Islamic Finance

Islamic Finance

Principles and Practice, Second Edition

Hans Visser

This thoroughly updated and revised second edition analyses the ideas behind Islamic finance, the forms Islamic finance has taken in practice and the tension between the two that may occasionally arise. Along with an expanded section on the history of the ban on interest, this second edition contains a much more extensive discussion of investment and savings accounts, sukuk and tawarruq.

Chapter 7: Public finance and the monetary authorities

Hans Visser

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


The ban on riba, if interpreted as a ban on conventional interest, poses a problem for the fiscal and monetary authorities. Alternatives for conventional bonds as a means of borrowing money have to be found. When the thinking on an Islamic economy was still inchoate its advocates advanced ideas that in their naïveté were only equalled by former Chilean President Salvador Allende’s conviction that under his post-capitalist Unidad Popular regime (1970–73) people would not work simply because they receive money in return, but from an innate urge to contribute to the wellbeing of society as a whole (Allende 1973). In the same vein, Maulana Maududi (1999, p._206) imagined that in order to meet emergencies, non-productive national expense and war expenditure, an Islamic government could be assured of voluntary donations. The proscription of interest and the establishment of the system of zakat would result in prosperity and people would consequently not feel such donations as a burden. In addition, people would be glad to provide beneficence (qard hasan) loans. But Maududi must have had an inkling that this was a bit starry-eyed after all, as he adds that if more money is needed than is collected in these ways, the government cannot only use capital levies such as the zakat, but also force people to lend part of their bank deposits to the government or even, if the worst came to the worst, resort to inflationary finance.

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