Current Issues in the Practice of Islamic Banking

Abstract

Islamic banking started in earnest in the 1970s with personal initiative of the concerned Muslims to address the problem for riba. The pioneers included committed and resourceful individuals, professional bankers, Islamic economists and religious scholars. There was no initial working model to act upon, except the thought that interest-based banking might be replaced by banking on the basis of profit-and-loss sharing. This effort took place when the financial system at large, as also the regulatory environment, was riba-based. Things soon began to change in the late seventies and in the early eighties with recognition at the state level for the need to develop riba-free financial system in Iran, Sudan, Pakistan and Malaysia. In the meantime, Islamic bankers also organized themselves through International Association of Islamic Banks. This was soon followed by establishment of AAOIFI for achieving standardization in Islamic banking practices. The current position is that there are more than 200 Islamic financial institutions all over the world with investment funds in excess of $250 billion. 1 The annual growth rate of Islamic banking industry world-wide is 16%+. In some Muslim countries, total or partial transformation has taken place in favor of Islamic banking. Islamic banking has also gained approval by international financial institutions, professional bankers and the academia. Islamic banking has established its identity. Alhamdolillah it is here to stay, grow and develop into a competitive alternative to interest-based financial architecture. AAOIFI has done commendable unification effort. Central banks of several Muslim countries have jointed hands in order to give it an international standard. Some issues are identified here that may help consolidation and growth of Islamic banking.

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