History and Growth of Islamic Banking and Finance

Abstract

From a very early stage in Islamic history, Muslims were able to establish a system without interest for mobilizing resources to finance productive activities and consumer needs. The system worked quite effectively during the heyday of Islamic civilization and for centuries thereafter. As recorded by Professor S. D. Goitein, partnership and profit-sharing rather than interest-based borrowing and lending formed the basis of commerce and industry in twelfth and thirteenth centuries in the Mediterranean region.¹ However, as the centre of economic gravity shifted over the centuries to the Western world, Western financial institutions (including banks) became dominant and the Islamic tradition remained dormant. In recent years, however, there has been a significant revival of interest in developing a modern version of the historic Islamic financial system in the wake of Muslims’ desire to stay clear of interest.