us, forced themselves into almost every kind of business and their related transactions. This is when many Muslim intellectuals recognized the need for an Islamic banking system that will serve the needs of Muslims from the business point of view and at the same time respecting the codes of Islam.Islamic banking as an institution has been around for 25 years but interest-free banks have also been tried before. There was one such bank in Malaysia in the mid-forties and one in Pakistan in the late fifties. Neither of them survived. The early seventies saw the institutional involvement. The Islamic Development Bank, an inter-governmental bank was established in 1975. The first private interest-free bank, the Dubai Islamic Bank was also setup in 1975 by a group of businessmen from several countries. Two more private banks were founded in 1977 under the name of Faisal Islamic Bank in Egypt and Sudan. Twenty-five years since the establishment of the first Islamic bank, more than 150 Islamic institutions have come into existence. Though most of these are in Muslim countries, there are some in Western Europe as well as in North America and Asia. PRINCIPLES OF ISLAMIC BANKINGThe Islamic banking system follows certain, yet simple, rules set by the Qur’an and the Shari’ah (Islamic law), which if deviated from the system becomes un-Islamic. These are summarized as follows: 1. Any predetermined payment or benefit over and above the actual amount of principal is prohibited: Islam allows only the type of loan in which interest of any form is not charged. Interest in this case is in either monetary form or other beneficiary forms such as using the borrower’s property, etc. in return for the lent money. In other words, any type of benefit received by the lender from the borrower in return for lending the money is prohibited. This is different however from the concept of ‘profit-sharing’ which will be explained next. This i...
