The History of Islamic Finance Between Two Business Models: The 1960s Vs. the 1970s (Lessons for the Future in the AI Era)

Using deductive, inductive, and analytical methodologies, this paper aims to explore the early inception of Islamic financial institutions (IFIs) in Muslim countries throughout the modern era. The literature on Islamic banking and finance clearly shows that IFIs emerged in two stages: in the 1960s and 1970s. The 1960s saw the creation of two organizations in two countries, based on different objectives and aspirations. However, they share a common characteristic, namely their "community-oriented" nature. These were the local savings bank or local development bank and/or the people's bank in Mit-Ghamr, in the Nile Delta province of Egypt, and the Tabung Haji (Hajj Fund) in Malaysia. The main business of these initiatives was based on a community-driven approach, in a way that resembles, to some extent, the widespread ecosystem of the Local Exchange Trading System (LETS). In contrast, the 1970s experiment began with the creation of the Islamic Bank of Dubai in 1975, based on the universal business model of a traditional commercial bank that has been operating for centuries in the West. Rather than focusing on a historical narrative of the development of IFIs over time in different jurisdictions, this paper has adopted a heterodox approach that has two objectives: (1) to make a quick comparison between the core business models of the two experiments, and (2) to draw lessons for the future directions of the sector's development in the age of AI and digitalization. In doing so, it is hoped that this research will lead to future studies focused on the relevance or irrelevance of a traditional financial business model in meeting the needs and aspirations of societies in the territories where IFIs operate. The initial results of the study indicate that the community-based approach is more appropriate and flexible for achieving people's aspirations by genuinely and realistically implementing the principle of asset-based financing in Islamic finance (IF), which links finance to real activities in an authentic and substantive manner. In addition, it encompasses social aspects that foster cooperation in a "win-win" scenario, thereby improving the effectiveness, resilience, and efficiency of financial resource allocation. Furthermore, AI and other digital developments seem to enable community-based initiatives that respond more effectively to the needs and aspirations of people within a well-defined "virtual" or "geographical" location. However, a balance must be sought between the benefits of such developments and the risks associated with their execution