Origin and history of Islamic Banking


 The Islamic banking today has become most popular and reliable financial system in the world. It appeared on the world scene as active player over three decades ago. But as many of us know most of the principles which is based on Islamic Banking ,commonly accepted by the all over the world goes for centuries than the decades. Islam as a religion very clearly prohibits the Riba -the interest, so the basic principle of Islamic banking is the prohibition of Riba (Usury or Interest) base transactions.

The Origin of Islamic Banking

While a basic tenant of Islamic Banking – the outlawing of Riba , a term that encompasses not only the concept of usury , but also that of interest -has seldom been recognised as applicable beyond the Islamic World, many of its guiding principles have. The majority of these principles are based on simple morality and common sense ,Which form the bases of many religions , Including Islam.

The Holy Quran clearly mentions about prohibition of Riba . The following verses will be able to taken as examples.

The Quran -Surah 02- Al Baqarah verse 275

“ Those who devour Riba will not stand (especially for judgement before Allah) except as stands one whom Satan by his touch has driven to madness. That is because they argue : “ Business and Riba similar to each other .”But Allah has made “business” Halal and He is made ‘Riba’ Haram. Those who after receiving this warning (concerning the Haram of Riba) from their Lord ,(now) desist (from Riba) , may keep whatever they had previously earned (as Riba) ; and their case (will now be judged by) Allah (alone ,i.e. the Islamic State will not deal with that matter); but those who return (to Riba even after this revelation of the Quran ) are companion of fire (of Hell) ; they abide therein (forever).”



The contrast between charity and Riba is stark .Charity is the opposite of Riba. The reason for the ‘state of madness’ to which the people of Riba will be driven is their assumption that Riba is just another form of business .But it is not ! The difference between the two is ,of course , the fact that business must involve ‘risk’ and hence the possibility of profit or loss. Riba minimises that risk until it is virtually eliminated.

Anyone who takes a decision in life to desist from Riba does not have to return to the past to try to erase it. He simply looks to the future to ensure that he never again enters into Riba . But he will have to prepare himself for judgement on the past whenever judgement takes place . Thus he needs to constantly struggle to earn forgiveness for thew past .But the punishment which awaits those who disregard the Quran and continue to indulge in Riba is the worst that anyone can receive, I.e, to remain forever in the fire of Hell.

The Quran -Surah 02- Al Baqarah verse 276

“ Allah will deal with Riba in such a way that it would be uprooted , but He will give (constant ) increase for deeds of charity ; for He loves not creatures who are ungrateful and wicked.”


Again the contrast between Riba and charity is emphasized. But there is also a warning that Allah will eventually destroy the Riba economy in such manner that it will be totally uprooted. Not even a fragment will survive . That will be a manifestation of the Divine anger against those people who practice Riba. They are a people who are describe as ungrateful and wicked!

All Islamic teachings come from only two sources: the Quran and the Hadith.The prophet Muhammed (Peace Be upon Him) ‘s saying are called as Hadith . As he mentioned and preached Riba is the most worst thing . The following Hadith of prophet Muhammed (Peace Be upon Him) will indicate how firmly he advised to avoid Riba base transactions.

“ Umar Ibn Khattab said : The last verse to be revealed was on Riba , but Allah’s Messenger was taken without having expounded it to us ; so give up not only Riba but also Reebah (I.e., whatever raises doughts in the mind about its rightfulness).”

(Sunan Ibn Majah, Darimi)

“ The Messenger of Allah Prophet Muhammed (Peace Be upon Him) cursed the one who takes (I.e.,Consumes) Riba, the one who gives (I.e., Pays ) Riba the one who records the transaction , and the two witness thereof .He said : They are all equally guilty.”

(Sahih Muslim)

 “Abu Hurairah (Raliyallahu ) said that the Messenger of Allah Prophet Muhammed (Peace Be upon Him) said : Riba is of seventy different parts , the least dangerous being equivalent to a man marrying (I.e having sexual intercourse with ) his own mother .”

(Sunan Ibn Majah,Baihaqi)

 So the basic principle of Islamic banking is as mentioned early is the prohibition of Riba , these verses of the Quran and Hadith – saying of prophet Muhammed (Peace Be upon Him) are the pillars to this concept which clearly says to avoid Riba.

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