Banking in Islam


By:(I. A. Farooq)

(When did the question of banking in Islam arise? Also where and how? These are all basic questions and possibly can be looked into from all angles flowing from “Ws” of an Auditor (It will be my pleasure to address and answer these questions). But for a short review it will be better to remain in the limited sphere.)

One view is that banking circumscribes those branches of knowledge that facilitate trade within physical limits of universe; the place or parameters entrusted to man as Khalifa. This view means that some kind of banking or trade facilitation may have been the part and practice of centre(s) of concentration of human dwellings that remained connected through trade.

We, as Muslims, believe in flow of knowledge from ALLAH to man through “Wahi” to guide him on the right path. Let me quote one incident in recent history. When “Riba” become a practice of Bani Israel, it was forbidden through commands revealed on Moses. But they observed relaxation in implementation of the code and Riba traveled with then where ever they went. ALLAH, for his wisdom, Hikmat and destiny format, did not punish then enbloc as happened with Ummah(s) in the past till the last of the Prophets, Al-Nabi was born in Makkah. He placed before all mankind, not mercly group(s) in limited space and time, the eternal message of ALLAH. At Arafat, when he performed Haj, He among other things, delivered message of ALLAH:-

  • Prohibiting Riba
  • Leave forgive and forget all past Riba
  • Transfer responsibility to Ummah to spread his message to end of the space, time and to last of mankind.

The message in physical terms means and includes a state of Islam circumscribing one man to all mankind in relevant time and space to practice one “Deen” jointly as well as severally and beyond in all possible permutations and combinations. At the time of his death he left behind “The Book” and “his Example” to guide and keep Muslims on the right and desired path. This then is gene of globalization and what he left behind, beyond an iota of doubt, contains complete code command and solutions to problems of Muslims down the time line.

With this very brief introduction, let us move a small step forward. The systems of trade facilitations of relative past had disappeared, were not deep and answering and solving latter difficulties, had limited application and also included Riba, an element of practice that was forbidden. History of man in the relevant time and space as available in Qasas-ul-Quran is the whole truth and not the account collected, unearthed, drawn from faulty and vague human memories. The books specially in economics side will need a complete re-writing after Riba is forbidden in Muslim states in accordance with injunctions of Quran. It is law of the lands that provide Riba a safe heaven to flourish and many may face questions when times change.

Some websites mention that the Arab world became aware about “Riba” of today in 1870 when digging of Suez Started and Anglo French Banks came to Egypt. Their reaction was “No Riba” and “Riba free Banking”. The obvious observations are:-
(i) For centuries Arab scholars had worked on Riba in trade. What was their reaction to banking? It seems more likely that they had some concept of banking or trade facilitations but had not given it a proper name describing the cluster of activities. It is more likely that for this reasons they started developing products on trade side to replace Riba. This was a knowledge based exercise and not economy based as oil had not been discovered until them. It was in 1908 that oil was discovered in Kuwait and used to lubricate and drive European war machine. While Suez enabled then to maintain an iron clamp on India and beyond. Then came the commercial use of oil and so far limitless wealth of Arab rulers and Arab nationalism – partly a result of commercial activity influenced from various centre(s) for even other reasons.

As regard our part of the world, the slaves, it was ruled by a combination of European swords, colonial wisdom and local disorder. A very significant event was setting up of Fort William College at Calcutta. Surprisingly entire British commercial law was enacted from 1800 – 1900 AC also creating a large number of local knights. Mohammad Iqbal was the one who chose to return the honor for known and unknown, expressed and not expressed reasons. (The foregoing requires a complete research which may be revealing).
Bank of Bengal came in 1809 and one at Bombay in 1840. The cooperative movement in 1904 and Reserve Bank of India in 1935. The atmosphere was slowly filled with branches if British Banks. Then “Riba” and banking spread to completely command  the economic scene.

Then ALLAH provided a safe heaven to Muslims of this part of the world and Pakistan came into being. In 1948, the founder father of the nation declared opening of STATE BANK OF PAKISTAN – encompassing Banking as per law of the land. But he made it clear that it was duty of the STATE BANK OF PAKISTAN to arrange comprehensive research into the subjects of banking and economic system of Islam and prepare/draft that system to be implemented in Pakistan.

An effort has been made to trace the path of history and travel through a part of Quran to trace roots and requirements of some concepts. We know that no new knowledge has been revealed by ALLAH after the departure of Al-Nabi, whatever exists today looks to be borrowed from Al-Quran and used by mixing forbidden practices of past – pre Al-Nabi days. Secondly a banking system in Islam lies resting in books of history of Islam and needs to b discovered.

Let us follow the British time line of Riba based Banking from 1.7.48 to Dark Ages as described in Dictionaries of Banking and Finance and Encyclopedia Britannica.


Opening of STATE BANK OF PAKISTAN on British Standards


Setting up of Reserve Bank of India


Beginning of cooperative movement


Remodeling of banking laws and providing legislation for Riba based lending. Banks were not included among money lenders.


Bank of Bombay


Bank of Bengal


Setting up of Bank of England with discount rate as the axis and sole right of Note Issue.


Adding Interest to deposit Function – Lord Gresham’s Modern Banking


Division of Roman church – Division of Riba into Interest and usury – Henry viii


Discount market of discount houses facilitating fund flows by borrowing


Middle ages. Jewish Goldsmiths


Extending Prohibition of Riba to Christian faith 1311 – Pope Clement v following a debate for over 1000 years – History of usury prohibition – Christians hanged for practicing usury.


Presence of Italian Banks in England.

Dark Ages
This Information is evidence to following:-

  • Deposit function does not have roots in England.
  • Banking existed in England in close proximity of Dark Ages. The banks were Italian. We need to trace the gene of banking in Italy.
  • Banking is not lending which was a business of Goldsmith.
  • Banking means acceptance of deposits of money only….
  • This was the basis of banking in Italy.
  • There is no mention of Riba in this definition.

We may conclude that the British banking disappears into darkness. This is why their economic history fails to answer questions on origin and gene of banking.

Let us follow the cycle of Islam regarding economic development. From Adam (AS) to the period before Mohammad (PBUH) we can trace and feel from Quran evidence to trade circles in limited spheres of time and space. There after there were at last regular travel routes from Makkah to Syria (now) and Yemen. If we make a deep probe, it coincides and appears as direct answer by ALLAH as having accepted prayers of Ibrahim (AS) that he begged of ALLAH while obeying command of ALLAH to leave his son and wife in Makkah. These trade routs then get linked up to other trade routs on face of this earth connecting the then known world. These customs of trade followed a process called “Bai” allowed by ALLAH. This was based on cash or credit and later developed to be supported by Modarbah or Musharkah for expansion or to suit events and circumstances. In this journey Riba also entered the scene and gradually became most important factor.

As Islam spread in Makkah and Madina, ALLAH sent his message through his messenger (PBUH) to leave this practice. The Financial system of Islam then was trade and agriculture and related professions and their produce. This has been shown in Fig-1. With the coming into existence of state of Madina following components appeared on the economic scene to support, sustain an expansion of the Islami state under the Holy Prophet (PBUH).

  • Bai, Agriculture related professions and produce
  • Addition of Modarbah, Musharkah, Amanat
  • Further addition of Sadqat, Ghaneemat
  • Further addition of Zakat, Voluntary contributions
  • Setting up of Bait-ul-Mal
  • Regulation of Functions of this institution by Devine order
  • Regulation of trade and commands to eliminate Riba
  • Expansion of state of Madina to whole of Arab
  • Total prohibition of Riba
  • Responsibility of Ummah expended to end of time and space and last of mankind.
  • Completion of Deen, its codes in all respects.
  • Death of Holy Prophet (PBUH).

That was the termination and end of institution of Risalat and Nabowat. This was followed by Khilafat.

The Islami state continued to expand and so did its trade and economy and components mentioned above. However during days of Umar-Ibne_Khitab as the Caliph, a financial product was put in place by Zubair bin Awam by combining credit and Amanat to support expansion of trade. This product gained support of Ashab-e-Rasool. Some even may have joined by adopting this practice (The words are very carefully chosen). The qualities, features and facilities circumscribed by this function resemble that of deposit of today.

Their activities thus became like those of large trading houses supporting their activities by deposits. The persistent and continued use of this financial technology can not but be termed as “Banking Gene”.

 As the state further expanding and so did trade and economy, the product needed support of other branches of knowledge such as:

  • Arithmetic
  • Accounts – Sector wise books
  • Document development
  • Expansion of Musharkah and its variations
  • Many other support mechanisms

While this process moved forward it was helped by certain decisions of Khalifa(s) and their companions.

  • Merging currency into single coin
  • Not agreeing to proposals of paper currency or leather currency
  • Transfer of funds from one Bait-ul-Mal to other
  • Lending from Bait-ul-Mal for trading activities etc
  • Large scale economic activities such as canals, Madaris, copying Holy Quran education etc
  • Completing the cycle of Islami welfare state

Let it not be all praises. Yes the fact is that later role of Bait-ul-Mal was diverted in questionable manner. Thus for this, as also other reasons, the new banking functions found safe passage in private sector and by the time all the above function were developed almost 100 years had passed. It was thus for Abu Hanifa (RA) to fully operate expand and implement banking function. He thus was the first man in history of Islam to have practiced full range of banking and thus established the principle of today “Banking means acceptance of deposits of money only for the purpose of investment or lending, withdraw able by cheque ……….”
No doubt in practice of above components he only followed Quran and Sunnah and his vision of both was far superior to that of today for obvious reasons (Fig-II) (CF Abu Hanifa ki Siyasi Zindagi-Manazir Ahsan Gillani)
In the foregoing we have traced roots of 4 kinds of banking and the banking gene. These can b described as:

Banking: Riba based banking practiced after middle ages. This is not our role model for obvious reasons.

Interest Free Banking: Conventional Banking minus Interest. But it still continues to include practices not permissible in Islam. This experiment has failed.

Islamic Banking: By creation of products (compatible) for continuity of system.
Muslims have not responded positively to this mode as well. Now that we know banking, as it is available in Islam, it will be all the more difficult to follow this. Abu Hanifa (RA) a man of much deeper and wider vision did not improvise any of the standard practices. People engaged in this exercise may match their substance with his concept. We need not come in this picture.

Banking in Islam: It is believed that the aim of this article was to find this fact. It is placed for consideration of Board responsible for publication.

Although this is the end of Article, I shall be failing in my duty as a research man if I do not answer the question written boldly and prominently in time and space.

Answer: ALLAH has been kind to guide a complete model of Sin called Riba onto this research paper. He surly has showered his Rahmat and provided an answer to this. Chapters 9 to 13 of the enclosed book may prove useful reading. I may add that this book (English version) was presented at ICAP Karachi in 1994 when Mr. Safdar Abbas Zaidi (then Chairman Investment Board) presided the presentation. This was through good offices of Mr. Bashir Chaudhry of Alzamin Mudarbah and Mr. Hussain of Hussain Shah Rehman (then). Mr. Sibghatullah DG STATE BANK OF PAKISTAN had duly authorized this presentation.

I believe this will give rise to further questions. Sir, I shall be more than happy to answer rather be present and share this face of Islam.  (Fig III)


  1. Riba in currency issue.
  2. All products woven around currency.
  3. Other un-Islamic element routed through currency.
  4. Exchange rate problems.
  5. Shifting dealing from currency to accounts.
  6. All Muslims to open account to benefit from Bail-Ul Mal. ( or discharge of duties to Bait-Ul-Mal)
  7. All accounts Islami digit based.
  8. Complete documentation.
  9. Change to Islami currency gradual.
  10. Other impacts and benefits.
    Back to main
Copy Rights Reserved 2006-2007