6
$\begingroup$

What is "Islamic banking," and how is it similar to and different from banking as it occurs in the U.S.?

I have heard Shariah Law prohibits usury, the taking of interest on loans. How do Muslim bankers justify the prohibition of interest? Are there any prominent Muslim economists, contemporary or older, who justify their prohibition of interest not only from a religious perspective?

$\endgroup$
  • $\begingroup$ I discovered this, which mentions riba (usury). $\endgroup$ – Geremia Jan 14 '16 at 18:35
3
$\begingroup$

Both another answer and the OP have linked to the wikipedia article on the matter. I think the following passage from the article sums adequately the situation (bold mine):

"The term “Islamic banking” refers to a system of banking or banking activity that is consistent with Islamic law (Shariah) principles and guided by Islamic economics. The contemporary movement of Islamic finance is based on the belief that "all forms of interest are riba and hence prohibited".[48] In addition, Islamic law prohibits investing in businesses that are considered unlawful, or haraam (such as businesses that sell alcohol or pork, or businesses that produce media such as gossip columns or pornography, which are contrary to Islamic values). Furthermore, the Shariah prohibits what is called "Maysir" and "Gharar". Maysir is involved in contracts where the ownership of a good depends on the occurrence of a predetermined, uncertain event in the future whereas Gharar describes speculative transactions. Both concepts involve excessive risk and are supposed to foster uncertainty and fraudulent behaviour. Therefore, the use of all conventional derivative instruments is impossible in Islamic banking. In the late 20th century, a number of Islamic banks were created to cater to this particular banking market."

"Islamic banking has the same purpose as conventional banking: to make money for the banking institute by lending out capital while adhering to Islamic law. Because Islam forbids simply lending out money at interest, Islamic rules on transactions (known as Fiqh al-Muamalat) have been created to prevent it. The basic principle of Islamic banking is based on risk-sharing which is a component of trade rather than risk-transfer which is seen in conventional banking. Islamic banking introduces concepts such as profit sharing (Mudharabah), safekeeping (Wadiah), joint venture (Musharakah), cost plus (Murabahah), and leasing (Ijar)."

I can also offer my professional experience on the matter, which says that some times these are used as merely veils for what is essentially a conventional loan earning interest.

As a side remark, Christian institutions like the Catholic Church never officially lifted their condemnation of "usury"/charging interest -they just don't actively enforce the doctrine. (As far as I could find, the most recent papal discussion of usury occurred in Pope Benedict XIV’s encyclical of 1745, Vix pervenit.)

$\endgroup$
1
$\begingroup$

Usually it involves interest fee loans covered by a fee. Some islamic banks ignore the prohibition on interest entirely and call themselves islamic for other reasons.

https://en.m.wikipedia.org/wiki/Islamic_banking_and_finance

$\endgroup$
0
$\begingroup$

In general, Islamic banking, when fully complaint with sharia law, is the sharing of the risk arising from any financial transaction. It is the sharing of the risk that matters. Both the borrower and the lender should equally benefit from the transaction, and no one party should benefit at the expense of the other.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.