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KembaraXtra-Islamic Banking-Introduction-Geographical Developments
Early initiatives in Islamic finance were generally limited in scope, either because they were restricted to specific geographical regions or because they were established to serve a particular and immediate objective. One of the earliest examples is the Mit Ghamr Savings Bank in Egypt, established in 1963, which aimed primarily at enhancing the social welfare of Muslims. However, its operations and benefits were confined to Egypt.
The Mit Ghamr Savings Bank accepted deposits from the public based on an interest-free loan arrangement, provided financing on a similar interest-free basis, and was also responsible for the collection and distribution of zakat. Zakat, which constitutes the third pillar of Islam, is an obligatory annual levy imposed on Muslims whose wealth exceeds a prescribed minimum threshold.
In the same year, 1963, Malaysia established the Pilgrimage Funds Board, commonly known as Tabung Haji. This institution was created to enable Muslims to save systematically for the performance of the pilgrimage (Hajj), which is the fifth pillar of Islam. Funds collected by Tabung Haji were deposited or invested exclusively in Shari’ah-compliant assets and business activities. Unlike commercial banks, Tabung Haji does not have statutory authority to offer financing facilities; its primary function is deposit-taking, with a mandatory obligation to invest those deposits in accordance with Shari’ah principles.
Before the 1970s, financial institutions capable of conducting financial intermediation in compliance with Shari’ah were either very limited or entirely absent in most countries. A major milestone occurred in 1975 with the establishment of the Islamic Development Bank (IDB) by the Organisation of Islamic Conference (OIC). The IDB was created to meet the development and financing needs of its member countries while adhering to Islamic principles. Its establishment facilitated cross-border financial arrangements that incorporated Shari’ah considerations, marking a significant shift in the practice of banking.
The mid-1970s also witnessed the emergence of fully-fledged Islamic commercial banking. The establishment of Dubai Islamic Bank in 1975 represented the first attempt to operate a commercial bank entirely in accordance with Shari’ah principles, paving the way for the global expansion of Islamic finance.
Key Points
- The early growth of Islamic finance focused primarily on addressing the welfare and financial needs of Muslims within specific domestic contexts.
- The Mit Ghamr Savings Bank in Egypt and Tabung Haji in Malaysia were among the earliest institutions to implement Islamic finance practices.
- Dubai Islamic Bank was the first commercial bank established to operate fully under Islamic finance principles.
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