab Middle East. Shortly after the establishment of IDB in 1974, they established Bank Islam Dubai. In the year 1977, three more Islamic Banks commenced business. For example Faisal Islamic Bank of Egypt, Faisal Islamic Bank of Sudan, Kuwait Finance House and Bahrain Islamic Bank in year 1979.

1980’s.

While throughout the 1980’s, several Islamic Institutions has established. For example Qatar Islamic bank; Islamic bank Bangladesh limited; Bank Islam Malaysia Berhad; Al-Baraka Islamic Bank of Bahrain; ANZ Global Islamic Finance of UK and among others. Some countries including Pakistan, Iran, Sudan, Malaysia and Bahrain initiated efforts to implement Islamic banking. They start at larger scales in their respective countries during 1980s. In the next decade some of the conventional banks also introduced Islamic banking products and services. They operating separate Islamic banking units and divisions.

GOAL OF ISLAMIC BANKING CORPORATION

  • Eliminates the practice of banking from all banking transactions. Trough offering alternative products and services that can compete with conventional banking.
  • All business transactions are based on the Qur’an and the Sunnah. Which lead to principles of justice and equality for the benefit of society as a whole.

EASE THE UMMAH TROUGH ISLAMIC BANKING.

1. Various Islamic banking institutions.

In the past, we may not have the option to use Islamic financial products in financial activities. Such as banking, pawn tax, takaful and so on. But today there are various Islamic banking institutions as well as conventional banks that open the ‘Islamic window’ by offering products, Islamic banking products to those interested especially Muslims.

2. Islamic mortgages.

Among the Islamic financial products on the market today are Islamic mortgages which the community recognizes as al-rahnu, takaful and sukuk. Even in this era of IR4.0 technology there are also some Scholars who have taken an open stance. By providing guidance on the latest blockchain-based products, Artificial Intelligent (AI) and the Internet of Things (IoT).

Conclusion.

In the limited circumstances and situations, we may justify no alternative to the conventional financial system. This forces us to use it either willingly or not. But when there are alternative Islamic financial product alternatives in almost every banking institution in the country besides the criticism of Allah Almighty and His Messenger on usury practitioners. Do we still choose to use the conventional financial system based on usury and ignore the Islamic financial system ?

Related Article : Bank Islam Zaman Nabi dan Sahabat.

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