Introduction to Evolution of Conventional

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ISLAMIC MODE OF FINANCING

SARHAD UNIVERSITY, PESHAWAR

PART-I

INTRODUCTION TO ORIGIN AND EVOLUTION

OF CONVENTIONAL BANKING.

In primitive times people exchanged goods, to fulfill their needs, among them.

This system was called barter system. But this system could not, completely, satisfied the

need of the people.

By the passage of time human civilization developed to such an extent which

affected the prevailing political, social, cultural, and economic models intensively.

Among these the most affected, in form of innovation, was the economic system as the

people needed influential instrument which made them able to manage in solving their

problems easily. Thus the concept of money, gradually, emerged from that very

development which took over the barter system, introducing money commodity

transactions in the society. As a result, people who could not make their ends meet, due

to lack of resources, became able to manage their needs through borrowing the money.

So, this act of lending and borrowing had been growing until different lenders of moneyi.e. goldsmiths institutionalized this common practice into a profitable business.

Later on, these institutions were named Bank, which has been derived from

Banque means bench and this was called so because the lenders would sit on the

benches to do their business of lending. In Lombardy whenever the banker fail and could

not carry on the business and continue it, his bench was broken up by the people.

Because of the confidence that people had in the priests, they also began lending

the money in temples which leads, around 200 BC, to the emergence of banking in

PREPARED BY: TARIQ MEHMOOD, LECTURER.

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Babylonia. So, the temples of Ephesus and Delphi became highly operational in finance

transaction in Greece.

This development in exchange system gave away the opportunity to the people to

enhance their business which in return gave them back surplus of funds. Goldsmiths and

priests, as mentioned earlier, considered being trustworthy, these surplus funds were

deposited with them; however, they issued the receipt against those deposits. This shows

well organized transactional activities.

With flourishing of the business savings piled up and lenders started lending

money to the traders and merchants. This, in turn, lured them to benefit from the

transaction. So, the idea resulted in the charging of extra amount from the borrower on

the amount lent. In the continuation of the process the depositors felt that depositing

money with the lenders free of cost was not beneficial to them because they earned profit

on the deposits with out giving any share to the depositors. So this awareness made the

lenders to offer extra amount to the depositors which was termed as interest.

Eventually, lending on the basis of interest became the major instrument of finance.

As every system, in the process of evolution, faces the disputes so the same

happened to that and dispute emerged regarding the payment of principal amount and

interest due to lack of any appropriate law. This paved a way to a code, which comprised

of 150 paragraphs, covered all important aspects of banking namely loan, interest,

guarantees, pledges and also loss of securities. This law was imposed, during the period

from1728 to 1686 BC, by the King Hammurabi.

Later on, Aristotle opposed the interest oriented transactions. He was of the view

that money is to fulfill the needs of the people not to accumulate it at interest. As a result,

followers of the Aristotle started abstaining from the interest which discouraged


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the practice of charging it on the loan during the Babylonian era. Consequently, the Jews

established interest-free bank known as AGIBI BANK in 700 BC in Babylonia.

Christian also propagated prohibition of the interest as the religious obligation,

but fall of the church, in 13th century, gave away the way to interest based banking again.

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Introduction to Evolution of Conventional