The Foundations of Islamic Banking

The Foundations of Islamic Banking

Theory, Practice and Education

Edited by Mohamed Ariff and Munawar Iqbal

After barely half a century of experience, Islamic banking has become established as a niche industry across the world, offering new and sophisticated financial products designed to be compliant with Islamic legal principles and common law. This comprehensive book explores the theory, principles and practices underpinning this rapidly expanding sector of banking.

Chapter 12: Riba and Interest in Islamic Banking: An Historical Review

Raquib Zaman

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


Raquib Zaman 1.0 INTRODUCTION The origin of Islamic banking is rooted in the belief that interest and usury are synonymous, and that all conventional financial institutions are dealers in usury and that their transactions are usurious. The Islamic concept of riba, which should appropriately be translated into usury, is instead proclaimed to be interest by the proponents of ‘Islamic’ banking and finance. Since riba is clearly prohibited in Islam, as will be shown below, they argue that Muslims should not deal with the conventional banking system. Hence, we are now showered with discourses that not only come up with the justification of Islamic banking and finance (IBF), but with the ‘theory’ of Islamic finance.1 A number of texts elucidate the claimed rationale behind the creation and operation of IBF,2 while a number of others3 question their modus operandi. But, for a basic understanding of the concept of riba and its interpretation one must start with the Quran,4 Islam’s holy book, and then examine the hadith5 literature, followed by the opinions of Muslim jurists, shari’ah.6 2.0 THE CONCEPT OF RIBA (USURY) IN ISLAM Prohibition of riba according to the Holy Quran: O you who believe! Devour not usury, doubling and quadrupling (the sum lent). Observe your duty to God, that you may be successful.7 O you who believe! Observe your duty to God, and give up what remain (due to you) from usury, if you are (in truth) believers. And if you do not, then be warned of war...

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