There have been 3 key attempts to establish modern Islamic financial institutions over the past century. The first non-interest financial institution was founded in Pakistan in the 1950s. Loans were offered to clients without interest, but minimal charges were imposed to cover the operational expenses of the bank.
Ahmed El Najjar, in the Egyptian town of Mit Ghamr, led the second attempt in Egypt, between 1963 and 1967. The institution took the form of a savings bank that operated on the basis of profit sharing.
In 1967, towards the end of this experiment, there were approximately nine similar banks established in Egypt. By 1972, the Mit Ghamr Savings Bank became part of Nasr Social Bank. It was described as an interest-free bank although there was no indication in its charter that it was an Islamic Bank guided by Shariah. The Nasr Social Bank later became the first Islamic Bank in Cairo, Egypt.
In 1963, in Malaysia, another Islamic financial institution was created, called the Muslim Pilgrims Savings Corporation. Its function was to assist people in saving for the Hajj (Pilgrimage) to Mecca and Medina, Saudi Arabia.
Six years later, this institution developed into what is now known as the Lembaga Urusan Tabung Haji (LUTH), Tabung Haji or the Pilgrims Management and Fund Board. Although it is a non-bank financial institution, with a limited role, its success helped to pave the way in 1983 for the Bank Islam Malaysia Berhad (BIMB), which is now one of the chief commercial Islamic banks in Malaysia.
The Dubai Islamic Bank, UAE, was established in 1975. Shortly afterwards, this was followed by the Islamic Development Bank which was created by the Organisation of Islamic Countries (OIC) from all over the world to support the economic development of Muslim nations whilst complying with Islamic Law. It was the first international development assistance agency to provide loans on an interest-free basis, thus complying with Islamic Law.
The success of the Dubai Islamic Bank saw the establishment, in 1977, of the Faisal Islamic Bank (Sudan). The first attempt to establish an Islamic Bank in the western world also occurred in the 1970s, with the Islamic Finance House established in Luxembourg in 1978.
Several Islamic countries have attempted the complete Islamization of their financial system. These countries include Iran, Pakistan, and Sudan, which act as targets for much research on Islamic financial systems. However, a number of other countries have established Islamic Banks in conjunction with 'conventional' banks, including Malaysia, Indonesia, Bangladesh, Jordan and Egypt.
Even in countries where the legal system does not allow the establishment of Islamic Banks, such as (until recently*) India, Muslims have found alternative methods within the law to substitute interest-based financial institutions so as to carry out their financial needs, while abiding by the Shariah.
*In April 2016, and after a decade of deliberations by the Reserve Bank of India, the Indian Government signed an agreement with the Saudi Arabia-based Islamic Development Bank (IDB) to launch operations in Ahmedabad in the western state of Gujarat. As of the date of release of this blog, no date has been announced for the commencement of Islamic Banking in India.
The Islamic Development Bank counts 56 Islamic states as its shareholders. Saudi Arabia holds approximately 25% of the bank's shares, while UAE is quoted as its 5th largest shareholder as of October 2015.
More comprehensive information can also be found in the Trade Finance training module at www.tradefinance.training