Name: Abdul Razzaque

Roll No: 2K21/BBAE/5

Subject: Money & Banking
Topic: Evolution of Islamic_Banking
Assigned By:Maa'm Asfa Sheikh

Introduction:
Muslims boast that theirs is a religion that is not technically a “religion” at
all: it’s a way of life. Being a Muslim, as it turns out, is a major lifestyle
choice. Islam is not limited to a set of rituals and worships that promise
heaven and God’s gratification in the life hereafter. It also gives precise
guidelines on how to lead one’s life.
It has laws in every aspect of life. Business and finance is also covered
in Islam. Islamic banking, as I have explained later, is a banking system
that is interest-free and totally Sharia compliant.
In a world filled with “Islamophobia” (!), Islamic banking is actually on the
rise, mainly in the developed world.
This report explains why this is so the privileges of Islamic banking. It
sheds lights on the evolution of Islamic banking worldwide and how its
current trends.
Islamic banking system has emerged as a competitive and a viable
substitute for the conventional banking system during the last three
decades. It is especially true for Muslim world where presently Islamic
banking strides at two separate fronts. At one side, efforts are also
underway to cover the entire financial systems in accordance to Islamic
laws (Shariah). At the other side, separate Islamic banks are allowed to
operate in parallel to conventional interest based banks. Pakistan and
Malaysia are the two good examples of above mentioned approaches.
Both countries adopted different tracks for the same ultimate destination
of developing full fledge viable Islamic financial system and produced
quite interesting results. The Government of Pakistan tried to cover the
entire financial system to an interest free system through presidential
orders at a national level. However, the overnight practice of islamization
didn’t achieve the required success. Most of the efforts have either been
reversed or further developments have been stopped. Malaysia opted for
the alternative gradual way of developing and implementing Islamic
banking system. Starting with one Islamic bank it later allowed
conventional financial institutions to offer and participate in Islamic
banking products and services through their existing staff and branches.
The country is now actively involved in designing new Islamic financial
instruments for capital and money market transactions. This study
provides the comparative analysis of implementing two opposite Islamic
banking approaches, one in Pakistan and other in Malaysia along with
their acquired results.

Brief History & Evolution of Islamic Banking:

Although mediation goes back hundreds of years, alternative dispute
resolution has grown rapidly in the United States since the political and
civil conflicts of the 1960s. The introduction of new laws protecting
individual rights, as well as less tolerance for discrimination and injustice,
led more people to file lawsuits in order to settle conflicts. For example,
the Civil Rights Act of 1964 outlawed “discrimination in employment or
public accommodations on the basis of race, sex, or national origin.
Laws such as this gave people new grounds for seeking compensation
for ill treatment. At the same time, the women’s movement and the
environmental movements were growing as well, leading to another host
of court cases. The result of all these changes was a significant increase
in the number of lawsuits being filed in U.S. courts. Eventually the
system became overloaded with cases, resulting in long delays and
sometimes procedural errors. Processes like mediation and arbitration
soon became popular ways to deal with a variety of conflicts, because
they helped relieve pressure on the overburdened court system.
 The first instance of Islamic banking came into the picture in Egypt in
1963. The pioneering efforts by Ahmad El Najjar brought this bank into
existence, whose key principle was profit sharing (non-interest based
philosophy of Shariah). By the end of 1976 there were 9 such banks in
the country. These banks neither charged nor paid interest but their
activities were mostly limited to trade and industries where these banks
invested directly or as partners of depositors. Hence, functionally these
banks were working more as financial institutions rather commercial
banks. In 1971, Nazir Social Banks is known to be the first commercial
bank in Egypt, though its charter never made references to Shariah. The
first bank explicitly based on Shariah principles was established by the
Organization of Islamic countries (OIC) in 1974, called Islamic
Development Bank (IDB). This bank was primarily engaged in
intergovernmental activities for providing funds for development projects
running into member countries. Its business model involved fees for
financial services and profit sharing financial assistance for projects.
With time, during the 1970s several Islamic banks came into existence,
including the Dubai Islamic Bank (first Islamic private commercial bank,
1975), the Faisal Islamic bank of Sudan (1977) and the Bahrain Islamic
bank (1979). Others from the Asia Pacific region include the Philippine
Amanah Bank (PAB), formulated under presidential decree. Pakistan
also had an established Islamic banking system at the time which
unfortunately didn’t survive.
Within a decade of the first private bank coming into existence in Dubai,
the global industry had more than 50 such banks in the same country.
Most banks were a result of private initiatives, whereas the first concrete
government initiative was taken by the Iranian government, when in
1985 no bank was permitted to give or take interest. Interests was
replaced with service charges of 4-8% and guaranteed minimum profits.
The true phase of development of Islamic financial institutions actually
occurred in the 1980s. Earlier initiatives were more inclined towards
interest free Islamic banking, but the emergence of financial systems has
evolved in the 80s. However, non-payment of interest still remains the
pivotal part of Islamic banking, whereas principles of Islamic finance
such as property rights, sanctity of contracts and the rules of sharing risk
are also supported. In 1985, the High Council of OIC (Organization of
Islamic Conference) declared takaful / Islamic insurance as Shariah
compliant. The new, wider spectrum of Islamic finance covers not only
banking activities but also capital markets, capital formation and other
financial instruments and intermediaries.
The biggest change in terms of adaptability came in 1991 when the
Accounting and Auditing Organization for Islamic Financial Institutions
(AAOIFI) was established to advise on Islamic finance standards all over
the world. Later, the development of uniform standards was supported
by other organizations such as Islamic Financial Services Board (IFSB)
in Malaysia in 2002.
Since then, Islamic finance is spreading all over the world at a
tremendous pace from virtual anonymity to becoming a powerful
competitive force in the world today.