Is Contemporary Interest Rate in Conflict with Islamic Ethics?

This paper considers whether the modern interest rate theory is in conflict with Islamic values. Unfortunately, the issue is not sufficiently debated in economic and cognate literature and thus a mist surrounds the Islamic concept of interest (riba) and its use in the Moslem world that contains about 1.3 billion people and hundreds of billions of dollars of surplus funds. A substantial part of this money has not been made available to the commercial banking system as Islamists in particular keep their savings in the form of gold, precious stones or durable foreign currency, in residential or other safe places, believing that earning interest on savings is against the principles of Islam. This attitude by creating a shortage of funds for investment projects is hampering the economic development of many Moslem countries where standards of living are generally low. The finding of the paper is that only one component part of the time preference rate, namely pure time discount, may be objectionable from the Islamic as well as from secular viewpoints; the rest does not appear to be against Muslim ethics. However, a truly competitive financial market structure is likely to wipe away the excessive pure time discount rate leaving the market interest rate free from any objectionable parameter.