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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.  
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Chapter 5: Islamic Financial Systems

Mervyn K. Lewis and Latifa M. Algaoud


OBJECTIVES OF AN ISLAMIC FINANCIAL SYSTEM This chapter examines the appropriate structure of a complete financial system based on Islamic principles. Three countries which have sought to develop such a system are Pakistan, Iran and Sudan. Pakistan was the first to move in this direction, and a major part of this chapter is devoted to a study of the legal framework and the legislative and other changes instituted in Pakistan to bring this about. The transition in Iran and Sudan has been abrupt, in the wake of political transformations. But, to begin with, we outline the objectives and then the ideal structure of an Islamic financial system. An Islamic banking and financial system exists to provide a variety of religiously acceptable financial services to the Muslim communities. In addition to this special function, the banking and financial institutions, like all other aspects of the Islamic society, are expected to ‘contribute richly to the achievement of the major socio-economic goals of Islam’ (Chapra, 1985, p. 34). The most important of these are: economic well-being with full employment and a high rate of economic growth, socio-economic justice and an equitable distribution of income and wealth, stability in the value of money, and the mobilisation and investment of savings for economic development in such a way that a just (profit-sharing) return is ensured to all parties involved. Perhaps the religious dimension should be presented as a further explicit goal, in the sense that the opportunity to conduct religiously legitimate financial operations has a...

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