Interest-Based Banking Model: Historical Development and Inception of Islamic Banks

Abstract

Banking institutions have become integral to an economy by supplying credit and other financial services to existing markets. The concept of central banking emerged to regulate banking activities and control them through a sound supervisory framework. In recent days, a central bank has been responsible for regulating the monetary and credit systems of a country. Muslim society has been conducting its economic activities through money and dealing with some banking-type activities since its inception. Thus, it is worth exploring and reviewing the historical development of the interest-based banking model to understand the dynamics of conventional banking in depth and to propose alternate modes of Islamic finance. Islamic banking has experienced tremendous growth in recent decades, with diversified services for retail and corporate customers. Yet, until now, we knew less about the topic from a historical perspective. Therefore, this paper aims to review the literature about the interest-based banking model over time and the modern practices of Islamic banks all over the globe. Banking institutions are playing an important role in attaining economic growth and stable markets. Concerned central banks are recommended to provide a supportive environment to banking institutions and welcome Islamic banks for financial inclusion in Muslim-majority territories.