The history and evolution of Islamic Banking dates back over 14 centuries ago to the origins of Islam when the Holy Quran was first revealed to Prophet Mohammed (PBUH), hence encompassing a complete set of rules and regulations for all aspects of life put forth in the Holy Scripture and authentic recordings of the Prophet’s traditions. The fundamental basis of Islamic Banking, which is based on the prohibition of charging interest or usury (Riba), is summarized in the Holy Quran in verse 275 from Surat Al-Baqara: “Those who swallow usury cannot rise up save as he ariseth whom the devil hath prostrated by (his) touch. That is because they say: Trade is just like usury; whereas Allah permitteth trading and forbiddeth usury. He unto whom an admonition from his Lord cometh, and (he) refraineth (in obedience thereto), he shall keep (the profits of) that which is past, and his affair (henceforth) is with Allah. As for him who returneth (to usury) - Such are rightful owners of the Fire. They will abide therein.” These verses in the Holy Quran are no doubt viewed as the guiding principle behind the theory and concept of Islamic Banking, which consequently led to the formation of Shari’a approved financial instruments or transactions practiced for centuries since the beginning of the Islamic era.
The modern day practice of Islamic Banking is a revival of the original Shari’a approved financial transactions that were dormant for a long time. The successful revival of Islamic Banking, which started taking shape in the mid-seventies of the 20th century in the Middle East, has led to an ever-growing presence and popularity of this industry within the global landscape. There are many financial instruments currently available in Islamic Banking, but this introduction covers a comprehensive overview of the 6 most common tools utilized worldwide for financial transactions in the market today.
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