4.2 Phases of the History of Islamic Finance and Its Innovation
4.2.4 Phase 4: Partial Growth (Thirteenth–Sixteenth Century)
The Islamic state, in this phase, started to revive in some aspects and decline in others. This revival began in Greater Syria (Bilad al Shaam) from 1168 when
4Sukuk: (singular sakk):deposit certificate. A document or certificate, which evidences the undivided pro-rata ownership of underlying assets—the Sakk (singular of Sukuk) is freely tradable at par, premium or discount.
Salaah El-Deen Al Ayyoubi conquered Egypt. This lasted until the fall of the Ayyoubian state after the death of Salaah El-Deen in the thirteenth century due to the conflict with the Seljuq Turks.5This was the beginning of the Seljuq Turk’s state in Syria and Egypt in 1250. During this phase, the Crusaders fleet of ships dominated the sea and all its trade and transport. The Tatar invasion also made the situation worse for the growth of the Islamic state and affected economic and financial development (Al Omar 2003: 110). This was concluded by the fall of Baghdad, the capital of the caliphate, which was destroyed by the Mongols (1220–1500), and the Euphrates, as historians tell us, were swamped with corpses.
Even the lives of the Abbasid caliph and his delegates who hurried to receive the Mongol Chieftain Hulagu to surrender were not spared (Al Doori 1981: 103).
Trade and finance, on the other hand, flourished in Syria and Egypt during this time under the Mamlouk rule. This was due to the relative political and economic stability during which trade increased with the Italian cities, this period of economic growth lasted until 1382 (Al Doori 1981: 103). Trade finance practised at that time was somehow similar in concept to what Islamic banking does currently except, it was more aligned with Shariah because it was practised as a joint venture between skilled merchants, suppliers and investors rather than being based on debt (Murabaha(credit sale), an Islamic finance principle) as is widely practised cur- rently by Islamic banks.
By the end of the thirteenth and the beginning of the fourteenth centuries, those who fought the Islamic world now assimilated into it. The four Mongol empires had converted to Islam and had become staunch Muslim supporters in the central Islamic land. These were the Il-Khans in the Tigris-Euphrates valley and the mountainous regions of Iran, the Chaghaytay in Syr-Oxus basin, the White Horde in the Irtysh region, and the Golden Horde around the river Volga (El-Ashker and Wilson 2006: 285). From these four, two powerful Islamic empires emerged: the Shi’ah Safawid6Empire, which became the foundation of what Iran is today, and
5The Seljuqs originated from theQynykbranch of Oghuz Turks who in the ninth century lived on the periphery of the Muslim world, north of the Caspian and Aral seas in their Yabghu Khaganate of the Oghuz confederacy, in the Kazakh Steppe of Turkestan. In 985, the Seljuq clan split off from the bulk of the Tokuz-Oghuz. They set up camp on the west bank of the lower Syr Darya (Jaxartes), where they converted to Islam.
Later, in the tenth century the Seljuqs migrated from their ancestral homelands into mainland Persia, in the province of Khurasan, where they encountered the Ghaznavid Empire. Following the defeat of the Ghazavids to the Seljuq Turks at the battle of Nasa plains in 1035; Toghril, Chaghri and Yabghu received the insignias of governor, grants of land and were given the title of dehgan.
At the battle of Dandanaqan they defeated a Ghaznavid army and following Tughrul’s successful siege of Isfahan in 1050–1051, led to the establishment of an empire which would later be called the Great Seljuk Empire.
The Seljuqs mixed with the local population and adopted the Persian culture and language in the following decades. See: M. Ravandi, (2005), “The Seljuq court at Konya and the Persianisation of Anatolian Cities”, in Mesogeios (Mediterranean Studies), vol. 25–26 (2005), pp. 157–169.
6The Safawid dynasty was one of the most significant ruling dynasties of Iran, and is often considered the beginning of modern Persian history. They ruled one of the greatest Persian empires after the Muslim conquest of Persia and established the 12 Schools of Shi’ah Islam as the official 4.2 Phases of the History of Islamic Finance and Its Innovation 61
the Sunni Moghul, or Mongol Empire in the Indian subcontinent which constitutes the present Pakistan and some parts of India. Moreover, to the west of the Mongols, came another, and long lasting, source of support to Islam, the Ottoman Turks7 (El-Ashker and Wilson 2006: 285).
These three empires dominated the political scene in the Islamic world as depicted in Fig.4.2below: the Ottoman, the Safawid and the Mongol. Each had different socio-economic conditions, features of intellectual development and influence over the development of Islamic economics and finance (El-Ashker and Wilson 2006: 285).
Many political and economic aspects shaped this phase, such as wars (that exhausted the treasury of the Islamic state and imposed more taxes on people to finance those wars) among the Islamic states themselves. This was in order to acquire a bigger piece of the Islamic state territories for themselves and be more powerful, the Tatar and Mogul invasion, the Crusade wars and natural disasters that affected mainly Western Europe and the trade with the East (Issawi 1991: 45). Also influential was the discovery of new sea trade routes that changed trade and shifted the balance of power and the revenue generated from the use of the old routes controlled by the Islamic state. From the start of the eleventh century, the European ships dominated the Mediterranean Sea and its trade until the eighteenth century (Issawi 1991: 45).
The underdevelopment of the concept of institutions, which means here a system of socially produced regularities, impacted negatively on the financial development and innovation during this period as it limited the mobilisation and deployment of capital (Kuran 2011: 14). During these same centuries, however, there were signifi- cant changes in the West regarding the concept of institutions, corporate structures, society and governing laws that fostered innovation in finance.
religion of their empire, marking one of the most important turning points in Muslim history. The Safawid ruled from 1501 to 1722 (experiencing a brief restoration from 1729 to 1736) and at their height, they controlled all of modern Iran, Azerbaijan and Armenia, most of Iraq, Georgia, Afghanistan, and the Caucasus, as well as parts of Pakistan, Tajikistan, Turkmenistan and Turkey.
Safawid Iran was one of the Islamic “gunpowder empires”, along with its neighbours, the Ottoman and Mughal empires. See: Helen Chapin Metz, (1989), Iran, a Country study, University of Michigan, p. 313; Emory C. Bogle, (1989),Islam: Origin and Belief. University of Texas Press.
1989, p. 145; and, Stanford Jay Shaw. History of the Ottoman Empire. Cambridge University Press. 1977, p. 77.
7The Ottoman Turks (or Osmani Turks) were the Turkish-speaking population of the Ottoman Empire who formed the base of the state’s military and ruling classes. Reliable information about the early history of Ottoman Turks is scarce, but they take their Turkish name,Osman(corrupted in some European languages as “Ottoman”), from the house of Osman I (reigned ca. 1299–1326), the founder of the dynasty that ruled the Ottoman Empire for 620 years. After the expansion from its home in Bithynia, the Ottoman principality began incorporating other Turkish-speaking Muslims and non-Turkish Christians, becoming the Ottoman Turks and ultimately the Turks of the present. The Ottoman Turks blocked all land routes to Europe by conquering the city of Constantinople, the capital city of the Byzantine Empire, and Europeans had to find other ways to trade with Eastern countries.
Fig.4.2PoliticalaspectsthatinfluencedthedevelopmentofIslamicfinance(Katibi1994) 4.2 Phases of the History of Islamic Finance and Its Innovation 63
In 1602, the invention of multinational corporation emerged with the Dutch East India Company, which was created in Holland (Shiller 2012: 7). It allowed the creation and development of long-term capital in the form of trading posts around the world, including mobilisation of this capital, distribution channels and long- term contracts. The large size of the company helped investors to minimise the huge risks via the pursuit of economies of scale (Shiller 2012: 7).
The evidence we have regarding economic institutions in their early forms in Islamic finance goes back to the eighth and ninth centuries which marked the emergence of an Islamic law to govern the trusts or endowment (known as waqfs). At that time the refinement of the Islamic law of partnerships also came about, while the development of some areas such as tax collection, innovations and cross-cultural borrowings never ceased (Kuran 2011: 10).