IntroductionA central bank also referred to as a reserve bank (Banaji, 2007) is a public institution that manages the currency of a state, their money supply, and the rates of interest charged on loans from commercial banks. It also controls the banking activities of commercial banks of a country. It differs from the commercial banks in that it prints the currency of the nation which acts as the countries legal tender; it is usually the key determinant of the countries monetary base (Aggarwal & Yousef, 2009). Islamic banking also referred to as participant banking involves the consideration of the sharia law and also has the evidence that their source of funds is through the development of the Islamic economics (Abeng, 1997).
This means that ventures involving pork, alcohol and gambling are not the source of funds. Sharia law forbids the taking of fixed or floating payment, and the receiving of specific interest fee on loans offered. Investing in ventures that are not in line with the principles of the Islam is also prohibited because this is considered sinful. However, these Islamic principles have been applied variably due to the difference in the Islamic historic economies.
This is caused by the lack of the practice of Islamic religion. This type of market economy known as ‘mercantilism’ which refers to an Islamic capitalism is based on the gold dinar which was commonly used as a currency (Nakagawa, 2009). The regions that were involved were economically independent. The various strategies that were involved in the Islamic banking are the: bills of exchange, mufwada which consists of limited partnership referred to as mudaraba, al-mal which is also a type of capital, and nama-al-mal which is also a form of capital accumulation (Ahmed, 2011).
Some banking institutions also independent of the government in these countries also existed at that time. When these principles were introduced, these capitalist principles were adopted and further improved in the early Europe from the 13th century and the later years. Just like the convectional banks, the main aim of the Islamic bank is to make money but that is not the only purpose (Ahmad & Najmi, 2008). It also involves ensuring that that the Islamic laws are followed as required.
Islam forbids the lending of money at an interest, there are some rules on transaction that have been set up based on the Islamic laws. This has been done with the aim of preventing the charging of interest which is termed as a sin in the Islamic laws. Islamic banking is based on the sharing of risks rather than the transferring of risks which is the main objective of the commercial banks and the central bank. AnalysisIslamic financing started a long time ago and can be said to be as old as Islamic region itself; it has been regulating the modern Muslim world and the past (Rosly, 1999).
In 1960s, modern Islamic financing began and its growth was accelerated in 1970s by the petro-dollar boom. In 1975, Islamic Development Bank was formed with an aim of promoting acceptance of Islamic finance financial practices to Islam (Rice, 1999). As from the mid-1970s, the Islamic financing has evolved from a micro financial institution to a widely spread financial system globally. After the first full Islamic (Dubai Islamic Bank) bank was founded in 1975, the number has speedily grown to more than five hundred Islamic financial institutions globally (Munawar, 2001).
For the past three years, more than fifty Islamic banks have been established specifically in the Middle East, for instance, the Noor Islamic Bank in UAE, Bank Al Bilad in Saudi Arabia, and Boubyan Bank in Kuwait (Jobst, 2009; Aggarwal & Yousef, 2009). This has contributed to the speedy development of the Islamic finance globally.