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An Early Experiment: Islamic Banking

A pioneering experiment of putting the principles of Islamic banking into practice was conducted in Mit-Ghamr, Egypt, from 1963 to 1967. The experiment combined the idea of German saving banks with the principles of rural banking within the general framework of Islamic values. Mit-Ghamr was essentially a rural area and the people in general, like elsewhere in the Islamic region, were quite religious. They did not put their savings into any bank because interest is forbidden in Islam. Moreover, hardly any financial institution was available to them. Under these circumstances, the task was not only to respect the Islamic values regarding interest but also to educate the people about the use of banking. 

A western observer describes the significance of Mit- Ghamr experiment in the following way:


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“The majority of population had never been dealing with the financial institutions. Because of this, capital fomiation had been impaired. Basically rural and religious, they tended to distrust the bankers operating in the western style and, what is more, there were few local branches they could patronise. Since a substantial part of their income was not spent immediately, but put aside for social events, emergencies and the like, this idle capital could not be used for productive investment. A precondition, however, for any change of behaviour from hoarding and ‘real-asset saving’ to ‘financial saving’ was the creation of financial institution which would not violate the religious principles of large segments of population. Only then could the rest of the majority of population be integrated into the process of capital formation.”

Thus, an attempt was made to integrate rural population into financial system and “developmental nature of this early experiment made it very prominent.”

In Mit-Ghamr project the following types of accounts were accepted: saving accounts; investment accounts; and Zakah accounts. No interest was payable to depositors in the saving accounts but they were allowed withdrawals on demand. They were also eligible for small, short-term interest-free loans for productive purposes. The funds deposited in the investment accounts were subjected to restricted withdrawals and were invested on the basis of profit-sharing. The Zakah account attracted the amount of Zakah for redistribution amongst the poor.

The Mit-Ghamr project of Islamic banking had an unexpected success as saving deposits increased from 25,000 Egyptian pounds to 125,OCX) Egyptian pounds during 1963-66. During the same period, investment deposits increased from 35,000 to75,000 Egyptian pounds. It is also reported that “the bank functioned on cautious basis, rejecting, on the average, 60 percent of the loan applications in the first three years. The default ratio was zero in economically good times.’’

Although Mit-Ghamr project made good start, it was abandoned due to certain political factors. Its importance is only historical now. Nevertheless, it was the first experiment which showed that commercial banking activity could be organised on the basis of Islamic principles respecting the prohibition against riba without indulging in interest.

 

Source: Elimination of Riba, Khurshid Ahmad, Khalid Rahman and Zahed A. Valie. Republished with permission.