Brief Historical Background of Islamic Finance
Islamic Finance is not at all a new concept, it has originated since the spread of Islam, it prohibits Riba (usury/interest) and this is the back bone of the whole idea. Muslims are restricted to indulge in any activity which is prohibited in Islam, and that’s how the whole concept of Islamic Finance had begun. There are vivid laws and regulations of what is permissible and what is not permissible in Islam and same in the case of IF. Islam spread mostly on the efforts of its followers who visited faraway lands as traders and did their business, non Muslims usually had contacted Muslims as traders and got influenced from their way of conduct, honesty etc. As the time passes this idea has spread in the world that Muslims did not exploit anyone by taking more money than the principal which is actually given, be it in any case as it is not allowed to them to have anything extra which is nothing but riba/interest.
But when conventional banking started and it was primarily based on interest which is not allowed in Islam, Muslims around the world felt that we should have our own institutions which will be dealing in non-interest-based transactions and avoid exploiting poor by putting the burden of paying interest on the debts/loans. We found existence of many small interest free loan institutions, co-operative societies, self help groups in early 19th century like Patni Cooperative Credit Society established in 1938 in Surat Gujarat. At the early stage it was just a place where one can have the interest free loan compare to what was offered in the conventional banks on the basis of paying certain amount of interest.
The major pioneer in the field of organized modern Islamic Finance was begin in the year 1963 in Egypt where an economist Ahmed Enlarger established the first and formal interest free Islamic bank in the Nile Delta town of Mit Ghamr. It was unfortunate for this pioneer institute that it faced lot of oppression and even later closure from that time’s Gamal Naseer’s Egyptian government later it was re established as part of Nasr Social Bank.
And in the same year in Malaysia another pioneer institution was established as Muslims Pilgrims Savings Corporation which is popularly known as Tabung Haji is still standing in Malaysia as one of the largest Finance company. It was established to facilitate the Pilgrims of Mecca to save their money and have this journey. They use to invest this money in Shariah compliant funds and even distribute interest free dividends to their subscribers.