The first Islamic bank opened in 1975 to mixed reactions; today, an Islamic instutution, the Dubai Islamic Bank, is considered a reputable bank in its region. Islamic banks avoid riba (interest) in following the guidelines set forth in
Capital should flow in an Islamic economy as blood flows in the human body. Funds should go where they are needed. With the domination of
Interest is at the core of today's banking system. It is well understood that interest impedes projects with low profit margins. This impediment can be particularly problematic in the less-developed world.
Islamic economics is more a normative science than a positive one. The social sciences in
Islamic revivalism has spurred the creation of Islamic banking and finance. Islamic banks utilize equitable risk sharing instead of riba, which shari`a prohibits.
The recent popularity of Islamic banking has prompted many to wonder how Islamic banks relate to other banks, how they could cooperate with Western banks, and how they should be regulated. Some believe that Islamic finance is incompatible with banking elsewhere due to the inordinate amount of risk depositors bear in an Islamic bank and other differences that would hamper the regulation of such banks.
The bayt al-mal was central to the Islamic banking and financial system and is the precursor of modenr Islamic banks.
Financial sector reforms in developed and developing countries over the past two decades have been highly beneficial. Under these reforms, an economy with greater flexibility of interest rates, an enhanced role for market forces in credit allocation, increased autonomy of commercial banks, and a gradual deepening of money and securities markets is taking shape. Reduced credit rationing and greater interest rate flexibility have led to improved allocation of financial resources. An increase in competition between banks has lowered the cost of inter-mediation.