Timeline: The Evolution of Islamic Finance
Part of the Islamic Finance For Dummies Cheat Sheet
The modern Islamic finance industry is young; its timeline begins only a few decades ago. But Islamic finance is evolving rapidly and continues to expand to serve a growing population of Muslims as well as conventional, non-Muslim investors.
The core concepts of Islamic finance date back to the birth of Islam in the 6th century; Muslims practiced a version of Islamic finance for many centuries before the Islamic empire declined and European nations colonized Muslim nations. The modern Islamic finance industry emerged only in the 1970s, in large part because of efforts by early 20th-century Muslim economists who envisioned alternatives to conventional Western economics (whose interest-based transactions violate Islamic law).
Here are some of the key events in the short history of the modern Islamic financial industry:
In 1963, the Mit Ghamr Savings Bank in Egypt was opened, becoming the first modern Islamic bank on record.
Also in 1963, the Pilgrims Saving Corporation of Malaysia — although not a bank — began to incorporate basic Islamic banking concepts.
In 1975, the Islamic Development Bank opened in Saudi Arabia and gave the Islamic finance industry an international presence. It recruited member countries and then offered them financial products to promote economic and community development.
In 1979, the first Islamic insurance (or takaful) company — the Islamic Insurance Company of Sudan — was established. (Muslims cannot purchase conventional insurance products because those products involve interest-based transactions, uncertainty, and gambling, which are all prohibited by Islamic law.)
In 1990, the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) was created to establish industry accounting and auditing standards.
Also in 1990, the Islamic bond market emerged when the first tradable sukuk — the Islamic alternative to conventional bonds — were issued by Shell MDS in Malaysia.
In 1996, Citibank began to offer Islamic banking services when it established the Citi Islamic Investment Bank in Bahrain.
In 1999, the Dow Jones Islamic Market Index (DJIMI) was established, becoming the first successful benchmark for the performance of Islamic investment funds.
In 2002, the Malaysia-based Islamic Financial Services Board (IFSB) was established as an international standard-setting body for Islamic financial institutions.
In 2004, the Islamic Bank of Britain became the first Islamic commercial bank established outside the Muslim world.
In total, more than 500 Islamic financial institutions have been established worldwide since the 1970s, including about 300 Islamic banks. In the past two decades, the Islamic finance industry has averaged growth of 14 percent per year, and its assets are estimated to be worth $1 trillion. Islamic financial institutions are currently operating in 75 Muslim and non-Muslim countries.