Extent to Which Islamic Banking Is Affecting Global Economy

The Islamic Banking is one of the recent phenomenons in the field of banking transactions which started in the early years of the 1960's. The Islamic banking is quite rare and has very ideal origins that do not resonate some of the basic features of the customary banking system. The historical overview of the Islamic banking system is discussed in the System Access White Paper on Islamic Banking and Finance: Core banking System Solutions and Shariah Compliance. The paper mentioned that Islamic banking system aims to strip off all the characters of usury which were prevalent in the traditional banking system and observe the prohibitions that were imposed by the Shariah law. Likewise, the code of conduct, which is being followed by the Muslim banking employees as well persons who perform financial transactions, observes the mandates of the Quran.

Accordingly, System Access White Paper, stated that the first bank that embodied the character of Islamic banking is the Myt Ghamar Bank which is a bank that was founded in Egypt and which operated in 1963 to 1971 in accordance with the Shariah principles. Later on, the bank was converted to become the Nasser Social Bank which did not only serve Muslims. The revolutionary change in development of Islamic banking happened when the Dubai Islamic Bank and the Islamic Development Bank were established sometime in 1975. Later on, more banks opened in Iran, in Sudan and Pakistan in the 1980's. Three years later, the Bank Islam Malaysia Berhad was established in Malaysia. The paper also revealed that by the year 2005, there were already more than 200 banking institutions that operate Islamic banking.

The International Journal of Social Economics in a study on Islamic Banking in Brunei Darussalam also discussed that the commercial banking industry has been penetrated by the Islamic tradition when it comes to financial transaction. Islamic banking at present does not only cater to Muslim clientele but also to non-Muslims who appreciate the services offered by these Islamic banks. Today, many traditional huge banking institutions such as the Hong Kong & Shanghai Banking Corporation and the Citibank are attracted by the services offered by Islamic banks. The Islamic banking preserved the traditions of the early Islamic banks that aim to incorporate the values taught in the Quran and Sunnah in the field of socio-economic transactions. Likewise, the Islamic banking system seeks to reduce the shocks of intense economic output through risk sharing instruments.

System Access added that among the reasons why the Islamic banking system gained popularity is due to the unique features of this banking system. Among these features are the Riba and the Gharar which are not found in the traditional banking system. The Riba is often understood as interest which tends to make the wrong notion that Islamic banking is interest free. Riba actually refers to the interest payments or the income as well as the interest returns and the expenses. In the banking context, the Riba means to say that if a bank loans money to a lender, the lender is expected to pay interest in exchange of the understanding that the loan is to be paid at a later date. Therefore, it is not the interest that is called Riba but the postponement of exchange of items that are similar. The Gharar on the one hand is the sale of goods which at present is not on hand though the same exists. Gharar-laced transaction is prohibited under the Islamic laws in order to avoid litigations involving contracts. An example is the prohibition of any contract involving a minor or somebody who is under the influence of alcohol.

It can be shown that the Muslim practice and the salient features of the Islamic banking are the reasons why a number of clients are eager to avail of its services and why is able to make influences in the global economy.

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