Evolution of Islamic Banking

Evolution of Islamic Banking and Financial Institutions
The first attempt:

The concept of Islamic banking is several decades old. The first attempt to establish Islamic financial
institution was initiated in Pakistan by some pious landlord who deposited their money at no interest.
Thus this fund was loaned to some small land owners at no interest for agricultural development. But a
small charge was imposed for operational expenses. There were two reasons for which this attempt was a
failure. One is the depositors deposited the funds as one time event and because of the increasing number
of borrowers the gap between the available fund and the credit demands increased. The other reason is
that the bank staffs didn’t have autonomy over the banks operation because the depositors showed interest
in the way their fund was lent out.
The Second attempt:

The second attempt was conducted in Egypt from 1963 to 1967 through the establishment of Mit Ghamr
Savings Bank. There was also no interest on the deposits and loans. But unlike the Pakistani bank the
borrowers had to have a deposit account with the bank. The attempt soon became successful as the
amount of deposits increased.
Then the first Islamic Bank in an urban area was established named Nasser Social Bank. The bank was a
public authority and the basic purpose of the bank was to promote social concerns about granting interest
free loans to small projects on profit loss sharing basis, assistance to poor and needy students etc. Its
capital comes from the President’s extra budgetary resources, appropriation from state budget and
contribution from ministry of Awqaf. It was very similar to Mit Ghamr Savings Bank. But it also
produced normal banking services and a wide range of investment activities through equity participation.
Emergence of Islamic Banks and Financial institutions over ages:

The full-fledged history of Islamic banks and the time and purpose of their emergence are
described clearly below:
Time, place and Purpose and other
Financial Institutions particulars
Pilgrims Savings Develped for pilgrims of Malaysia

Corporation (1963 at Malaysian muslims wanted to spent their money
Malaysia) on the pilgrims that is untainted with riba.
Dubai Islamic Bank(1975 Started with 50 million Dirhams.

at Dubai) is a public limited company.
Al-Rajhi Banking To develop active relationship with major

Investment Corporation manufacturing and trading companies in Eorope
(1985 at Saudi Arabia) and US corporations.
Islamic Development Founded by several muslim countries as a

multinational corporation.
Bank( 1975, Founder To support cocial and economic development in
Government) Muslim nations
Islamic Investment Multinational Holding company

Company (1977 at To establish Mudarabahh in various parts of
Islamic countries.
Bahamas)
is a joint stock company.

Islamic Banking System
To participate in investment projects in islamic
International Holding and non islamic countries.
(1978, Luxembourg) To establish International Islamic Banks.
Dar-al-Mal-al- To foster an Islamic Financial system based on

equity and social justice.
Islami(DMI) (1981, Major activities are Islamic investments, Islamic
Geneva) solidarity and Islamic Banking operations
49% owned by Kuwait govt, remainder by private
investors.
Kuwait Finance source of liquidity was from the deposites od the
House (1978) faithful Muslims.
Large scale project Financing like real estate.
Operates banks, investment companies, financial
advisory in more than a dozen of countries.
Al- Baraka (1982) First group who obtained license to launchIslamic
banking in London.
Fastest growing.
Complete Islamization of banking at national level:

Islamization of Banking at
National Level
Establishment of
Restructure the whole
Islamic Financial
financial system
Institutions
Islamization of Islamization of
Islamic banks in banking in Iran banking in
muslim countries Pakistan
Islamic investment and

holding companies mostly in
non-Muslim countries.
Islamization of Banking in Iran:

The process of Islamization in Iran has processed in 3 phases. They are described below:
 First phase: Nationalization, restructuring and reorganization of the whole banking
system was done in this phase. Although various attempts were made for Islamization of
the banking system in Iran but the external and internal developments did not allow the
policy makers to develop plan for it.
 Second phase: In this phase some legislative and administrative steps were taken to
clearly establish a model of Islamic Banking. The law of Riba-free banking was passed in
1983 giving a very short deadline of one year to the banks to convert their deposits in the
line of Islamic law and total operations within 3 years from the date of enactment of the
law.
 Third phase: Till now this phase is continuing, began in 1986. The development is a
direct result of the political debate within Iran about the role of government in an Islamic
economy. The banking sector was used as an instrument to restructure the Iranian
economy. By this system the resources were shifted from the services and consumption to
the production sector in four ways.
i. Bank Credit to the service sector

ii. Bank Credit used to encourage the growth of the agricultural sector.
iii. Islamic banking was used to create incentives for the development of
cooperative sector spanning agriculture, industry and trade.
iv. Banking system used to finance large industrial projects in partnership
with the government.
Islamization of Banking in Iran:
Gradual Transformation of banking system from Feb 1979
The process started when the president said to remove interst from the
economy within a preiod of three years.
3 specialized cedit institutions were to remove interest from financing

operations immediately.
In 1981, separate counters were opened in the commercial bank gor accepting
deposites on a PLS basis.
Separate accounts were created for deposites received on PLS basis.
In 1981, commercial Banks were permited to issue non-interest based credit

to finance exports and imports, trading operations and Housing as well.
In June 1984, dual window operations of the banking system weer

discontinued by the government within 1 year.
If there is to be further progress, the rules must be designed in such a

manner that will have a fair chance to perform as expected.
Genesis of Islamic banking in Bangladesh:
After 5 years of declaration by the OIC at its foreign ministers meeting, in 1983 Bangladesh
established its first Islamic bank. At present it has 6 Islamic banks in Bangladesh.
1. Development of Islamic banking in Bangladesh:
Islami Bank Export Import

Bangladesh Bank Of
Limited in March Bangladesh in
1983. July 2004.
Oriental Bank
Shahjalal Islami
Bangladesh
Bank Limited in
Limited in July
2001.
1987.
Al Arafah Islami Social Investment

Bank Limited in Bank Limited in
September 1995. November, 1995
2. Islamic banking Branches in Conventional Banks:

Some of the conventional banks in Bangladesh has entered into the market of Islamic
banking. They have introduced their Islamic branches. Presently 10 conventional banks have
opened 22 Islamic banking branches alongside with the interest based branches. The separation of
Islamic banking branches includes separation of capital, accounts, staff employed and office. The
most important thing is to compliance with the Islamic Shari-ah. Some Shari-ah scholars also must be
employed to monitor the compliance. There should be annual review of the transactions carried
during the year. The staff of the banks also go through training programs in order to understand basic
Islamic principles. For all this maintenance conventional banks should have Shari-ah Supervisory
Boards for each of them.

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Evolution of Islamic Banking and Financial Institutions

The first attempt:

The Second attempt:

Emergence of Islamic Banks and Financial institutions over ages:

Pilgrims Savings Develped for pilgrims of Malaysia

Dubai Islamic Bank(1975 Started with 50 million Dirhams.

Al-Rajhi Banking To develop active relationship with major

Islamic Development Founded by several muslim countries as a

Islamic Investment Multinational Holding company

is a joint stock company.

Dar-al-Mal-al- To foster an Islamic Financial system based on

Complete Islamization of banking at national level:

Islamic investment and

Islamization of Banking in Iran:

i. Bank Credit to the service sector

Gradual Transformation of banking system from Feb 1979

3 specialized cedit institutions were to remove interest from financing

Separate accounts were created for deposites received on PLS basis.

In 1981, commercial Banks were permited to issue non-interest based credit

In June 1984, dual window operations of the banking system weer

If there is to be further progress, the rules must be designed in such a

Islami Bank Export Import

Al Arafah Islami Social Investment

2. Islamic banking Branches in Conventional Banks:

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