Introduction 13
if and when it comes into being, will help reduce the risk of moral
hazard and lead to a better distribution of risk, it will not address the
inherent and fundamental fragility of a system based largely on debt
contracts.The fi nancial crisis of 2007–2009 reinforced and exposed many of the
inherent vulnerabilities of a debt-based system: excessive leverage, failure of
market discipline, complex derivatives remote from real economic transac-
tions, and lapses of corporate governance. Askari et al. (2010) examined the
crisis and have argued that an Islamic fi nancial system would be more stable
when followed in its essence.
MODERN HISTORY OF ISLAMIC BANKING
AND FINANCIAL SERVICES
Although Islam has provided a blueprint of how a society is to be organized
and how the affairs of its members are to be conducted in accordance with
its prescriptions, with the exception of a brief period following its incep-
tion the system itself has not been applied in its entirety. The economy at
that time was, of course, much less complex than the economies of mod-
ern times. The business practices of the day conformed to the principles
of Islam and the element of “interest” was minimized. Indeed, the practice of
interest was also condemned by other major religions and the institution
of interest had yet to be developed. It is only in recent decades, when the
element of interest became an integral part of economic life, that Muslims
have been forced to become more conscious of its existence at a time of
growing interest in the wider implementation of Islamic teachings.
It is for this reason that our discussion on the history of Islamic eco-
nomics and fi nance is limited to developments since the nineteenth century.
These developments towards implementing a Shari’ah-compliant economic,
fi nancial, and banking system can be divided into three phases.
Phase I: Pre-1960
Throughout the nineteenth century and through a good part of the twenti-
eth century, several Muslim countries were under colonial rule. During the
colonial period, these Muslim societies to varying degrees lost touch with
their old traditions, values and cultural heritage. Although there is evidence
of resistance to the imposition of colonial values and a desire to return to the
Islamic tradition, such efforts were not widespread. It was only after the end
of the colonial period that Muslims began to re-discover their identities and
manifested the desire to regain the lost values in all aspects of life, especially
in the economic sphere.