Islamic finance in modern times emerged in the form of commercial banking in the mid-1970s as a response to the endogenisation of religious norms in shaping the norm and substance of financing to produce a moral economy-oriented proposition for developing economies and societies since Islam, as a religion, also provides the norms, values, principles and injunctions related to everyday aspects of economic and financial activity. While Islamic banking is a modern phenomenon, Islamic financing itself has been in practice within the periphery of the Muslim world ever since the Prophet Muhammad revealed such principles about fourteen centuries ago.

Islamic finance is marked by essential operational features such as ‘profit-andloss- sharing’, ‘risk sharing’ and ‘embedded financing’ in the sense of financing being directly related to real assets and real economy as well as being embedded in Islamic norms and values. In addition, the underlying principles of Islamic finance such as the prohibition of interest (riba); the prevention of excessive debt, speculation and uncertainty (gharar); as well as the prohibition of gambling (maysir) are considered to be essential norms of Islamic finance derived from Islamic teachings.

Since the inauguration of the first Islamic commercial bank in 1975, we have seen an unprecedented expansion in the development of Islamic banking and finance. As identified in the recent Special Issue of the Banker (November, 2013), over 500 banks in more than seventy-five jurisdictions operate and provide various types of Islamic financing. Thus, the Islamic banking and finance sector has experienced substantial and unprecedented growth in recent years: growing at a rate of 10-15% per year. Today, Islamic banks and financial institutions are claimed to manage assets worth no less than US$ 2 trillion while assets held in such institutions were valued at only less than US$10 billion in 1985. In Malaysia, the Islamic banks and financial institutions are planned to capture 25% of the market share (in terms of assets owned) by 2015 while it is expected that Islamic finance itself will become mainstream finance in the GCC by the end of this decade. Emerging Islamic finance markets such as Indonesia, North Africa and Turkey will add further momentum to the developments. Such immense growth has brought Islamic finance to the attention of the international banking and finance community, prompting major banks to set up Islamic financial windows to take advantage of the increasing demand for Shari’ah compliant finance in relation to various domains. This is a clear vindication of Islamic banking and finance as an alternative proposition.