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History of Islamic Banking

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History of Islamic banking [edit]Introduction An early market economy and an early form of mercantilism were developed between the 8th-12th centuries, which some refer to as Islamic capitalism .[3] The monetary economy of the period was based on the widely circulated currency the gold dinar, and it tied together regions that were previously economically independent. A number of economic concepts and techniques were applied in early Islamic banking, including bills of exchange, partnership (mufa
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  History of Islamic banking [edit] Introduction An earlymarket economyand an early form of mercantilismwere developed between the 8th-12th centuries, which some refer to as Islamiccapitalism . [3] Themonetary economyof the period was based on thewidely circulatedcurrencythegold dinar , and it tied together regions that were previously economically independent.A number of economic concepts and techniques were applied in earlyIslamic banking, includingbills of exchange,partnership( mufawada ) suchaslimited partnerships( mudaraba ), and forms of capital( al-mal  ),capitalaccumulation( nama al-mal  ), [4]  cheques,promissory notes, [5] trusts(see Waqf  ), [6]  transactionalaccounts,loaning,ledgersandassignments. [7]  Organizational enterprisesi ndependent from thestatealso existed in the medieval Islamic world, whiletheagencyinstitution was also introduced during that time. [8]   [9] Many of these early capitalist concepts were adopted and further advancedinmedieval Europefrom the 13th century onwards. [4] [edit] Riba The word Riba means excess, increase or addition, which according toShariah terminology, implies any excess compensation without dueconsideration (consideration does not include time value of money). Thedefinition of  riba in classicalIslamic jurisprudencewas surplus valuewithout counterpart , or to ensure equivalency in real value , andthat numerical value wasimmaterial. Applying interest was acceptable under some circumstances. Currenciesthat were based on guarantees by a government to honor the stated value(i.e.fiat currency) or based on other materialssuch as paper or base metalswere allowed to have interest applied to them. [10] When base metalcurrencies were first introduced in the Islamic world, the question of  paying a debt in a higher number of units of this fiat  money being riba wasnot relevant as the jurists only needed to be concerned with thereal  valueof money (determined by weight only) rather than thenumericalvalue. For example, it was acceptable for a loan of 1000golddinarsto be paid back as 1050 dinars of equal aggregate weight (i.e.,the value in terms of weight had to be same because all makes of coinsdid not carry exactly similar weight).... [edit] Modern Islamic banking (1946), Naiem Siddiqi (1948) and Mahmud Ahmad (1952) in the lateforties, followed by a more elaborate exposition by Mawdudi in 1950. [ citationneeded  ] The writings of Muhammad Hamidullah 1944, 1955, 1957 and 1962should be included in this category. [ citation needed  ] They have all recognised theneed for commercial banks and their perceived necessary evil, haveproposed a banking system based on the concept of Mudarabha - profitand loss sharing. [ citation needed  ] In the next two decades interest-free banking attracted more attention,partly because of the political interest it created in Pakistan and partlybecause of the emergence of young Muslim economists. Worksspecifically devoted to this subject began to appear in this period. The firstsuch work is that of Muhammad Uzair (1955). [ citation needed  ] Another set of works emerged in the late sixties and early seventies. Abdullah al-Araby(1967), Nejatullah Siddiqi (1961, 1969), al-Najjar (1971) and Baqir al-Sadr (1961, 1974) were the main contributors. [ citation needed  ] The early 1970s saw institutional involvement. The Conference of theFinance Ministers of the Islamic Countries held in Karachi in 1970, theEgyptian study in 1972, the First International Conference on IslamicEconomics in Mecca in 1976, and the International Economic Conferencein London in 1977 were the result of such involvement. The involvement of institutions and governments led to the application of theory to practice andresulted in the establishment of the first interest-free banks. The IslamicDevelopment Bank, an inter-governmental bank established in 1975, wasborn of this process. [11] The first modern experiment with Islamic banking was undertakeninEgyptunder cover without projecting an Islamic image—for fear of being  seen as a manifestation of Islamic fundamentalism that was anathema tothe political regime. [ citation needed  ] The pioneering effort, led by AhmadElnaggar, took the form of a savings bank based on profit-sharing in theEgyptian town of Mit Ghamr in 1963. This experiment lasted until 1967(Ready 1981), by which time there were nine such banks in country. [12] This section requires expansion. In 1972, the Mit Ghamr Savings project became part of Nasr Social Bankwhich, currently, is still in business in Egypt. In 1975, theIslamicDevelopment Bankwas set up with the mission to provide funding toprojects in the member countries. [13] The first modern commercial Islamicbank,Dubai Islamic Bank, opened its doors in 1975. In the early years, theproducts offered were basic and strongly founded on conventional bankingproducts, but in the last few years the industry is starting to see strongdevelopment in new products and services.Islamic Banking is growing at a rate of 10-15% per year and with signs of consistent future growth. [14] Islamic banks have more than 300 institutionsspread over 51 countries, including the United States through companiessuch as theMichigan-basedUniversity Bank, as well as an additional 250 mutual funds that comply with Islamic principles. It is estimated thatover US$822 billion worldwide sharia-compliant assets are managedaccording toThe Economist. [15] This represents approximately 0.5% of totalworld estimated assets as of 2005. [16] According toCIMBGroup Holdings,Islamic finance is the fastest-growing segment of the global financialsystem and sales of Islamic bonds may rise by 24 percent to $25 billion in2010. [17] Addressing the Oman Investment Forum in October 2011, all conventionalbanks inOmancan offer Sharia-based financial services upon approvalfrom theCentral Bank of Oman(CBO). [18] The Vatican has put forward the idea that the principles of Islamic financemay represent a possible cure for ailing markets. [19] [edit] Largest Islamic banks  See also:Islamic Development Bank  Shariah-compliant assets reached about $400 billion throughout the worldin 2009, according toStandard & Poor ’s Ratings Services, and thepotential market is $4 trillion. [20]   [21]  Iran,Saudi ArabiaandMalaysiahave the biggest sharia-compliant assets. [22] In 2009Iranian banksaccounted for about 40 percent of total assets of theworld's top 100 Islamic banks.Bank Melli Iran, with assets of $45.5 billioncame first, followed by Saudi Arabia'sAl Rajhi Bank,Bank Mellatwith $39.7 billion andBank Saderat Iranwith $39.3 billion. [23]   [24] Iran holds theworld's largest level of Islamic finance assets valued at $235.3bn which ismore than double the next country in the ranking with $92bn. Six out of tentop Islamic banks in the world are Iranian. [25]   [26]   [27] In November 2010,TheBanker published its latest authoritative list of the Top 500 Islamic FinanceInstitutions with Iran topping the list. Seven out of ten top Islamic banks inthe world are Iranian according to the list. [28] [edit] Principles Islamic banking has the same purpose as conventional banking: to makemoney for the banking institute by lending out capital. Because Islamforbids simply lending out money at interest (seeriba), Islamic rules ontransactions (known as Fiqh al-Muamalat  ) have been created to avoid thisproblem. The basic technique to avoid the prohibition is the sharing of profit and loss, via terms such asprofit sharing( Mudharabah ), safekeeping( Wadiah ), joint venture( Musharakah ), cost plus ( Murabahah ),andleasing( Ijar  ).In an Islamicmortgagetransaction, instead of loaning the buyer money topurchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank ininstallments. However, the bank's profit cannot be made explicit andtherefore there are no additional penalties for late payment. In order toprotect itself against default, the bank asks for strict collateral. The goodsor land is registered to the name of the buyer from the start of thetransaction. This arrangement is called Murabahah .
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