Progress and challenges of Islamic banking

Abstract Three decades have passed since the first Islamic bank began its operations in Mit Ghamr, Egypt, and more than a decade has passed since the Islamic Republics of Iran and Pakistan adopted a non‐interest‐based financial system. 1 The growth of financial institutions, instruments, and transactions operating without interest has been impressive, from assets totaling a meager 5 billion in 1985 to a current level of approximately 100 billion. Today, Islamic banking is spreading and gaining acceptance in non‐Muslim countries as well as Muslim ones. Equally important has been the growth of scholarly interest in the subject. The viability and feasibility of noninterest‐based financial transactions, instruments, institutions and systems as well as the legitimacy of academic research in this area are no longer questioned. The objectives of this article are to (i) review the progress of Islamic banking and Islamic financial markets; (ii) present the fundamental principles of an Islamic financial system in light of developments in modern financial theory; and (iii) identify the challenges ahead for the development and further growth of a non‐interest based financial system. The article is organized into six sections. Section I discusses the progress of Islamic banks and financial markets. Section II and III summarize developments in Islamic economic and financial theory respectively. Section IV discusses the relevance of Islamic financial principles to modern financial theory. Section V addresses the issues and challenges facing Islamic finance, and finally Section VI concludes the discussion. © 1999 John Wiley & Sons, Inc.