When it first appeared in the mid-1970s, Islamic finance was generally dismissed as an inconsequential epiphenomenon of the oil boom. Introducing the religious factor in what was perceived as a quintessentially secular area struck many as bizarre, and many critics asserted that the growth of Islamic banks was bound to remain stunted. In reality, for most of its existence, Islamic finance experienced growth rates in the double digits. In fact, the rate of growth accelerated from an average of 14 per cent a year in 1994–2002 to 26 per cent a year in 2003–2009.

The overall record is nevertheless mixed. On the one hand, Islamic finance by becoming a permanent feature of the global financial system has proven its viability. It did not, however, quite live up to its original billing. Rather than being a different financial system, based on partnership finance, which would bring social and economic development to the Islamic world, Islamic banks have generally mirrored conventional finance and concentrated on short-term financial transactions.

Islamic institutions thus raise the inevitable question: is Islamic finance necessary? Stated differently, does it add anything of value to the conventional banking system? Before discussing the issue, two points should be stressed. One is that the gap between promise and performance could be attributed to the youth of the industry. Modern Islamic finance started in earnest only in the mid-1970s. Its evolution has been marked by a constant process of trial and error, and its shortcomings may be unavoidable growing pains.