Non-interest Banking in Practice

Abstract

The history of the interest prohibition in Muslim experience is strikingly similar to that of ‘Christian’ societies (see Chapter 8). The proscription was adhered to during and immediately after Mohammed’s lifetime, and was subsequently upheld by the Caliphate. Commercial investment was legally financed through partnership arrangements, with beneficial consequences for Arab prosperity (Udovitch, 1970). Interest-based lending was usually confined to non-Muslim minorities, particularly the Jews. But the interest prohibition became increasingly inconvenient, and was circumvented more and more. Lenders began to use forms of contract within the letter of the law but which, in effect, yielded a risk-free return. Rulers came to see Shari’ah as applicable to individual conscience but not to social legislation, whilst accommodating theologians questioned the contemporary relevance of the Qu’ranic prohibition, particularly with regard to commercial loans (Rodinson, 1978, p. 149). Paradoxically, the outcome has been that short-term returns and security have been emphasised by Arab banks, to the detriment of equity or partnership investment. A high propensity to hoard amongst pious Muslims and very shallow share markets have resulted (Abdul-Hadi, 1988).1