Towards an Interest-Free Islamic Economic System

Abstract

The author, who is chief economist at the Banker's Equity Limited, aninterest-free institution in Pakistan, earned his Ph.D. in 1983 from BostonUniversity. This book, a revised version of his doctoral dissertation acceptedat that university, is the first publication sponsored by the International Associationfor Islamic Economics in collaboration with the Islamic Foundation.The study contains important lessons for both interest-bearing and theinterest-free Islamic societies. Theoreticians and practitioners in finance canequally benefit from this timely publication. It is therefore a very useful additionto the literature in Islamic economics and in the "signalling theory"in finance, which are both new and fast growing areas of study.Traditional banking is on the brink of crisis at present. The banks are failingat a post-depression record rate in the United States. Experts agree thata single event such as inability of the developing nations to service their debt,a steep fall in oil prices, withdrawal of petrodollars from the traditional institutions,or a significant rise in the interest rates, can lead to hture widespreadfailures of banking institutions. Traditional bankers in search of alternativessuch as Islamic banking can benefit from Dr. Khan's rigorous cost benefitanalysis.Muslim societies interested in Islamization can recognize some of the difficultiespointed out by the author, especially the information or disclosurecosts associated with interest-free financing. Material incentives, which frequentlyexceed the moral teachugs of Islam in contempomy Muslim societies,may lead to dishonesty in reporting the costs and benefits of business projectsamong the concerned parties.Chapter one outlines the objectives and organization of the study. Readersare informed that the origin of the principles of Islamic economics lies in ...