Salient features of Islamic banking

Salient features of Islamic banking

Concepts of Islamic Banking, Historical and Its Objective

In the late seventies and early eighties, Muslim countries were awoken by the emergence of Islami Bank which provided interest-free banking facilities. There are currently more than 300 interest-free institutions all over the world. Islam Bank nowadays not only operates in àlmost all Muslim countries but have extended their wings to the western world to serve both Muslim and non-Muslim customers.

In case of Islami Banking, the establishment of Mitghamar Local Savings Bank in 1963 is said to be a milestone for modern Islamic Banking. The history of Islami Banking can nevertheless be traced back to the birth of Islam.

Salient features of Islamic banking

Definition of Islamic Banking:

 OIC:An Islamic Bank is a financial institution whose statutes, rules, and regulations expressly state its commitment to the principles of Islamic Shariah and to the banning of the receipt and payment of interest on any of its operation”

Dr. Ziauddin Abmed Islamic Bank is essentially a normative concept and could be defined as conduct of banking in consonance with the ethos of the value system of Islam.

According to Islamic Banking Act. 1983 of Malaysia:

An Islamic Bank is a company which carries on Islamic Banking Business Islamic Banking business means banking business whose aims and operations do not involve any element which is not approved by the religion of Islam.

Bangladesh Bank License for IBBL operation:

“The bank will operate within the frame work of the existing banking laws, rules and regulation subject to such minor adjustment that may be considered for an Islamic Bank to function. In addition to the above all requirements of banking companies ordinance

1962 (as adapted in Bangladesh) as also the relevant previsions of Bangladesh Bank order, 1972 (P.O. No. 127 of 1972) and instructions issued from time to time there under by Bangladesh Bank will also apply to the bank”.

The Relationship Between the Banking System and Religion Within Islam

The Relationship Between the Banking System and Religion Within Islam

Source: Ismail (1992)

Goal & Objectives of Islamic Banking System:

  1. Establishment of an Interest-free financial system.
  2. Ensuring justice to both suppliers of fund (depositor) and user of fund (Investment taker)
  3. Encouraging and patronizing entrepreneurship
  4. Creating employment
  5. Bridging up the gap between the surplus and deficit of fund
  6. Development of a healthy capital and money market
  7. Providing various services and utilities to the public
  8. Development of standard of living
  9. Maintaining justice and equity at all level of transaction
  10. Swissing over to mass banking from class banking
  11. Alleviating Poverty through Zakat and profit sharing micro-finance


History of Islami Banking:

During Sumerian, Babylonian and Mesopotamian civilization, temples gave loans to states and individuals and accumulated much wealth prompting various councils to issue decrees.

The city of Mecca was a complex and heterogeneous place, where clan and tribal community were involved in interest based loans.

Prophet (Pbuh) and his companions were to introduce Arabs to Islam. There is evidence to indicate that the development of Islami Banking started from the time of Prophet (Pbuh)

Four revelations of Al-Quran specifically dealing with interest are milestone which later shaped the operational aspects of the Islami Banking system.

There are numerous Hadiths relevant to banking which clearly prohibits Muslim from accepting or paying riba.

The only known organized financial institution originated during prophet (Pbuh) was the Baitul Mal (state treasury).

Baitul Mal was involved in state income, expenditure, and development purpose. Evidence indicates that the two sons of Caliph Umar were given loans from Baitul Mal which they used on their way back to Madina for trading and consequently earned the profit. Caliph declared it as Mudaraba and taken half profit for Baitul Mal against involved capital (Ref: Muatta Imam Malik).


* Institutional Development:

1962 Pilgrims Savings Corporation, established in Malaysia.

1963 Savings Bank Established by Dr. Ahmed – Al-Nazzar, who played the pioneer role in establishing the first Islamic Bank in modern world. Named Mithhamar Bank in the bank of the Nile of Egypt.

1969 Tabung Hajji – Non bank financial Institutions in Malaysia.

Initial steps in establishing Islami bank in various countries has largely been undertaken by private initiatives.

Major contribution by late King Faisal bin Abdul Aziz Al Saud of Saudi Arabia by initiating the establishment of the Organization of Islamic Conference.

Under his Majesty’s leadership and initiative, Muslim countries were urged to establish Islamic financial and economic institutions which were free from riba (Interest)

1970 OIC Minister Conference Approach to establish IDB

1971 Naser Social Bank – Ex. Mit Ghamar Bank.

1973 Resolved to establish IDB in the Finance Minister Conference

-1975 Work of 1DB started at Jeddah at 20th 0f October 1975


Pioneer Banks-1975-1985

 – Kuwait Finance House.

– Islamic Development Bank

– Faisal Islamic Bank of Sudan.

– Jordan Islami Bank for Finance and Investment.

– Bahrain Islamic Bank

– Islami Investment & Exchange Corporation.

– Dubai Islami Bank

1978 Western Countries – Islami Banking System International Holdings, SA. Luxemburg.

1981 Daar Al Maal Al Islam (DM1- in Many Muslim Countries)

1983 In London – Islamic Finance House.

1985 Al- Rajhi Banking Investment Corporation K.S. A.


Islami Banking in Bangladesh:

1974 – Bangladesh signed the charter of Islamic Development Bank and committed to re-organize its economic & financial system as per Islamic Shariah.

1978- Bangladesh recommended in Islamic Foreign Minister conference in Senegal towards systematic effórts to Islamic Banking.

1980 – Foreign Minister Conference in Pakistan where Bangladešh Foreign Minister Prof. Shamsul Hoq, proposed for taking steps for Islamic Banking.

1980 – Bangladesh Bank sent representation abroad to study Islamic Banking System,

1980 – International Seminar held in Dhaka inaugurated by Bangladesh Bank Governor for early introduction of Islamic Banking.

1981 – President of the peoples Republic of Bangladesh addressed the 3rd Islami summit conference at Makka & Taif to suggest as “The Islamic countries should develop a rate Banking system of their own in order to facilitate their trade & Commerce.

1982 – 1DB visited Bangladesh for Study They found contributions done by Islamic

Economics Research Bureau (IERB) & Bangladesh Islamic Bankers Association (BIBA), they mobilized the seminars, public opinion through symposia & workshop.

Professional activities reinforced by Muslim Businessman Society (now reorganized as Industrialists and Businessman Association) The body mobilized mainly equity capital for emerging Islamic Bank.

1983 13.03.1983 IBBL under companies Act. Function on 30.03.1983. with major share by the foreign entrepreneurs.

– First Chairman Jb. Abdur Razzaque Lasker, Owner of Eastern Regal Industries/

– First Executive President Jb. Abdul Karim, Ex. M.D: of Rupali Bank.

– 1987 20.05.1987 Al Baraka Bank -Now The Oriental Bank Ltd.

– 1995 27.09.1995 Al Arafah Islami Bank Ltd.

– 1.995 22.11.1995 Social Investment Bank Ltd. with Foreign Shares

– 1997 August, Shamil Bank of Bahrain EC (Islamic Bankers) a foreign ownership Bank. Now Converted Bank Al-Falah

– 2001 10.05.2001 Shahjalal Bank Ltd.

– 2003 04.12.2003 Export-Import Bank Ltd.

– 2009 01.01.2009 First Security Islami Bank Limited.

– At present 12.9% of total banking business owned by the Islamic Banks in Bangladesh.


Interest-based traditional banks with Islami Banking Branch

  1. Prime Bank Ltd.
  2. Dhaka Bank Ltd.
  3. Southeast Bank Ltd
  4. The City Bank Ltd
  5. Premier Bank Ltd.
  6. Arab Bangladesh Bank Ltd.

Many other Banks are trying to either Islamise or to open Islamic Windows.

Islamic Banks and Financial Institutions around the world: Up to 400 Institutions are working at present.

Islamisation process of the Institutions


  1. International Association of Islamic Banks (TAIB) founded in KSA in 1997.
  2. Iran, Pakistan & Sudan have already started all banks and the financial institution is Islamic: during 1979 to 1989 in Bangladesh:
  1. The central Bank of Trap (Bank Markazi Jomhuri Islami Iran) organaizes International Training Courses every year for the high ranking bank officials for Islamization of banks.
  1. Islami Bank Centrai Shariah Council in Bangladesh Established on 2001
  2. Islamic Bank Consultative Forum (IBCF) Established on 1995
  3. Central Bank started shariah Auditing to develop the shariah Implementation process in Islamic Banks from the Late 2004.
  1. A separate Islami banking Act is under process with central bank for better control and guidelines for the Islami Banks.
  1. Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) Agreements signed by all of the Islamic Financial Institution on 26 February, 1990 Registered on 27th March 1991 in the state of Bahrain to develop accounting & auditing standards, good governance and uniformity amongst all the Islamic financial Institution around the world.

They have already developed the

  1. Shariah Standards
  2. The Accounting & Auditing Standards
  3. The good governance standard.
  1. Seminars, Training programs, publications etc are continued by different institutions

like IDE for developing Islamic Banking ideas around the world.


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