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The Journey of Islamic Finance

Ancient roots to modern horizons

Published: 08:47, 19 April 2024

Update: 08:59, 19 April 2024

Ancient roots to modern horizons

Photo : Messenger

Islamic finance, a fusion of ancient principles with modern innovation, has emerged as a dynamic force in the global economy. Rooted in Quranic and Sunnah principles, its journey traces back centuries, embodying the ethos of ethical finance and social responsibility.

At its core, Islamic finance is governed by Fiqh al Muamalat, a jurisprudential framework derived from Quranic teachings and the traditions of Prophet Muhammad. Contrary to common misconceptions, Shariah law is not static but evolves in response to intellectual inquiry and societal context.

Scholars like Imam Abu Hanifa played a pivotal role in shaping Fiqh al Muamalat, preparing a jurisprudence that balanced rationality with ethical considerations. Their efforts gave rise to innovative financial instruments such as the “Sakk” and “Hawala” facilitating trade along the Silk Route while upholding principles of fairness and justice.

The modern era of Islamic finance took root in the 1960s with the Mit Ghamr experiment in Egypt, where Dr. Ahmed Elnaggar established a profit-sharing financial institution. This venture, devoid of interest-based transactions, focused on real economy investments, laying the groundwork for subsequent Islamic banking endeavors.

In the 1970s, the establishment of Islamic banks in the Gulf, including the Dubai Islamic Bank and the Islamic Development Bank, marked a significant milestone in the industry’s evolution.

Fueled by soaring oil prices, these institutions offered an alternative financial model based on profit-sharing and risk-sharing principles.

However, challenges persisted, including the need for a liquid capital market and robust regulatory frameworks. Malaysia emerged as a pioneer in the 1980s, introducing sophisticated instruments like Sukuk (Islamic bonds) and Shariah-compliant stock screening.

As the Islamic finance sector expanded, it became evident that conventional accounting and regulatory standards were inadequate. In response, organizations like the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the Islamic Financial Services Board (IFSB) were established to develop Shariah-compliant frameworks and regulatory guidelines.

The turn of the millennium witnessed a surge in international interest, with investment banks entering the Islamic finance arena. Deutsche Bank’s pioneering efforts in structuring innovative products in the early 2000s heralded a new era of growth and diversification.

However, the global financial crisis exposed vulnerabilities within the industry, prompting a recalibration of strategies and a renewed focus on stability and compliance. Amidst these challenges, financial technology (fintech) emerged as a transformative force in Islamic finance.

Fintech offers opportunities to enhance efficiency, reduce costs, and broaden access to financial services. It presents avenues for innovation in areas such as cryptocurrency, non-bank financing, and investment products, reshaping the industry landscape.

The evolution of Islamic finance epitomizes resilience, adaptability, and innovation. From its inception rooted in timeless principles to its embrace of modernity through fintech, Islamic finance continues to chart new frontiers in the global economy. As the industry navigates the complexities of the digital age, its foundational ethos of ethical finance and social responsibility remains unwavering, driving inclusive and sustainable economic growth.

In essence, the evolution of Islamic finance showcases the harmony between tradition and innovation. From its roots in ancient principles to its embrace of modern technologies, Islamic finance has demonstrated resilience and adaptability as we look to the future, the industry stands poised to leverage fintech for greater efficiency and accessibility. Yet, amidst the advancements, the core values of ethical finance and social responsibility remain unwavering. In this transformation journey, Islamic finance continues to be a beacon of inclusivity and sustainability, offering a path towards a more equitable and prosperous future for all.