Islamic Banking

Islamic Banking

Mervyn K. Lewis and Latifa M. Algaoud

The prohibition of interest is the feature of Islamic banking which most distinctly sets it apart from conventional banking. To Western eyes, this seems a strange restriction, but Christian countries themselves maintained such a ban for 1,400 years. Islamic Banking asks why Islam has been able to maintain its stand. The book explores the intricacies of Islamic law and the religious and ethical principles underpinning Islamic banking. It then considers the analytical basis of Islamic banking and financing in the light of modern theories of financial intermediation, and identifies the conceptual issues to be overcome.  

Chapter 2: Islamic Law

Mervyn K. Lewis and Latifa M. Algaoud

Subjects: economics and finance, financial economics and regulation, islamic economics and finance, money and banking


THE ESSENCE OF ISLAM It is difficult to examine the workings of Islamic banking without some knowledge of the economic and legal principles underlying an Islamic banking system. The first thing which has to be eschewed is the notion that Islamic economics is a new paradigm. Certainly, Islamic economic thought has come to the fore in recent years in a number of Muslim states. But as noted in Chapter 1, the ideas can be traced back to the message of the Holy Qur’an in the seventh century, and in this sense Islamic economics is as old if not older than the theoretical foundations of most Western economic systems, especially modern capitalism.1 Those who pioneered Islamic economic thought developed rules for carrying on banking and finance from Islamic law or the shari’a (formally shari’a Islami’iah but generally abbreviated to shari’ah or shari’a). The literal meaning of the Arabic word shari’a is ‘the way to the source of life’ and, in a technical sense, it is now used to refer to a legal system in keeping with the code of behaviour called for by the Holy Qur’an and the hadith (the authentic tradition). Muslims cannot, in good faith, compartmentalise their behaviour into religious and secular dimensions, and their actions are always bound by the shari’a. Islamic law thus embodies an encompassing set of duties and practices including worship, prayer, manners and morals, marriage, inheritance, crime and commercial transactions: that is, it embraces many aspects that would not necessarily be considered as law...

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