ISLAMIC MODE OF FINANCING 1

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 money
i.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.

 ISLAMIC MODE OF FINANCING 2
SARHAD UNIVERSITY, PESHAWAR
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

PREPARED BY: TARIQ MEHMOOD, LECTURER.

 ISLAMIC MODE OF FINANCING 3
SARHAD UNIVERSITY, PESHAWAR

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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PREPARED BY: TARIQ MEHMOOD, LECTURER.