Modern Islamic Banking

CHAPTER 1Historical Developments

The evolution of Islamic finance in modern history is only a small part of overall banking history, and in its current form only spans a period of around 60 years. This does not imply that Islamic finance did not exist prior to the mid-1960s. Comparable to other modes of financing, it has gone through periods of increased as well as diminished popularity, and ceased to exist for long periods of time. This chapter will look at the general history of banking as well as the way Islamic finance has evolved.

1.1 The History of Finance

Financial services have historically always played an important role in the economy of every society. Banks mobilise funds from investors and apply them to investments in trade and business. Although the actual origin of banking is difficult to determine, the history of banking is long and varied, and the financial system as we know it now is generally ascribed to the Florentine bankers of the fourteenth to seventeenth centuries ad.¹ The word “bank”, for example, is derived from the Italian word banco (for the merchant's bench). Interestingly enough, the word “bank” also assists in tracing the origins of “bankruptcy”, which relates to the breaking of a merchant's bench in medieval Italy as a signal of failure. Whether it be safe keeping, money changing, investing funds on behalf of others or making other capital goods such as land available at a charge, financial services have been around in some form for a long time. ...