By Rachel Ehrenfeld
Islamic banking is erroneously viewed as an ancient practice. “Neither classical nor medieval Islamic civilization featured banks in the modern sense, let alone ‘Islamic’ banks,” notes Timur Kuran, professor of economics and law at the University of Southern California.
Reports by Islamic banking scholars, the IMF, or the Congressional Research Service do not mention that Islamic banking was first concocted by Muslim Brotherhood founder Hassan al-Banna in the 1920s. The stated goal was to penetrate the Western finance system, corrupting it from within in hopes of creating a parallel system to re-establish a global Islamic empire governed by Islamic law (shariah). Islamic rules of commerce (fiqh al-muamalat) forbid interest (riba) and investing in a prohibited (hara’am) enterprise. They also mandate tithes on wealth (zakat). However, the Koran fails to precisely define these concepts. Imams and ayatollahs differ, for example, on whether riba prohibits all interest or only usurious interest.
The first successful Islamic banking experiment was the Mit Ghamr Savings Bank in Egypt in 1963. But five years later, the Egyptian government, which subsidized the bank, shut it down after Muslim-Brotherhood-led demonstrations swamped the country.
In 1963, Malaysia also introduced a limited form of Islamic banking, with establishment of Tabung Haji (Pilgrim’s Fund) that served only as a savings institution, to help Muslims save towards their pilgrimage to Mecca (Hajj).
Ten yerrs later, growing oil fortunes in the Middle East, lead the Organization of the Islamic Conference’s (OIC) to establish the Islamic Development Bank (IDB) “in accordance with the principles of the shariah,” as prescribed by the MB-and to launch the fast-growing petrodollar-based Islamic financing market. The IDB, more a development than a commercial bank, was established largely “to promote Islamic banking worldwide.” Consequently, the IDB founded the Bahrain-registered and -based Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). Other regulatory organizations followed.
Finally, the most crucial element that helped persuade reluctant Muslims to use Islamic banks, the invention of “Islamic banking windows,” is never noted in reports documenting the development of Islamic banking. This happened in 1993, when Anwar Ibrahim, then Malaysia’s finance minister, helped to introduce the newly invented “Islamic Banking windows” into conventional banks. This measure, which familiarized clientele with and built confidence in the unknown Islamic banking system, proved central to the development of the global Islamic finance industry.
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