Fundamentals of Islamic Finance and Banking

CHAPTER 1Introduction to Islamic Finance and Islamic Economics

Learning outcomes

Upon completion of this chapter, you should be able to:

1. Define Islamic finance and explain the distinctive features of Islamic finance.
2. Discuss the relationship between Islam and economics and the role of Islamic economics in social welfare.
3. Describe the evolution of Islamic finance from the early days to the modern Islamic finance and banking industry.
4. Identify the timeline of the development of contemporary Islamic finance and banking.

INTRODUCTION

The core concepts of Islamic finance are as old as Islam. Islam is not just a religion but a way of life. It provides guidance to its followers encompassing the social, religious, economic and political aspects of their lives. The Islamic law called Shariah law dictates specific dos and don'ts related to all aspects of a Muslim's life, including commercial and financial transactions. From the time of the Prophet Muhammad, peace be upon him (PBUH), specific financial instruments were used that were designed as per the requirements of the Shariah principles. Shariah law will be discussed in much more detail in Chapter 2 of this book.

The birth of modern Islamic finance and banking though happened in the second half of the twentieth century as an extension of Islamic economics, through the joint efforts of Shariah scholars and bankers. The global expansion of Islamic finance and banking was accelerated by the discovery of oil, rise in petrodollars ...