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Islamic Banking

Mervyn K. Lewis and Latifa M. Algaoud

The prohibition of interest is the feature of Islamic banking which most distinctly sets it apart from conventional banking. To Western eyes, this seems a strange restriction, but Christian countries themselves maintained such a ban for 1,400 years. Islamic Banking asks why Islam has been able to maintain its stand. The book explores the intricacies of Islamic law and the religious and ethical principles underpinning Islamic banking. It then considers the analytical basis of Islamic banking and financing in the light of modern theories of financial intermediation, and identifies the conceptual issues to be overcome.  
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Chapter 6: Islamic Banking in Mixed Systems

Mervyn K. Lewis and Latifa M. Algaoud


GROWTH OF ISLAMIC FINANCIAL INSTITUTIONS Modern banking was introduced into Muslim countries in the late nineteenth century.1 Leading banks based in the home countries of the imperial powers established branches in the capitals of the colonies and they catered mainly to the import-export requirements of the foreign enterprises. Banking was generally confined to the capital cities, and the general population remained largely untouched by the banking system. Local traders avoided the ‘foreign’ banks for nationalistic as well as religious reasons. However, over time it became difficult to engage in trade and other activities without making some use of the commercial banks. Even then, many confined their involvement to transaction services such as current accounts and money transfers. Borrowing from the banks and depositing savings with the banks were generally avoided in order to avoid dealing in interest. With the passage of time, and along with other socio-economic forces demanding more involvement in national and international economic and financial activities, interactions with the banks became more commonplace. Indigenous banks were established on the same lines as the interest-based foreign banks for want of an alternative system and they began to expand within the country bringing the banking habit to more local people. As countries gained independence the need to engage in banking activities became more urgent. Governments, businesses and individuals began to transact with the banks, with or without necessarily liking it. This state of affairs attracted the attention and concern of Muslim intellectuals. The story of interest-free or Islamic banking...

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