CHAPTER 6 23/05/2001 12:02 pm Page 1 6. Islamic banking in mixed systems 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...
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