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A Macroeconomic Model of an Interest-free System


  • Hamid Zangeneh

    (Department of Economics, Widener University, Chester, Pennsylvania, USA.)


A number of economic models have been designed to evaluate and analyse the Islamic banking system. However, less attention has been paid to macro model-building in an Islamic framework even though most of the Keynesian, Classical, and Neo-classical economic systems are compatible with the tenets of Islamic economics. In this paper an interest-free economic system is formulated in terms of the familiar Neo-classical macroeconomics models. Even though the rules of conduct for Muslims in an Islamic economic system are different from those in the non-Islamic economic systems, it is shown that the Islamic economic system does exhibit properties that are consistent, reasonable, and familiar. For example, under some reasonable simplifying assumptions, the model shows that savings and investment do not necessarily have to fall because of the institution of an Islamic economic system, as some economists suggest. These depend on the rate of return on mudarabah investment, just as they depend on the rate of return on investment (profits) in a credit-based economic system. These could be higher, lower, or remain the same relative to their levels in a credit-based economy under different conditions. The model also shows the impact of fiscal and monetary policies on the rate of inflation, the rate of return on mudarabah, and therefore on the investment demand. The model shows that, in general, an economic system based on Islamic principles is viable; it also provides unique solutions for income, employment, and prices.

Suggested Citation

  • Hamid Zangeneh, 1995. "A Macroeconomic Model of an Interest-free System," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 34(1), pages 55-68.
  • Handle: RePEc:pid:journl:v:34:y:1995:i:1:p:55-68

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    Cited by:

    1. Mohammed B. Yusoff, 2006. "Fiscal Policy In An Islamic Economy And The Role Of Zakat," IIUM Journal of Economics and Management, IIUM Journal of Economis and Management, vol. 14(2), pages 117-146, December.

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