What is Wrong with Islamic Economics?

What is Wrong with Islamic Economics?

Analysing the Present State and Future Agenda

Studies in Islamic Finance, Accounting and Governance series

Muhammad Akram Khan

What is Wrong with Islamic Economics? takes an objective look at the state of the art in Islamic economics and finance. It analyses reasons for perceived stagnation and also suggests a way forward.

Chapter 16: Prohibition of riba: the way forward

Muhammad Akram Khan

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

Extract

The prohibition of riba is absolute and unequivocal in the Qur’an. However, Muslim scholars differ on the interpretation of the term ‘riba’. Chapters 10–15 have discussed the position of orthodox and modernist scholars. Our general conclusion is that none of the interpretations of riba is satisfactory. The orthodox interpretation that equates riba with all types of interest leaves several questions unanswered. For example, it does not have satisfactory answers for the difference between cash and credit prices, discounting of commercial papers, penalty for late payment, indexation of loans, determination of profit and loss, and so on. Modernist scholars also do not have a conclusive definition of riba. For example, they accept interest as legitimate if the rate is not ‘exorbitant’, without giving a benchmark for the exorbitant rate. They distinguish between interest on consumption and productive loans and treat the former as riba and accept the latter as legitimate. However, the demarcation between consumption and production loans is blurred. The general response of Muslim people is also confused. Most of them deal in interest-based transactions though they may believe in the prohibition of interest. The economies of most Muslim countries are also based on interest-based finance. The question arises: what, then, is the meaning of the prohibition of riba in the present age? The present chapter deals with this question.

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