This is the first chapter of Islamic Banking course (FAB 1233), Astin College, Puchong. Using the book of Islamic Finance and Banking system by Sudin Haron and Wan Nursofiza Wan Azmi as the main reference.

1. Chapter 1
History and development of the
Islamic banking system.
Nor Izzuddin Bin Norrahman
BBA. (Hons) Islamic Finance

2. Contents…
• History of Islamic Banking
– Early era
– Middle era
– Modern era
• Development of Islamic banking system in
selected countries.
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Malaysia
Egypt
Sudan
Iran

3. Introduction
• Islamic banking system (IBS) is defined as a
banking system whose principles of its
operations and activities are founded on
Shariah rules.
• Islam forbids Riba which is includes in the
transaction
of
conventional
banking.
So, Islamic banking system which is free from
Riba has to be establish for the sake of the
ummah.

4. History of Islamic Banking
• The establishment of Islamic bank is in 1960’s.
• However, banking activities exist long before
the 1960’s in the Islamic history.
• Before the era of Prophet Muhammad
p.b.u.h, there were trade activities conducted
in Mecca.
• These activities continued even after Islam
became rooted in Mecca and Medina.

5. Continue…
• From the historical point of view, Islamic
banking can be divided into three eras:
– First era (Early era)
• The early year of Islam until the period of Caliph arRashidin
– Second era (Middle era)
• Streches from the era of the caliphates until the fall of
the Uthmaniyah Empire.
– Third era (Modern era)
• The era of modern Islamic banking.

6. Early Era
• Before Prophet Muhammad p.b.u.h received
the divine revelations, Mecca was a city of
trade.
• Its business activities continued even after
Islam became rooted there.
• Example of the activities: Safe-keeping
• There were activities that not against the
Shariah rules and there were also activities
that against it.

7. Continue…
• With the arrival of Islam, the practice of Riba
was no longer permitted.
• Nevertheless, activities which is not against
the Shariah rules were allowed.

8. Middle era
• Began with the end of the reign of Caliph
Uthman in the year 661 A.C.
• It witnessed the continuation of banking
activities which were practiced in the early era
of Islam.
• With the fall of Islamic empire and followed by
the fall of the roman empire, there were
significant adverse impact on the economic
activities of Muslim countries.

9. Continue…
• European countries in the 12th century revived
the economic and expand it to the Muslim
countries.
• Islamic banking system was failed to expand
on that era.
• However, the development of Islamic banking
system took place in terms of fatwa by
Muslim jurists pertaining to issues of
muammalat, particularly those involving Riba.

10. Modern Era
• Started with the establishment of Mit Ghamr Savings
Bank in 1963
• This is however does not mean that no earlier attempts
were made.
• Mit Ghamr Savings Bank
– From Egypt
– Provided basic banking services.
•
•
•
•
•
Deposits
Loans
Equity Participation
Direct Investment
Social Service
– Used the Shariah principles which well received by the
local community and the farmers.

11. Continue…
• Set back for Mit Ghamr Savings Bank
– Mid-1967
– Political unrest in Egypt, the operations were
taken over by the National Bank of Egypt.
– Interest-free operations were reverted to interestbased system
• However, the operations of interest-free
banking were studied by Muslim scholars all
over the world.

12. Continue…
• The problems are the scarcity and unavailability
of proper guidelines concerning principles and
practices of the interest-free banking.
• So, the first task is to formulate the guidelines
and the frameworks on the practical aspects of
Islamic Banking System.
• Another problem arose where it was a daunting
task finding Muslim Economists who were also
well versed in the knowledge of Shariah laws.

13. Continue…
• The need to establish an Islamic Banking
System reach its peak around 1970’s.
• The action were taken by private initiatives
rather than the government.
• King Faisal bin Abdul Aziz al-saud (The late
Saudi Arabian King)establish the Organization
of Islamic Countries (OIC) and urged Muslim
countries to set up their own Islamic Banking
System.

14. Continue…
• The result:
– The establishment of Islamic Development Bank
(IDB) in 1975.
– Dubai Islamic Bank (1975)
– Faisal Islamic Bank of Egypt (1977)
– Bank Islam Malaysia Berhad (1983)

15. Continue…
• With the establishment of the Islamic bank, it
continues with:
– Islamic inter-bank Money Market (1994).
– Establishment of Accounting and Auditing
Organization For Islamic Financial Institution
(AAOIFI) in 1990.
– Other establishment.

16. Modern Era
Middle Era
Early Era

17. Developments of Islamic Financial and Banking
Institutes According to Specific Periods
• 1950s
– Models of Islamic Banking and financial system was presented.
– Twin mudharabah concept were suggested.
• 1960s
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The practice began.
The recommendation of Operation mechanisms for IFI.
Rise and fall of Mit Ghamr Savings Bank.
Establishment of Tabung Haji in Malaysia, 1966.
• 1970s
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Islamic Financial Institutions were established. (Banks / non-banks)
Academic institutions were set up.
The establishment of Mudharabah financial mechanism.
Research center, publications of books and the held of International
Islamic Economics Conference were done.

18. Developments of Islamic Financial and Banking
Institutes According to Specific Periods
• 1980s
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Government intervention.
More private sector banks.
Variety of Islamic Banking products.
More scholars and economist in the west who interested in Islamic Banking.
Conventional Banks offer Islamic Banking Window.
Growth of Islamic Index and trust funds.
Pakistan, Sudan, Iran and Malaysia attemped to use the Islamic system.
Establishment of Fiqh Academy of OIC and other Fiqh Boards.
Establishment of Islamic trust funds.
• 1990s
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Growth in the Islamic window concept.
Enhancement in asset-based financial instrument.
Establishment of Islamic Index.
Regulations and supervision given attention.
Standards of AAOIFI issued.

19. Developments of Islamic Financial and Banking
Institutes According to Specific Periods
• Early 2000s
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Continuous growth
Completion of the architecture of Islamic Finance.
Attention on Risk management and corporate control.
Capitalization of Islamic banks trough mergers.
Creation of asset-backed securities market.
The formation of IFSB in 2002.
Establishment of the International Islamic Rating
Body, Bahrain.

20. History of Islamic Banking System in
Egypt
• Started with the establishment of Mit Ghamr Savings
Bank in 1963
• Followed by:
– Nasser Social Bank in 1972
– Faisal Islamic Bank in 1977, and
– International Bank for Investment and Development in
1980.
• Offers 2 types of deposit accounts:
– Savings Account
• Interest-free
– Investments Account
• Profit and loss sharing

21. Continue…
• Due to the political changes in Egypt, its
operation suffer a setback.
• Taken over by the National Bank of Egypt in
mid-1967.
• Thus, riba based financing were introduced.
• In 1971, the Islamic Banking system was
revived by Anwar al-Sadat when the
government established the Naseer Social
Bank in 1972.

22. History of Islamic Banking System in
Sudan
• Underwent two distinct periods:
– Period of full government support
• Enjoyed encouragement and full support from the
government.
• Rapid development of Islamic banking in Sudan.
– Period of distress in the banking sector
• When the support was withdrawn, banks in Sudan
faced with obstacles.

23. Continue…
• The concept of Islamic banking was first
introduced in Sudan with the establishment of
Faisal Islamic Bank of Sudan (FIBS) in 1977.
• Under a special law known as the FIBS Act of
the national people’s council.
• In 1984, the government Islamized the entire
banking system.

24. History of Islamic Banking System in
Iran
• As with Pakistan, Iran has also converted its
entire financial system to Islamic Banking
System.
• Began with Islamic revolution in 1979.
• Implemented in a gradual basis.
• Took 6 years for the system to fully
implemented.
• First step: introduction of a service charge to
replace the riba system in 1981.

25. Continue…
• A
committee
comprising
bankers, academicians, businessman and
ulama’ proposed a legislation called Law for
Usury-Free Banking in August 1983.
• The law required banks in Iran to fully convert
their operations in accordance with Syariah
principles.

26. History of Islamic Banking System in
Malaysia
• Started with Islamic resurgence movement in
1970s.
• In 1980, Bumiputra Economic Congress made a
resolution – required the government to allow
the pilgrimage board (Known as Lembaga Tabung
Haji) to establish an Islamic Banking.
• 1981 – The government appointed National
Steering Committee on Islamic Banking to
studied the operations of FIBE and FIBS.
• A report was made by the committee and
submitted to the government on 1982.

27. Continue…
• 1983 – Islamic Banking Act was gazetted and
came to effect on 7 April 1983.
• The first Islamic bank – Bank Islam Malaysia
Berhad (BIMB) was establish under Companies
act 1965 on 1 March 1983 and commenced
operations on 1 July of the same year.
• 1994 – The government launched the “Interestfree Banking Scheme”.
• The scheme allow financial institutions to offer
Islamic Banking products and services.

28. Continue…
• 1994 – Islamic inter-bank market was introduced.
• 1997 – BNM established the National Shariah
Advisory Council on Islamic Banking and Takaful
(NSAC).
• 1999 – Second full-fledged Islamic Banking was
established, the Bank Muammalat Malaysia
Berhad (BMMB).
• 2004 – BNM allow foreign Islamic Bank to
operate in Malaysia.
• 2006 – The launching of the Malaysia
International Islamic Finance Center (MIFC).

29. Summary
• The system can be traced back to the early
days of Islam.
• The banking activities were done in the time
of Prophet Muhammad p.b.u.h. but were not
developed.
• With the rise of Europe in 12th century, the
conventional banking system was introduced
to the Islamic countries and Islamic banking
were ceased to exist.

30. Continue…
• The establishment of Mit Ghamr Savings Bank
in 1963 sparked the Islamic countries to set up
their own Islamic Bank.
• However, the development of the Islamic
Banking differed one from the another Islamic
countries.
• Until then, Islamic continues to grow and in
2008, there were more 300 Islamic Banks in
the world.

31. The end of Chapter 1

32. Tutorials
• Please find out the current amount of Islamic
Bank in Malaysia (categorized it with local or
foreign bank) and the world.
• The different between Early era of Islamic
Banking with the Modern era of Islamic
Banking.

33. Refference
• Sudin Haron, W. Nursofiza, (2009). Islamic
Finance
and
Banking
System
:
Philosophies,
Principles
&
Practices.
Selangor, Malaysia. McGraw-Hill (Malaysia)
Sdn. Bhd.