Overview of Islamic Banking

History of Islamic Banking

While the initiation of modern Islamic Banking dates back to 1963, the present-day practice debuted in 1975, when banks were established and mandated to operate in adherence to Shari'a rules and principles. Ever since, Islamic Banking has been one of the fastest growing sectors in the global banking industry. As new geographies continue to open up to Islamic Banking, industry forecasts suggest that Islamic Banking assets held by commercial banks globally will continue to grow.

The pace of growth has increased dramatically over the past decade driven by awareness and demand, as well as easier access to Islamic Banking services. Across world markets, and particularly in the GCC, South-East and South Asia (which is home to over 50% of the total Islamic Banking industry), the strategy has been to allow a dual banking system, whereby Islamic Banking co-exists with conventional banking.

The growth of the Islamic Banking industry has been fuelled by surging demand for Shari'a-compliant products, not only from financiers in the Middle East and other Islamic countries, but also by investors worldwide, thus making it a global industry. Besides its vast geographical expanse, Islamic Banking is witnessing rapid expansion across the whole spectrum of financial activities including personal banking, insurance and capital market investments. The continued growth in the Islamic banking industry is attributable to three factors: increasing demand from a large number of Muslim communities (including Muslim immigrants to western countries); oil wealth in GCC countries; and the growing attractiveness of Shari'a-compliant financial services to non-Muslim investors seeking 'ethical' investments and banking practices.

Oman's Islamic banking (including Islamic windows) is expected to continue its steady growth over the coming years. Reports and banking experts are also expecting that Oman should witness a growth of sukuk as local and regional players look to raise funds in a Shari'a compliant manner.


Islamic banking is an Islamic financial system conducting banking and business activities in line with the provisions and principles of Islamic Shari'a '. It follows the beliefs and principles of Islamic jurisprudence pertaining to trade and business, so-called fiqhal-muamalat or Islamic rules on transactions. The Quran, Sunnah and other sources of Islamic law such as Ijma' (opinions collectively agreed among Shari'a scholars), Qiyas (analogy) and Ijtehad (personal reasoning) collectively form the basis, from which rules and practices of fiqhal-muamalat (Islamic jurisprudence) are derived.

Islamic banking avoids all the prohibited activities such as riba (usury-interest), gharar (uncertainty), financing of haram (forbidden) trades & businesses like alcoholic beverages, pornography, gambling, etc.

The basic difference between Islamic banking and conventional banking is that Islamic Banking based on principles of Shari'a while conventional banking is purely man-made. Thus all aspects of transactions like products' features and business approach are derived from the Shari'a law, which lead to a significant difference with those of the conventional banks.

Islamic bank does not compromise on the Islamic Shari'a rules, though it is a profit-making organization. Islamic banking is not based on pricing and exchanging money and earning interest as conventional interest-based banks do, but it is a system of trade where goods and services are sold and capital is invested by taking risk to earn Shari'a -compliant profits. It is based on the Quranic injunction whereby trade has been permitted and riba has been prohibited.

Amongst the governing principles of an Islamic bank are:

  • The absence of interest-based (Riba) transactions
  • The avoidance of economic activities involving oppression (Dhulm)
  • The avoidance of economic activities involving speculation (Gharar)
  • The avoidance of speculative activities (Qimar)
  • The discouragement of the production of goods and services which contradict the injunctions of Islam (Haram)

Social Responsibility

The Islamic banks have significant roles in the social responsibility. Moreover, the core and guidelines of Islamic economics spontaneously achieve the justice and equality, an example for that, the Zakat payment on annual basis by the Islamic banks which goes to the needy people and zakat channels as outlined in the Holy Quran, as it helps in alleviation of poverty. Zakat is a religious levy deducted from the bank net income and to be paid annually. Further, the microfinance products contribute in achieves some balance in the community by financing the limited income category.

Social responsibility of Islamic banks refers to all activities carried out by it, to accomplish religious, economic and ethical responsibilities. In other words, Islamic banks are responsible and obligated towards community to carry out a fully Shari'a-compliant banking and services, and to obey the rules of Islam in all dealings and businesses, this is in regard to the religious responsibility. In respect to the economic responsibility, Islamic banks should conduct a profitable and financially viable business and reserve and develop the moneys of the Shareholders and Depositors. Ethical responsibility refers to the obligation of the Islamic banks to respect and value the community religious and customary norms which are not codified in laws.