"Regulating the Rise of Islamic Banking and Finance 1963 to 2010: Divergence, Convergence, and the Road to Common Global Standards "

This paper discusses the creation and subsequent development of the category of “Islamic finance.” Prior to the mid-1970s, the term “Islamic finance” did not exist and banking in the Muslim-majority countries was dominated by firms that operated on Western banking principles and which thus violated the Islamic prohibition on usury. The category of Islamic finance has diffused rapidly from the Arabic-speaking world and now includes sharia-compliant financial institutions on four continents that serve Muslim-majority countries and Muslims in the West.
In our paper, we explore the historical forces that contributed to the rapid growth of this sector. Our particular focus is on regulation and the efforts over several decades to establish a common global standard for determining which practices and securities ought to be deemed sharia compliant. In an effort to harmonise standards, the Accounting and Auditing Organization for Islamic Financial Institutions AAIOIFI was established in 1990-1. However, major discrepancies in what was considered to be sharia-compliant between the Gulf Region and South-East Asia persisted up to about 2010.
We advance an explanation for why it took so long to overcome regulatory divergence that is rooted in the geographical distribution of madhhabs of fiqh (Islamic jurisprudence). In the paper, we explore the important role of Dubai entrepreneur Saeed Louta, who founded the Dubai Islamic Bank in 1975, in the development of norms in the sector. We also explore the very important role of migrant professionals from the Indian subcontinent in the development of this global field. We identify differences between important global centres of Islamic finance such as Kuala Lumpur and Dubai. Our paper is based on oral history and extensive printed primary source research by a team of three business historians.