Islamic finance is considered a modern version of the historico-religious forms of financing generated through the normative principles of Islam along with the customs of Arabia during the time when the Qur’an was revealed fourteen centuries ago. While in its historic form institutionalisation cannot be located, the practice of Islamic financing has existed in the periphery of the Muslim world since the practice was taught to his disciples by the Prophet of Islam. This un-institutional form of Islamic financing had continued to exist throughout the centuries along with the decline in Muslim economies over the centuries and as well as during the colonial era.

Post-colonial times and the emergence of new Muslim nation states paved the way for the search for identity in some of these countries, which also included the conviction that Islam as a way of life had a particular way of organising economic and financial practices. Searches for modern forms of Islamic financing were initiated by a number of Muslim economists, technocrats, Shari’ah scholars, and businessmen in the mid-1960s after initial peripheral experiences in Islamic financing, such as the mudarabah and musharakah experience in the sub-continent. As a result of such initiation, the very first institutional form of Islamic finance appeared in the form of an Islamic social bank in lower Egypt, by an idealist named Ahmad Al-Najjar, with the name of Mith Ghamr. As a successful yet politically controversial model during the time in Egypt, the experience did not last long due to political pressure. However, it provided the institutional hope that in modern times Islamic banking and finance would be possible. This experience was later substantiated with another ongoing and successful institution in Malaysia, Tabung Hajji, which has remained a socially-oriented Islamic investment institution. Thus, in modern times, the creation of these two institutions represented the first stage of the modern form of Islamic financing.

Based on such experiences, the second stage of institutionalisation came about as a result of the same agencies in the form of commercial Islamic banking with the establishment of the Dubai Islamic Bank in 1975. As opposed to the earlier experiences of Mith Ghamr and Tabung Hajji, the Islamic conventional banks were defined through a profit-maximising paradigm, with a shareholder-oriented governance structure as opposed to a stakeholder organisational form essentialised by Islamic moral economy. As a result, a neo-classical economic paradigm based on efficiency was implicitly adopted in the operationalisation of Islamic banks and financial institutions, as opposed to the aspirational position of Islamic moral economy which stressed ‘equity’, ‘justice’ and ‘developmentalism’. In this new emergent paradigm, Islamic banks positioned themselves as complementary financial institutions within the dual banking system and as competition to conventional banks rather than aiming to be part of an alternative paradigm as suggested by Islamic order.