Islamic finance is governed by the Islamic law (shari’ah) and the sources from Quran and Sunnah. Islamic finance is the financial framework that comprise the activities according to Islamic law that known as Shariah principle. In Islamic law, any activities involved must be prohibiting from riba. Riba means extra or excess interest in payment made by buyer or customer to the seller or bank. Besides riba, Shariah Law also prohibits any transactions that contain gharar (uncertainty) and maysir (gambling). In Islam, any business activities must be clear and based on Quran. For example, Islam prohibit from investing business in unlawful and haram like run business in producing media such as gossip column which are contrary to Islamic values. The sources of Shariah Law is come from Quran, Sunnah, Ijmaa’ and Qiyas. Quran is refer to the words of Allah revealed to Prophet Muhammad s.a.w. Ijmaa’ is the opinion and agreement between Muslim jurisconsults while Qiyas is application and extension of law established by binding authority to a particular case and compare a new case with Divine text with same and common effective cause (illahi). Islamic finance also can be categories into three sections, there are about faith and belief, practice and activities and moralities and ethic. Under practice and activities, it can be divide into two which is ibadat (relationship with God) and mu’amalat (relationship with others human). In mu’amalat, it separate to political, economic and social activities.
ISLAMIC FINANCE HISTORY
First effort of Islamic finance is in 1960’s. In 1963, Mit Ghamr Local Saving Bank was established in Eygpt. The operation is based on German Saving Bank. The purpose of the bank is to mobilize the idle saving of Muslims within Shariah and provide halal return on their saving. But after two years later, the bank could not survive the operation due to lack of resources and support. Mit was set up new guidelines with new terminologies that helped for future planning. At the same time, The Pilgrims Management and Fund Board of Malaysia were established in Malaysia. The purpose is to assist the Muslim communities in Malaysia with the financial cost of performing the hajj to Saudi Arabia.
In 1970’s to 1980’s, Islamic finance was more organize commercial banking, trade finance, syndication and Islamic conglomerates. Since 1970’s Islamic Finance has emerged as a new reality in the international financial scene. It related to revival of Islam and the desire of Muslim to live in all aspects based on Islam. In 1975, Islamic Development Bank was established at Saudi Arabia and follow by Dubai Islamic Bank at UAE. In 1976, the first Islamic Economic Conference at Saudi Arabia and 1977, Kuwait Finance House was established at Kuwait. Islamic Research and Training Institution (IRTI) was established at Saudi Arabia in 1981. After two years, the first bank in Malaysia was established that is Bank Islam Malaysia Berhad (BIMB) in 1983. Actually...