Islamic banking, Islamic finance ( masrifiyya 'islamia), or Sharia-compliant financeKhan, Ajaz A., Sharia Compliant finance| halalmonk.com is banking or financing activity that complies with Sharia (Islamic law) and its practical application through the development of Islamic economics. Some of the modes of Islamic finance include mudarabah (profit-sharing and loss-bearing), wadiah (safekeeping), musharaka (joint venture), murabahah (cost-plus), and ijarah (leasing).
Sharia prohibits riba, or usury, generally defined as interest paid on all loans of money (although some Muslims dispute whether there is a consensus that interest is equivalent to riba). Investment in businesses that provide goods or services considered contrary to Islamic principles (e.g. pork or alcohol) is also haram ("sinful and prohibited").
These prohibitions have been applied historically in varying degrees in Muslim countries/communities to prevent un-Islamic practices. In the late 20th century, as part of the revival of Islamic identity,Usmani, Introduction to Islamic Finance, 1998: p. 6 a number of Islamic banks formed to apply these principles to private or semi-private commercial institutions within the Muslim community.Saeed, A. (1996). "Islamic Banking and Interest: A Study of the Prohibition of Riba and its Contemporary Interpretation". Leiden, Netherlands: E. J. Brill. Their number and size has grown, so that by 2009, there were over 300 banks and 250 mutual funds around the world complying with Islamic principles.
By 2024, estimates of total Sharia-compliant assets ranged from US$3.88 trillion according to the Islamic Financial Services Board's Stability Report 2025, to US$5.98 trillion according to the ICD–LSEG Islamic Finance Development Report 2025, which applied a broader definition of the Islamic economy across 140 countries. The Gulf Cooperation Council region accounted for the largest share at 53.1% of IFSB-measured assets, followed by East Asia and the Pacific at 21.9%, driven by Malaysia and Indonesia.
Although Islamic banking still makes up only a fraction of the banking assets of Muslims, since its inception it has been growing faster than banking assets as a whole, and is projected to continue to do so.Islamic finance in the global economy, 2000: p. 21
The Islamic banking industry has been lauded by devout Muslims for returning to the path of "divine guidance" in rejecting the "political and economic dominance" of the West, and noted as the "most visible mark" of Islamic revivalism; its advocates foresee "no inflation, no unemployment, no exploitation and no poverty" once it is fully implemented. However, it has also been criticized for failing to develop profit and loss sharing or more ethical modes of investment promised by early promoters, and instead merely selling banking productsQureshi, D.M. 2005. Vision table: Questions and answers session. In Proceedings of the First Pakistan Islamic Banking and Money Market Conference, 14–15 September, Karachi that "comply with the formal requirements of Islamic law",Fadel, Mohammad. 2008. Riba, efficiency, and prudential regulation: Preliminary thought. Wisconsin International Law Journal 25 (4) (April) 656 but use "ruses and subterfuges to conceal interest", and entail "higher costs, bigger risks" than conventional (ribawi) banks.
History
Usury in Islam
Islamic finance is based upon the belief that "all forms of interest are riba and hence prohibited". The word "riba" literally means "excess or addition", and has been translated as "interest", "usury", "excess", "increase" or "addition".
According to Islamic economists Choudhury and Malik, the elimination of interest followed a "gradual process" in early Islam, "culminating" with a "fully fledged Islamic economic system" under Caliph Umar (634–644 CE).Choudhury, M.A. and Malike, U.A. (1992) The Foundations of Islamic Political Economy, London: Macmillan; New York: St. Martin's Press. p. 104
Other sources (Encyclopedia of Islam and the Muslim World, Timur Kuran), do not agree, and state that the giving and taking of interest continued in Muslim society "at times through the use of legal ruses (ḥiyal), often more or less openly,"Encyclopedia of Islam and the Muslim World, p. 596 including during the Ottoman Empire.Kuran, The Long Divergence, 2011: p. 148Kuran, The Long Divergence, 2011: p. 152 Still another source (International Business Publications) states that during the "Islamic Golden Age" the "common view of riba among classical jurists" of Islamic law and economics was that it was unlawful to apply interest to gold and silver currencies, "but that it is not riba and is therefore acceptable to apply interest to fiat money—currencies made up of other materials such as paper or base metals—to an extent."
In the late 19th century Islamic modernists reacted to the rise of European power and influence and the European colonization of Muslim countries by reconsidering the prohibition on interest and whether interest rates and insurance were not among the "preconditions for productive investment" in a functioning modern economy. Syed Ahmad Khan, argued for a differentiation between sinful riba "usury", which they saw as restricted to charges on lending for consumption, and legitimate non-riba "interest", for lending for commercial investment.
However, in the 20th century, Islamic revivalists, Islamists, and other Islamic activists worked to define all interest as riba, to enjoin Muslims to lend and borrow at "Islamic banks" that avoided fixed rates. By the 21st century this Islamic banking movement had created "institutions of interest-free financial enterprises across the world".Choudhury, M.A. and Malike, U.A. (1992) The Foundations of Islamic Political Economy, London: Macmillan; New York: St. Martin's Press., p. 104 Loans are permitted in Islam if the interest that is paid is linked to the profit or loss obtained by the investment. The concept of profit acts as a symbol in Islam of equal sharing of profits, losses, and risks.
The movement started with activists and scholars such as Anwar Qureshi,Qureshi, Anwar Iqbal. Islam and the Theory of Interest, with an Introduction by Syed Sullaiman Nadvi, Lahore, Muhammad Ashraf, xxiw, 223p. Arabic translation al-Islam wa'l riba by Faruq Hilmi, al-Qahirah Maktabah, Misr, 158p. Naeem Siddiqui,Siddiqui, Naeem. "Islami usul par banking" (Banking according to Islamic principles) Chiragh-e-Rah (Karachi) 1(11), November 1948: 60–64; 1(12), December 1948; 24–28 Abul A'la Maududi, Muhammad Hamidullah, in the late 1940 and early 1950s. They believed commercial banks were a "necessary evil," and proposed a banking system based on the concept of mudarabah, where shared profit on investment would replace interest. Further works specifically devoted to the subject of interest-free banking were authored by Muhammad Uzair (1955), Abdullah al-Araby (1967), Mohammad Najatuallah Siddiqui,(1961, 1969. The 1969 work isG̲h̲air sūdī bank kārī. 1969 al-Najjar (1971) and Muhammad Baqir al-Sadr.Muhammad Baqir al-Sadr, Iqtisaduna 1961; Al-Bank al-la Ribawi fi al-Islam (Usury-free Banking in Islam) 1974.
Since 1970 The involvement of institutions, governments, and various conferences and studies on Islamic banking (the Conference of the Finance Ministers of the Islamic Countries held in Karachi in 1970, the Egyptian study in 1972, the First International Conference on Islamic Economics in Mecca in 1976, and the International Economic Conference in London in 1977) were instrumental in applying the application of theory to practice for the first interest-free banks.ISLAMIC BANKING By A.L.M. Abdul Gafoor 4.1 Historical development Sami Hassan Homoud, established the Jordanian Islamic Bank in 1978. (source: ) At the First International Conference on Islamic Economics, "several hundred Muslim intellectuals, Sharia scholars and economists unequivocally declared ... that all forms of interest" were riba.
By 2004, the strength of this belief (which is the basis of Islamic finance) was demonstrated in Pakistan—when a minority (non-Muslim) member of the Pakistani parliament questioned it, pointing out that a scholar from Al-Azhar University (one of the oldest Islamic universities in the world), had issued a decree that bank interest was not un-Islamic. His statement resulted in "pandemonium" in the parliament, a demand by members of the leading Islamist political party to immediately respond to these allegedly derogatory remarks, followed by a walkout when they were denied it. When the upset members of parliament returned, their leader (Sahibzada Fazal Karim), stated that since the Pakistan Council of Islamic ideology had decreed that interest in all its forms was haram (forbidden) in an Islamic society, no member of parliament had the right to "negate this settled issue".Govt accused of fudging figures: Poverty reduction| dawn.com | 17 June 2004
The council's decree notwithstanding, over the years a minority of Islamic scholars (Muhammad Abduh, Rashid Rida, Mahmud Shaltut, Syed Ahmad Khan, Fazl al-Rahman, Muhammad Sayyid Tantawy and Yusuf al-Qaradawi) have questioned whether riba includes all interest payments.Siddiqi, Riba, Bank Interest, 2004: p. 55–56 Others (Muhammad Akran Khan) have questioned whether riba is a crime like murder and theft, forbidden by Sharia (Islamic law) and subject to punishment by human beings, or simply a sin to be inveighed against, with the reprimand left to God, since "neither the Prophet nor the first four caliphs nor any subsequent Islamic government ever enacted any law against riba."
With an increase in the Muslim population in Europe and the current lack of supply, opportunities will arise for the important role which Islamic finance plays in Europe's economy. In particular, Luxembourg is emerging as a leader and hub for Islamic funds.
Banking
While revivalists like Mohammed Naveed insist Islamic banking is "as old as the religion itself with its principles primarily derived from the Quran", secular historians and Islamic modernists see it as a modern phenomenon or "invented tradition".see also
Early example: Zubayr ibn al-Awwam It is argued that in practice the fundraising business of Zubayr ibn al-Awwam was banking with zero interest. Zubayr pioneered this practice by technically modifying the money-keeping service to be a loan which Zubayr was obligated to pay off, while he also got privilege to manage the money he kept to do his business. Zubayr's practice of accepting deposits while not charging any interest meant Zubayr died with an inflated debt of 2,000,000 Dinar. However, Zubayr invested his clients' deposits in his own lucrative businesses, so his inheritors managed to settle his debts while still leaving an inheritance for his family. After his death, his son Abdullah ibn Zubayr sold the property for 1.600.000 dinar. This practice was allowed according to classical scholar consensus, such as Ibn Taymiyyah in his Majmu Fatawa.
Early banking According to Timur Kuran, by "the tenth century, Islamic law supported credit and investment instruments" that were "as advanced" as anything in the non-Islamic world, but prior to the 19th century there were no "durable" financial institutions "recognizable as banks" in the Muslim world. The first Muslim majority-owned banks did not emerge until the 1920s.Kuran, Timur. 2004. Islam and Mammon: The economic predicaments of Islamism. Princeton, NJ; Princeton University Press, pp. x–xi
An early market economy and an early form of mercantilism, sometimes called Islamic capitalism, was developed between the eighth and twelfth centuries.Subhi Y. Labib (1969), "Capitalism in Medieval Islam", The Journal of Economic History 29 (1), p. 79–96 [81, 83, 85, 90, 93, 96]. The monetary economy of the period was based on the widely circulated currency the gold dinar, and it tied together regions that were previously economically independent.