Interest Free Banking and Economic Stability

Abstract

Since the end of World War II most colonial and semi-colonial countries have regained their political independence. These countries are now in the process of reorganising and restructuring their economic systems based on their religious, historical and cultural values. Today, there are approximately 50 countries with roughly one billion inhabitants that profess Islam as their religion. During the past two decades an attempt has been made, in varying degrees, in many of these countries to reconstruct the economic structure within the framework of an Islamic system. The economic system, in an Islamic society, is not significantly different than a welfare state in a capitalist system. Such an economic system is based on the principle of justice (AI Adl) in which the means of production are privately owned, freedom of domestic and international trade is emphasised and one is required to part with 2.5 percent of savings each year to support the needy. The Islamic system differs from the modern capitalist system in a significant way in that borrowing and lending money, based on a predetermined interest rate, is strictly prohibited in Islam, while interest rates have played a major role in the development of the modern banking system and the development of other financial intermediaries.