Islamic Banking in modern times

The first experiment based on Islamic Banking in modern times, took place in Egypt in 1963, in the city of Mit Ghamr. It was in the form of a savings bank founded on the profit-sharing principle (which is one of the cornerstones of Islamic Banking). This continued until 1967, when the banks established in the country in the meanwhile and modelled on the ethics of Islamic banking, actually amounted to nine.

The project then experienced a dormant period until 1972, when it became part of the Nasr Social Bank, which is still operative nowadays. Three years after that the Islamic Development Bank was founded, with the aim of procuring funds for projects promoted by member Countries. It was precisely in 1975 that the first, modern commercial Islamic bank was founded.

Initially, the Dubai Islamic Bank only offered basic services and a great many of the available services were of the traditional type; however, the institution developed an increasingly autonomous personality, expressed through decidedly innovative products and services. This tendency still continues nowadays with an even wider range of services, also thanks to the Islamic banking’s annual growth which varies between 10 and 15% and opens the way towards a future of further consolidation.

Nowadays there are more than 300 Institutions spread throughout over 51 Countries, besides 250 mutual funds conforming to Islamic principles. At this point, in other words from this delicate and complex moment as far as the global economic-financial viewpoint is concerned, the relative stability of Islamic banking is capturing a great deal of attention.

Even the Vatican has stated that banks should take the rules governing Islamic finance into consideration, to regain the trust of their clients and to create the conditions for a gradual emergence from the current crisis. Moreover, it is estimated that nowadays the client base of Islamic banks is also distributed over Europe, the United States and the Far East. Thanks to its excellent approach to the most advanced technology, Islamic banking is moving towards the forefront of investments, which prove to be not only favourable but also, and finally, gratifying on the much more complex ethical plane.

With a yearly frequency since 1994, the World Islamic Banking Conference is held in Bahrain: this is internationally recognised as the most significant event at Islamic finance level.

If true however, that today Islamic Banking is experiencing extensive expansion and growth, we must recognise that, when its fundamental values started spreading throughout the world (i.e. during the second half of last century), financial circles hastily judged it as a utopian dream. Having lived for a long time according to a capitalistic system, we asked ourselves what ethics could possibly have to do with finance. Nowadays this approach is gradually changing and banking activities, lacking these values until but a few years ago, are beginning to get the consciences of a growing number of people to awaken. In fact, there is a noticeable and increasing reluctance to entrust funds to banks and financial institutions that invest in activities which are ethically questionable and with scant social impact.

Islamic banking has managed to get itself accepted by a great many and, above all, is succeeding in spreading its principles to the non-Islamic financial world where, under a number of aspects, capitalism is revealing its weaker points.

With the premise that, in business relationships, the Islamic Banking prohibits not only interest (Riba) – for which it finds valid alternative solutions – but also bans alcohol, pork meat, gambling, pornography and whatever else is considered illegal by Islamic Law (Shariah), its fundamental principles can be summarised as follows:

1. Rejection of all forms of business which it considers morally and socially detrimental, according to a clear and net distinction between what is legal and what is not during the performance of one’s economic activity. All this permitting, at the same time, the pursuance of one’s economic wellness.
2. In recognising the right of every individual to legally attained wealth, Islam imposes the obligation that it be wisely administrated, without pursuing the sole objective of increasing it, nor leaving it unfruitful or squandering it.
3. Keeping the surplus of one’s assets is permissible; nevertheless, Islam aims at reducing the margin of this excess in favour of the benefit of the community as a whole, in favour, above all, of the weaker and the more needy, by taking part in the Zakat process. This, loosely translated, means "charity to the poor", and establishes a specified percentage of one’s income that should be donated to charity. Useful above all for providing support to the poor in Islamic Countries, it moreover represents a duty for the Muslim States, which not only have to collect the Zakat, but must also see to its distribution in the fairest way possible.
4. Even though fully aware of the various aspects of human nature, but in disagreement with the consequences of its worst aspects, Islam aims, through its property laws, at preventing the stockpiling of wealth in the hands of a few to the detriment of society at large. This, in order to prevent a sort of financial oligarchy from being created by the concentration of excessive riches among a few individuals.
5. In its entirety, the economic system conceived by Islam aims at social justice without inhibiting individual enterprise, to the extent that the latter neither harms the community nor becomes self-destructive as far as the individual is concerned.

The Islamic Financial System furthermore adopts the concept of sharing in the enterprise, deploying funds at risk according to the profit and loss-sharing principle. This does not however mean that investments entrusted to financial institutions are necessarily of a speculative nature, since this can be excluded by using a conservative policy with regard to investments, diversification of the risk and cautious management on the part of Islamic financial institutions.

The concept of profit and loss-sharing as regards financial transactions shows an extremely modern character, since it clearly distinguishes between positive, negative and mediocre performances, thus encouraging better resource management.

Finally, it is interesting to note that the way in which Islamic banks are structured ensures that a precise differentiation between shareholders’ capital and clients' deposits is maintained, thus managing to guarantee correct profit-sharing according to Islamic Law.