For hundreds of years, there was no need for Islamic finance because there was simply no financial system to “Islamise.” Up until the second half of the 19th century, the vast majority of the Muslim population around the world was unbanked and the prohibition of interest was applied on transactions by tradition rather than by law or regulatory bodies. During the colonial era, Western banks and financial institutions penetrated Muslim countries and imposed interest-based methods on the Islamic world. In the 1940s and 1950s, independence movements pushed for the revival of Islamic culture and religious scholars in countries such as India, Pakistan and Egypt started to condemn the use of interest by banks. They proposed to prohibit interest and replace it with Islamic risk-sharing. Localised Islamic finance experiments took place in the 1960s in Egypt and Malaysia. In many ways, Islamic finance was born as a rebellion against colonialism and for self-determination. The idea was to provide an ethical alternative to the Western-dominated international financial system based on the Quran. In the 1970s, Persian Gulf countries — which were both suddenly incredibly rich with petro-dollars and extremely conservative in religious belief — took Islamic finance beyond local experiments and created the Saudi Arabia-based Islamic Development Bank in 1975 followed by the Dubai Islamic Bank in 1979. Because the establishment of the first sharia-compliant institutions coincided with the rapid economic development of their home countries, a large share of Islamic investments went into the construction and real estate sectors. Islamic finance expanded quickly, first in the Arab world and East Asian countries with significant Muslim populations before reaching the West and especially the UK in the early 2000s. In parallel to that expansion, two regulating bodies emerged — the Accounting and Auditing Organisation for Islamic Financial Institutions (AAOIFI) in Algeria (now relocated to Bahrain) and the Islamic Financial Services Board (IFSB) in Malaysia.—Agencies
