The origin of Islamic banking dates back to the beginning of Islam in the 7th century. The Prophet Muhammad’s first wife, Khadijah, was a merchant and he acted as an agent for her business, using many of the same principles used in contemporary Islamic banking. In the Middle Ages, business and business activity in the Muslim world was based on Islamic banking principles, and these ideas spread throughout Spain, the Mediterranean, and the Baltic states, possibly providing some of the foundations for Western banking principles. In the 1960s and 1970s, Islamic banking re-emerged in the modern world.
This banking system is based on the principles of Islamic law, also known as Sharia law, and is guided by Islamic economics. The two basic principles are the distribution of profits and losses and the prohibition of the collection and payment of interest by lenders and investors. Islamic banks do not charge or pay interest in a conventional way when the interest payment is set up in advance and is considered the default price of the credit or the reward for the money deposited. Islamic law accepts capital reward for loan providers only on a profit and loss-sharing basis, working on the variable return principle related to the actual productivity and results of the financed project and the real economy. Another important aspect is its business characteristic. The system focuses not only on financial expansion, but also on the physical expansion of economic production and services. In practice, there is a greater concentration on investment activities such as equity financing, trade finance and real estate investments. Since this banking system is based on Islamic principles, all bank companies follow Islamic morals. Therefore, it could be said that financial transactions within Islamic banking are a culturally distinct form of ethical investment. For example, investments involving alcohol, gambling, pork, etc. are forbidden.
Over the past four decades, the Islamic banking system has undergone a tremendous evolution from a small niche visible only in Islamic countries to a profitable, dynamic and resilient competitor at the international level. Its worldwide size was estimated at about $ 850 billion at the end of 2008 and it is expected to grow about 15 percent annually. While the banking system remains the main component of the Islamic financial system, the other elements, such as Takaful (Islamic insurance companies), mutual funds and Sukuk (Islamic bonds and financial certificates), have also experienced strong global growth. By a reliable estimate, the Islamic finance industry now stands at more than $ 1 trillion. Furthermore, the growth opportunity in this sector is considerable. It is estimated that the system could double in size in a decade if past performances continue into the future.