INTRODUCTION:
Islam is founded upon the notion of Tawhid, a total commitment to the will of God.
There are no concepts of "mosque" and "state" as specifically religious and political institutions. They are believed to be fused together (Mills, Presley). The Qu'ran explicitly deals with economic questions such as distribution of property on inheritance, hoarding, usury and the use of financial resources. The principles of the Islamic Financial system is based on a set of rules and law called the "Shariah", originating from the Qu'ran. Its characteristics are based on the prohibition of the receipt and payment of interest (riba) and a more equitable distribution of income and wealth. Islam promotes profit and loss sharing. In this paper, I will first give a background of the Islamic banking system by using the example of the experimental bank in Pakistan and the Mitr Gahms Saving bank of Egypt, which set the bar for the new emerging banks and allow for a broader financial structure. Then I'll give an historic of the principles underlying Islamic banking, followed by a clear explanation of the profit and loss sharing contract. And finally I'll talk about obstacles faced by the Islamic banking system and alternative institutional structures in place to overcome those obstacles and broaden the banking system.
I) Historical development
a. Background
At first Qu'ranic ideas appear to have had relatively little effect on financial development because most of the first bank established were European (to serve expatriate communities). There was some unease in states throughout the Middle East about the spread of western banking practices, but most of them were ready to drop any reservations they had for the sake of modernizat ...