Islamic Banking: A New Era

Islamic Banking

Qu'ran 4:161 And for practicing usury, which was forbidden, and for consuming the people's money illicitly. We have prepared for the disbelievers among them painful retribution.

According to Islamic Law, riba (the act of usury) is illegal and should not be practiced by followers of the Islam religion. The term usury means to earn money from the money it self, it is the interest that banks get from loaning any party money. Therefore, because Allah considered usury a sin, in the Qur'an, most devout Islamic followers forbid the use of modern banks that use interest as their main source of income.

Islamic banking has just recently emerged into the international financial scene as a major contender in the banking market, even though the philosophies that guide the banks are not a very recent thing, having being written down in the Qur'an nearly 1,400 years ago. Three decades ago Islamic banking was being created to over come the barrier against riba in the banks and to allow Islamic people to lend money and borrow money free of interest (Ahmed, 2004). Josh Martin, an author for the magazine Middle East states, it began as a theological dream, but Islamic banking has become a practical reality across the Middle East. The question now is, how far will Sharia (Islamic Law) boards and western regulators let it spread (2005).

Islamic banking did not spring up all of a sudden and was fully functional when it was first thought of. It had to take numerous steps to be able to be where it is today. There where three main phases that Islamic banking has gone through since its birth. These phases are labeled emergence, expansion, and maturity.