Rethinking ‘Interest’ in Islamic Finance:A Critique of the Method of Fatwâ MUI and Its Legitimacy in Indonesia

Abstract

This article explores the concept of interest as a fundamental issue in Islamic financial practice in Indonesia, with a particular focus on the fatwa issued by the Indonesian Ulema Council (MUI) No.1/2004, which formalized the prohibition of interest in Islamic financial institutions as harâm activity.The fatwa has sparked criticism and debate among academics and scholars questioning its legitimacy.Also, the method of deriving laws is weak and less affirmative in addressing the socio-economic conditions of the Indonesian people who are used to conventional banks and have not recently intersected with Islamic banks, through a qualitative-normative approach and the collection of primary data from various academic sources that discuss the fatwâ.It was found that the MUI fatwâ relied heavily on normative postulates and used qiyâs, an analogical reasoning method based on legal illat (adequate cause), as its primary ijtihâd approach.However, the MUIs methods overlook the socio-economic context.Critical political indications specific to Indonesia can inform a more comprehensive and contextually relevant basis for expressing interest as harâm in financial institutions.The recommendation in this study is the need to review and reassess the arguments underlying the fatwa to align it more closely with the reality of the profit-taking system in financial institutions that is common to the national and global community.