1960s)
Having discussed the different phases of Islamic economics and finance develop- ment, its growth and decline and factors that influenced its development, it is now the time to analyse its modern revival and the emergence of its great innovation of Islamic banking in modern history.
Following the economic development and the political changes that we analysed in the previous six phases of the history of Islamic finance, most Gulf countries, in Fig. 5.1 Planning the Suez Canal sea routes (Katibi 1994)
Fig.5.2TheSuezCanalsearoutesandshiftitmadeinthetradingrouts(Katibi1994)
5.4 Phase Seven: Islamic Finance Revivalism (1950s–1960s) 71
this phase, in the 1950s and 1960s had their first introduction to the modern banking system. The focus on the Gulf countries is because Islamic banking emerged successfully there for the first time.
This introduction according to Smith proved to be problematic. Throughout the Gulf countries, mainly in Saudi Arabia, religiously observant individuals chose to leave their money in non-interest bearing accounts or they avoided the formal banking system altogether. The challenge increased to reconcile the Gulf financial system sectors and norms of Western finance with the prevailing belief amongst Gulf people that dealing in any form of interest is forbidden in Islam (2006: 1).
‘These religious constraints imposed economic costs, as the gap between local norms and global financial practices impeded free capital flows by preventing global financial markets from accessing a segment of Gulf capital and Gulf citi- zens’. A solution to this problem was introduced in 1970s2in the form of a new type of financial intermediation. This was created through the efforts of observant Muslim activists, Islamic legal scholars, economists and businessmen to apply Islamic law to the economic realm (Smith 2006: 2).
Throughout the history of Islam, religious leaders have emerged, invariably identifying the problems of Muslims as being the result of their desertion of the correct path of their religion (El-Ashker and Wilson 2006: 315). This has always been the case throughout history from the time of the first schism in Islam over the caliphate,Fitnah, to the time of the crushing defeat of the Egyptian, Syrian and Jordanian armies by the Israelis in the 1967 six-day war. Calls for religious reform did not go unopposed. The call for secularization was equally strong, from some modern movements that were influenced somehow by liberal ideologies, though it was a call for a move in the opposite direction in order to move away from religious constraints (El-Ashker and Wilson 2006: 315).
If this was the full story, as we believe it to be, of Islamic finance it would definitely prove challenging enough for current economic theories. Smith (2006: 5) argues that Islamic finance cannot be fully captured by economic or cultural studies.
It should be also perceived as a political institution that seeks power and presence in the political sphere through finance. She further argues that Islamic finance repre- sents one of the more prominent achievements of broad intellectual and political programme known as Islamisation according to Stenberg (1996) and Euben (2002).
Smith’s (2006) argument ignores the different phases of Islamic finance that we discussed earlier in this chapter, and focuses only on the founding of Islamic banks in the 1970s from a political perspective. She argues that the Islamisation move- ment gained political power by adopting Islamic finance, this then influenced decision makers in the Gulf States to ride this wave and keep it under their control.
2We should note that there had been attempts in establishing Islamic banking in the 1960s in Pakistan and the well-known experiment in the founding of a rural development bank in Mit Ghamr Savings Bank in Upper Egypt in 1963, however, the first commercial Islamic banks appeared in the 1970s in the Gulf.
It is not fair and accurate for Islamic finance to be studied and explained out of context and in isolation of its history and development.
Some writers (see Kerr 1971 and Smith 2006) attribute the founding of Islamic banks to a political agenda pursued by the Muslim Brotherhood which was founded in Egypt in the 1920s as an anti-colonial, pan-Islamic political movement.
Kerr argues that during the Arab Cold War of the 1950s and 1960s which pitted Arab nationalists against conservative monarchies, many Islamic activists from the Muslim Brotherhood found refuge in the Arab Gulf. Members of the Muslims Brotherhood from Egypt and other countries assumed professional positions in the public sector and were mainly prevalent in the rapidly expanding educational system (1971: 25–45). From that position, they were able to share their views on Islam and public life to persuade many Gulf people of their way of thinking. Overtime, the Gulf witnessed the formation of Islamic social reform that was affiliated to varying degrees with the Muslim Brotherhood. These groups and affiliations were later instrumental in bringing Islamic banking to the Gulf region (Kerr 1971: 25–45).
The direct role of Islamic political movements in Islamic finance is a subject of debate. This central and formal role of the political movements and the attribution of it to the Muslim Brotherhood is argued largely and disputed by some writes like Kahf (2004).
This is because, Islam is the guide and Islamic law is the framework that governs all aspects of life for Muslims including economics and finance. This has been the case during the history of Islamic finance which we discussed in its different phases.
Therefore, Islamic finance cannot be viewed in isolation of the society and its history, or be interpreted as being a political motive; it should be studied in its, first and foremost, religious context, then social, historical and cultural contexts. This is in order to understand its aspirations and the recent innovation of the phenomenon of Islamic banking. It is hard to believe that members of the Muslim Brotherhood had that large an impact in changing the course of the whole of the Gulf region, as if people of the Gulf were completely ignorant about their religion and the prohibition of interest. This argument does not, however, dismiss completely the role of the specific Islamic movements, such as the partial role played by the Muslim Broth- erhood in that regard.