Shortly after the Second World War, scholars started looking at how Muslims could access banking services without breaking Islamic rules on financial dealings. The first banks to comply with Islamic law – Shariah – were established in the 1970s.
Four decades on, over 390 Islamic financial firms operate in 75 countries around the world, according to business consultancy Ernst and Young. At the end of last year, they managed funds worth some $1.3 trillion, according to the UK Islamic Finance Secretariat.
Muslims can use everything from current, savings and investment accounts to insurance and asset management services – all approved by experts in Islamic law.
Islamic finance is still a relatively small concern in the global financial system. $1.3 trillion sounds like a vast sum, but HSBC, a British-based multinational, alone manages over $2.4 trillion.
Yet Shariah-approved banking is the fastest growing sector in the industry, according to CIMB Group Holdings, a Malaysian financial firm.
After only a brief decline during the crisis of 2008, Shariah-approved funds are again growing at a rate of 10-15% a year. The Economist newspaper calculates that around 12% of the world's Muslims use some form of Islamic financial product. That accounts for around 237 million people.
Islamic rules on banking, which date from the time of the Prophet Mohammed, are fairly straightforward. Charging interest on loans is prohibited. Lenders and borrowers should share risks. Nobody should take on excessive liabilities.
Sayings of the Prophet (Hadith) also urge believers not to trade in risky items such as an unborn calf, a fish that is still in the sea, and so on. Muslims may not invest in forbidden (Haram) goods and activities like alcohol, gambling and weapons manufacture.
Most Islamic lending models are based on risk-sharing and partnerships. They discourage rash lending, but still make credit available to home buyers and businesses.
“If banking institutions stick to Islamic rules, it is much less risky . They keep 100% reserves,” said Hossein Askari, Professor of International Business and International Affairs at George Washington University.
“But of course they can still invest in risky sectors, as long as the risks are shared,” he added.
Signup to our newsletter and follow us on Facebook and Twitter!
The Middle East is clearly a huge market for Islamic credit. By investing proceeds from their oil sales, Saudi Arabia and Dubai are already global centres for Shariah-approved banks. Experts foresee enormous growth.
If the sector expands as fast as they predict, it could have an equally big impact on the Middle East's economies as they emerge from the Arab Spring.
What role will Islamic finance play as the Arab Spring rolls on? As Islamist parties gather momentum and win power across the Middle East, will their credit-needy governments look to Shariah-approved loans rather than conventional ones?
Managers of Islamic funds will, of course, be hoping so.
John Sandwick is the Manager of Safa Investment Services, which claims to be the world's first independent Islam-approved asset manager. The firm was launched in October, in Riyadh.
Sandwick says the Arab Spring uprisings carried a clear message: Arabs want their societies to be more respectful of Shariah.
“That doesn’t mean Taliban-style government. It means that in many small ways they want their social organisation to involve more elements of Shariah. Islamic banking and finance is in particular an area of popular interest,” he said.
According to Sandwick, many consumers still do not have full confidence in Islamic financial institutions. Some, such as Gulf Finance House, invested heavily in real estate and took spectacular losses when the bubbles burst. Still, Islamic financial institutions are becoming better managed, and regulation of the industry is improving rapidly, according to Askari.
Both agree that the sector's outlook is bright.
As Sandwick put it: “If bankers provide professional services that give consumers full confidence they are not sacrificing safety or return by choosing Shariah-compliant financial services, then all Muslims will choose Shariah-compliant banking.”
Paul Adrian Raymond is a journalist based in Istanbul, covering Middle Eastern politics and economics. He previously worked for a human rights organisation in Jerusalem and the West Bank.