# Growth of Islamic Finance

Islamic finance — financial services and products structured in accordance with the principles of Islamic law (Sharia), primarily the prohibition of riba (interest/usury) — emerged as a modern industry in the second half of the twentieth century CE. From the establishment of the first Islamic banks in the 1970s, the sector has grown into a global industry with assets estimated at over $3 trillion and presence in over 80 countries.

The Prohibition of Riba

The foundational principle of Islamic finance is the prohibition of riba, which encompasses the charging of interest on loans. The Quran prohibits riba in several verses, including the strong condemnation in Surah al-Baqarah (2:275-280): "Allah has permitted trade and forbidden riba."

The word riba literally means increase or excess. Classical Islamic jurists debated its precise scope, but the mainstream scholarly consensus — across all four Sunni schools — identified the charging of any predetermined interest on money lending as prohibited.

This prohibition presented challenges as Muslim-majority societies encountered modern banking and finance systems built on interest-bearing instruments. The scholarly response, developed particularly in the twentieth century, was to develop alternative financial structures.

Key Islamic Finance Instruments

Murabaha (cost-plus sale). Instead of making a loan for a purchase, the bank buys the item and sells it to the customer at a marked-up price, with the customer paying in installments. This converts an interest-bearing loan into a legitimate sale transaction.

Musharaka (partnership). The bank and client jointly fund a project or purchase, sharing profits and losses in agreed proportions. This is a form of equity partnership rather than a debt relationship.

Mudaraba (profit-sharing). One party provides capital, the other provides labor and management. Profits are shared; losses fall on the capital provider (up to the amount invested). This is a classical Islamic partnership form.

Ijara (leasing). The bank purchases an asset and leases it to the customer. This provides the economic function of a secured loan without an interest payment.

Sukuk (Islamic bonds). Asset-backed certificates that provide returns based on profits from underlying assets rather than interest payments. Sukuk are the Islamic equivalent of conventional bonds and are a major instrument in Islamic capital markets.

Historical Development

Pioneering institutions. The Mit Ghamr Savings Bank, established in Egypt in 1963 CE by Ahmad al-Najjar, is often cited as the first modern Islamic bank, offering savings accounts and lending on the basis of profit-sharing rather than interest. The Islamic Development Bank, established by the Organisation of Islamic Cooperation in 1975 CE, provided institutional momentum.

Gulf expansion. The oil wealth of the Gulf states in the 1970s provided capital for Islamic banking. Dubai Islamic Bank (1975 CE), the first full-service commercial Islamic bank, and Kuwait Finance House (1977 CE) established the model that was replicated across the Gulf.

Global growth. From the 1990s onward, Islamic finance expanded beyond Muslim-majority countries. Major conventional banks including HSBC, Citibank, and Deutsche Bank established Islamic banking windows. The United Kingdom became the leading Islamic finance center outside the Muslim world. Malaysia developed the most comprehensive regulatory framework for Islamic banking and became the largest sukuk market.

Scholarly and Regulatory Framework

Islamic financial products require certification by Sharia supervisory boards composed of Islamic scholars who review instruments and transactions for compliance with Islamic law. This created a specialized field of Islamic finance scholarship, combining knowledge of classical fiqh with modern finance.

Different schools of thought among contemporary scholars have led to different standards: some instruments accepted in the Gulf are considered problematic by Malaysian scholars and vice versa. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) work toward standardization.

Significance

The growth of Islamic finance represents one of the most significant contemporary applications of classical Islamic jurisprudence to modern economic life. It demonstrates the vitality of the fiqh tradition in adapting to new contexts while maintaining foundational principles.

Sources

Mervyn Lewis and Latifa Algaoud, Islamic Banking
El-Gamal, Mahmoud, Islamic Finance: Law, Economics, and Practice
AAOIFI Standards
Islamic Financial Services Board, annual stability reports