Diversification of Islamic Financial Instruments
10
2015 included Pakistan (2012), Indonesia and Nigeria (2013), UAE (2014) and even Kenya
(2015).7
Over the past three decades, different Islamic finance contracts and principles have been
developed to be used in the diversified products in the segments of Islamic banking, capital
markets and Takaful. For example, the idea of Islamic windows – dedicated Shariah compliant
units of a conventional financial institution (such as a bank, insurance firm, asset management
industry etc.) have been developed across several jurisdictions, with their regulatory
frameworks, partly to provide investors and customers with a greater diversity in Shariah
compliant financial services, and partly to aid in the growth of the Islamic finance industry.
Similarly, since 2012, there has been an added diversity in the different Sukuk structures used
to meet clients’ needs, and now include Ijarah, Mudarabah or Musharakah contracts, and also
BBA (Bai Bithaman Ajil – sale based on deferred payments), Murabahah, Wakalah, Salam and
Istisna. Tawarruq and commodity Murabahah instruments have been developed to meet the
liquidity management or financing needs of IFIs and corporates, respectively (though the use
of Tawarruq may be prohibited in some jurisdictions, e.g. in Indonesia, Middle East etc.). For
savings and current account products (which form a significant part of the Islamic consumer
banking markets), as Chapter 2 explains in more detail, products are usually based on
Mudarabah, Qard and Wadiah contracts. For Takaful products (an industry which began in the
1980s, but is still regarded as developing), often hybrid structures that use Mudarabah,
Wakala or Wakala-Waqf are used. Different Ijarah structures have been developed for both
consumer and project financing, Salam and Istisna based products are also used by IFIs in
corporate financing.
The origin of Islamic finance dates back to the dawn of Islam 1,400 years ago. Historical books
written during the early years of Islam indicated that during the 1stcentury of Islam (AD 600),
some forms of banking activities existed that were similar to modern banking transactions.
Furthermore, these ancient books revealed that Al-Zubair bin Al-Awam, one of the most
famous personalities in Islam, was accepting deposits from people as loans and investing that
money. At the time of his death, his debt had reached 2,200,000 dinar, as counted by his son
Abduallah.
Post that the revival of Islamic banking thought revived in the last century, which can be
divided into a few phases.
Phase 1: This stage began in the early 1900s and was marked by the writings of Abul Aala
Maudud, Hasan AlBanna, Hifz Al-Rahman etc on theory of Islamic economic state. The first
work devoted to the subject of interest-free banks was Muhammad Uzair‘s research in 1955
where he introduced the concept of banking within the Islamic financial system.
Phase 2: This stage involved tremendous development at both the intellectual and
implementation levels. The early banks became pillars for the continued development of the
Islamic financial system. The following points summarize the events that took place during this
period. 1. Local savings banks were established in Mit Ghamr, Egypt, in 1963. Many
researchers consider these banks to be the first banks without interest in Islamic society.
However, these banks merged with government banks in 1967 for political reasons
7 Takaful Primer, World Takaful Report 2016 by Middle East Global Advisors, pages 10-17.