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Brief History of Islamic Banking (Copyright)

Brief History of Islamic Banking (Copyright)

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Published by Zuber Karim

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Published by: Zuber Karim on Mar 01, 2010
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04/04/2013

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Zuber Karim
 
MFP 201
Introduction
To understand Islamic Banking necessitates understanding its roots. This is so because anyParadigm is always constructed on preceding foundations. If the foundations are strong theinstitution is strong also. The whole picture of Islamic banking cannot be visualised until itsfoundations are not explored historically. Once the history is contextualised a brighter pictureemerges of the whole notion of Islamic Banking.Most writers restrict the history of this banking sector to post-1963 era. They rarely ventureout to the pre- sixty-three era. Thus, a vague picture emerges from their writing about the wholeIslamic Banking saga.Therefore, this work attempts to explore the roots of Islamic Banking from the onset of theIslamic history and transverse the time till the present Credit Crunch period and beyond. It will alsoexplore financial engineering and learn lessons. It
avoids
discussing the institutional structure of the Islamic financial industry due to fear of prolongation which will result in loss of focus anddefeat of goals of this paper. Thus the work intends to arrive at a sound conclusion by focusing onafore-mentioned aims and objectives.
Islamic Banking: The Past
Islam, unlike other faiths, always promoted economic activity. Since many migrants to thenew city of Madīnah lost their wealth due to migration, for their economic alleviation, the Prophetstarted a new initiative. This project was termed as
 Ikhā
(to make brothers) or 
Muwākhāt 
(Mutual© Zuber Karim 2009.1
 
Zuber Karim
 
MFP 201
Brotherhood)
.
Al-Mubārakpurī describes this Prophetic initiative as ‘unique in the history of theworld’.
1
 This was so because of the ‘magnetic personality of the Holy Prophet’ as Abdullah Yusuf Ali reasons.
2
This move could never have been conceived before Islam. To increase economicincentive, this brotherhood also encompassed inheritance of wealth.
3
However, this was atemporary provision until the Qur'ānic Law of Inheritance was revealed which entrusted the rightsof inheriting to the demise’s relatives.
4
Abdur Rahmān ibn ‘Auf, a Makkan who migrated toMadīnah can be cited as a good example of this. Anas reports that the Prophet established brotherhood between Ibn ‘Auf and Sa’d. Sa’d who was married to two wives, was ready to forsakeone by divorce and offer her to his ‘ new brother’ in marriage. But the ‘brotherblessed his offer and asked him to guide him to the market instead.
5
The economic activity can be further evidencedfrom above, where Abdur Rahmān ibn ‘Auf refuses his brother's economic welfare offer and asks to be guided to the market. A closer read of Abū Bakr's words reveal further that the Makkans wereentrepreneurs. Al-Dimashki and H. Ritter (1917) quote his words, “If there were trade in Paradise, Iwould choose cloth-trade because Abū Bakr al-Siddīq was a fabric-merchant”.
6
Looking at the scale of economic activity that the above elucidates, it would be absurd tosuggest that there did not exist any financial intermediation or banking activity. MohamedAbdelhamid (2005, p.5) admits the fact of existence of such type of intermediation, stating,“although modern Islamic banking is considered to be a recent development, Muslims were able toaccess financial systems operating without interest since the beginning of Islamic history”.
7
Onecannot ignore what Björklund et. al. (2004, p.17) stated, “Although banks did not exist, innovativefinancial instruments were a part of commercial life. A frequently used expression is that they were'bankers without banks'.”
8
 © Zuber Karim 2009.2
 
Zuber Karim
 
MFP 201
These institutionalised Muslim 'bankers without banks', would engage in different financialintermediary activities. Labib, while exploring the topic, expounded that, “savings or checkingaccounts were not new to the Islamic world, and pawning, loaning, trusts, money changing, transfer of credit, and transfer of debts were all important divisions of business life in any large Islamic city.Yet neither the government nor the busi-nessmen took upon themselves the task of founding a state bank which would take care of business transactions well and efficiently”.
9
 One would not find itstrange, to envisage these businessmen creating small entities with sole intention of providing
banking solutions.
Whilst investigating year 320/926, Adam Mez braves by calling these entities as
banks
 because of their provision of 
banking services,
reassuring that, “There was therefore plenty of employment for bankers, and it is not surprising that in Isfahān there were 200 banks in theBankers' Bazaar-for these too sat together”.
Thus, it would be unsurprising envisaging some early attempts towards an even larger institutionalised bank. This can be assumed through carefully investigating the economic boomenjoined by the Muslim lands. Such boom would surely give rise to creativity and development inthe early 'banking' industry. Two types of innovative banking institutes are recorded as signs of such attempts. One of which, as noted by Labib, was
Mawḍiʿ al-Hukm
, into which the State usedto deposit its funds for certain specific purposes. The second of which, again scribed by the samewriter, and referred to by other earlier writers such as Amari, Dozy, Canale, and Quatremere was the
Maʿūnah
, literally meaning help and support, a kind of private bank which loaned out state capital.
These financial institutions enjoyed transformations and additions, too. Fischel (1937)mentions that from 928, a special
 Diwān al-Jahābidhah
was instituted, henceforth, many peopleare recorded to bear this title.
 This institution was further developed as pointed out by Ray (1988?)© Zuber Karim 2009.3

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