Following a few pioneering experiments, modern Islamic finance started in earnest in the 1970s. Largely driven by the oil boom, it was bound to be transformed by the collapse of oil prices in the 1980s, and more generally by changes in the global political and economic system. In that respect, it is useful to think in terms of three distinct stages: the early years (1975–91); the age of globalization (1991–2001); and the post-September 11, 2001 period.

Precursors

The idea of modern Islamic finance is usually traced to Indian Muslims in the 1940s. As they pondered their future in the final years of British colonial rule, they discussed the ways in which old Islamic practices could be revived. Abul Ala Mawdudi (1903–79), who created the Jamaat-i Islami, popularized the notion of Islamic economics. In his view, Islam is not simply about religious beliefs and rituals. It is a complete way of life that should include economics and finance. Though short on specifics, Mawdudi argued in favor of constraining market processes through behavioral norms based on the Islamic tradition. In the same vein, following the partition of 1947 and the creation of the state of Pakistan (“land of the pure”), Pakistani scholars addressed the feasibility of a financial system that would conform with the Shariah and eliminate riba. However, these debates remained mostly theoretical, and it took a number of political and economic developments, more specifically the advent of pan-Islamism and the rise in oil prices, before such ideas were put into practice.