Islamic Finance and Economic Development: Risk, Regulation, and Corporate Governance

CHAPTER 1

History and Core Principles of Islamic Finance

An often-raised question is: What actually is Islamic finance and in what way does it differ from conventional finance? Islamic financial services pledge to conduct financial intermediation in accord with a code of behavior based on Islamic values. The code's principles are enshrined in the contracts and product offerings. It happens to use the word Islamic to characterize its observance of the code. Possibly for that reason, in the current international context, it gathers champions and advocates, attracting many who see in it merely a business opportunity; it raises open (sometimes vehement) as well as silent opposition; and it often leaves many puzzled about its nature and value added. This leads to unnecessary mystification and often poorly based judgments. Better knowledge of its history, principles that the sector pledges to observe, the industry's compliance with market demand for transparency and truth in advertisement, and finally market developments can promote balanced views and effective dialogue. It can help assess the potential contribution of the sector to development, in a professional way.

HISTORY REVIEW

An important milestone in the development of modern Islamic finance is the establishment of Mit Ghamr local savings bank in Egypt in 1963. Although the bank provided only basic banking services, these met the requirements of the local community it served at that time. This important experience sent a clear ...