Islamic banking: a historical perspective

The idea that God owns all things is at the core of Islamic economics. A second cornerstone of the Islamic economic system stems from the fact that the Qur'an strictly prohibits interest-bearing transactions but permits trade. The Prophet Muhammad (SAW) was a trader for much of his life. Islam allows investment income and a negotiable ratio of profit sharing but forbids a guaranteed return on capital. Historically, Muslims who avoid riba simply have deposited funds and refused to take interest. They instead have participated in land speculation, which has expended much energy. Islamic banking responds to the concerns of such Muslims. In a mudaraba (trust partnership), capital is supplied to a party skilled in earning profits -- the gains are shared and any losses are in proportion to the contribution. Thus, the financier may lose his money and the mudarib (agent) may lose his time. Mudaraba investment is a popular Islamic finance tool based on trust-worthiness. A mudarib is