Studies in Islamic Finance, Accounting and Governance series
Chapter 5: The case against interest: is it compelling?
Four of the world’s major religions (Judaism, Christianity, Hinduism, and Islam), having a following of more than two-thirds of the world’s population, have prohibited interest. In sharp contrast with this prohibition, the entire international financial system is now based on interest and has been so for more than 200 years. However, protests have been, and continue to be, made against interest. These protests have been particularly prominent in the Muslim world, where an effort is under way to replace the interest-based system of financial intermediation with the profit-and-loss-sharing (PLS) system. The introduction of a new model of financial intermediation based on PLS is not an easy task. The difficulties involved in the changeover justifiably raise the question of why should anyone try to replace the conventional system, which has been in existence for such a long time and has by now become highly sophisticated. Is the case against interest so compelling that a change needs to be considered seriously? One reason for the change is the imperative of abiding by a religious edict. This reason, though of prime importance to committed believers in Islam and other religions, may not have any appeal for those who are not so highly committed. It is, therefore, necessary to see whether the effort to remove interest from the financial system has any economic rationale.
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