Interest Based Financial Intermediation: Analysis and Solutions
Interest is prohibited in all monotheist religions. Apart from religion, interest is also regarded as unjust price of money capital by pioneer secular philosophers as well as some renowned economists. However, it is argued by some economists that modern day, market driven interest rate in a competitive financial market is different from usury and that the interest based financial intermediation has served a useful purpose in allocation of resources as well as in allocation of risk, given the interpersonal differences in risk preferences that exist in any society. Hence, there is a need to delineate clearly whether Islamic economics distinguishes between usury and interest. Secondly, there is also a need to reassess the economic merits and demerits of modern day competitive financial markets fueled by interest based financial intermediation. This paper tries to serve this need and presents a brief review of literature on the issue and examines the economic rationale usually presented for legitimizing interest as the price of capital. The paper analyzes the impact of interest based financial intermediation on macroeconomic variables as well as on development goals by highlighting few glaring facts and statistics and empirical evidence documented in past studies. The paper concludes with delineating the role of capital in an Islamic economy and how it can be valued in an Islamic economy without compensating it with fixed payoffs and the paper also assesses how economic and financial decisions will be altered in this new interest-free framework.
|Date of creation:||31 Oct 2012|
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- Zaman, Arshad & Zaman, Asad, 2001. "Interest And The Modern Economy," Journal of Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 8, pages 61-74.
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- Zaman, Arshad & Zaman, Asad, 2000. "Interest and the Modern Economy," MPRA Paper 9944, University Library of Munich, Germany.
- Haque, Nadeem ul & Mirakhor, Abbas, 1999. "The Design of Instruments For Government Finance in An Islamic Economy," MPRA Paper 56028, University Library of Munich, Germany.
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