The Islamic banking model

The origin of Islamic banking dates back to the beginnings of Islam in the 7th century. The Prophet Muhammad’s first wife, Khadija, was a merchant, and he acted as an agent for his business, using many of the same principles used in contemporary Islamic banking. In the Middle Ages, trade and business in the Muslim world was based on Islamic banking principles, and these ideas spread throughout Spain, the Mediterranean, and the Baltic States, possibly providing part of the basis for Western banking principles. . In the 1960s and 1970s, Islamic banking re-emerged in the modern world.

This banking system is based on the principles of Islamic law, also known as Sharia law, and is guided by Islamic economics. The two basic principles are the distribution of profits and losses and the prohibition of the collection and payment of interest by lenders and investors. Islamic banks do not charge or pay interest in the conventional way when the interest payment is set in advance and considered as the predetermined price of credit or reward for the money deposited. Islamic law accepts capital reward for loan providers only on the basis of a share of profit and loss, based on the variable return principle connected with the actual productivity and output of the financed project and the real economy. Another important aspect is its business characteristic. The system focuses not only on financial expansion but also on the physical expansion of economic production and services. In practice, there is a greater concentration in investment activities such as equity financing, trade financing and real estate investments. Since this banking system is based on Islamic principles, all commitments of banks follow Islamic morals. Therefore, financial transactions within Islamic banking could be said to be a culturally distinct form of ethical investment. For example, investments related to alcohol, gambling, pork, etc. are prohibited.

Over the past four decades, the Islamic banking system has undergone a tremendous evolution from a small niche visible only in Islamic countries to a profitable, dynamic and resilient international competitor. Its size worldwide was estimated to be close to $850 billion at the end of 2008 and is expected to grow about 15 percent annually. While the banking system remains the main component of the Islamic financial system, the other elements, such as Takaful (Islamic insurance companies), mutual funds, and Sukuk (Islamic financial certificates and bonds), have also seen strong global growth. According to one reliable estimate, the Islamic finance industry is now worth more than $1 trillion. In addition, the opportunity for growth in this sector is considerable. It is estimated that the system could double in size within a decade if past performance continues into the future.