Shaikh, Salman (2012): Interest Based Financial Intermediation: Analysis and Solutions. Published in: Journal of Islamic Banking & Finance , Vol. 29, No. 4 (31. December 2012)
Download (298kB) | Preview
Interest is prohibited in all monotheist religions. Apart from religion, interest is also regarded as unjust price of money capital by pioneer secular philosophers as well as some renowned economists. However, it is argued by some economists that modern day, market driven interest rate in a competitive financial market is different from usury and that the interest based financial intermediation has served a useful purpose in allocation of resources as well as in allocation of risk, given the interpersonal differences in risk preferences that exist in any society. Hence, there is a need to delineate clearly whether Islamic economics distinguishes between usury and interest. Secondly, there is also a need to reassess the economic merits and demerits of modern day competitive financial markets fueled by interest based financial intermediation. This paper tries to serve this need and presents a brief review of literature on the issue and examines the economic rationale usually presented for legitimizing interest as the price of capital. The paper analyzes the impact of interest based financial intermediation on macroeconomic variables as well as on development goals by highlighting few glaring facts and statistics and empirical evidence documented in past studies. The paper concludes with delineating the role of capital in an Islamic economy and how it can be valued in an Islamic economy without compensating it with fixed payoffs and the paper also assesses how economic and financial decisions will be altered in this new interest-free framework.
|Item Type:||MPRA Paper|
|Original Title:||Interest Based Financial Intermediation: Analysis and Solutions|
|Keywords:||Interest, Usury, Islamic Finance, Islamic Banking, Financial Intermediation, Economic Justice|
|Subjects:||E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems
E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy
|Depositing User:||Salman Shaikh|
|Date Deposited:||07. Nov 2012 15:49|
|Last Modified:||07. Jan 2016 10:56|
Africa Action (2008). “Campaign to Cancel Africa’s Debt”, Retrieved from: http://www.africaaction.org/campaign_new/debt.php
Ajayi, L. Boboye & Oke, M. Ojo (2012). “Effect of External Debt on Economic Growth and Development of Nigeria”. International Journal of Business and Social Science, Vol 3 (12), pp. 297-304.
Aristotle (384-322 BC). “Politics”, translated by Benjamin Jowett, with an introduction by Max Lerner, republished in 1943. New York: The Modern library.
Chapra, M. Umer (1984). “The Nature of Riba in Islam”. Hamdard Islamicus, Vol 7 (1), pp. 3-24.
Chapra, M. Umer (2007). “The Case Against Interest: Is It Compelling?” Thunderbird International Business Review, Vol 49 (2), pp. 161-186.
Clary, J. Betsy (2011). “Institutional Usury and the Banks”. Review of Social Economy. Vol. LXIX (4), pp. 419-438.
Cunningham, Rosemary T. (1993). “The Effects of Debt Burden on Economic Growth in Heavily Indebted Developing Nations”. Journal of Economic Development. Vol. 18 (1), pp. 115-126.
Dempsey, B. (1951). “The Usury Element in Inflation”. Review of Social Economy, Vol 9 (1), pp. 36-43.
Easterly, William (2002). “How Did Heavily Indebted Poor Countries Become Heavily Indebted? Reviewing Two Decades of Debt Relief”, World Development, Vol 30 (10), pp. 1677-1696.
Hanif, Nadeem & Shaikh, Salman (2010). “Central Banking & Monetary Management in Islamic Finance”. Journal of Independent Studies and Research, Vol 8 (2).
Haque, Nadeem-ul & Mirakhor, Abbas (1998). “The Design of Instruments for Government Finance in an Islamic Economy”. International Monetary Fund. IMF Working Paper, WP/98/54.
Keynes, John M. (1936). “Theory of Income, Employment, Interest & Money”. New York: Polygraphic Company of America.
Keynes, John M. (1932). “Economic Future of our Grand Children”. Essays in Persuasion New York: Harcourt Brace.
Malik, Shahnawaz, Hayat, M. Khizer & Hayat, M. Umer (2010). “External Debt and Economic Growth: Empirical Evidence from Pakistan”. International Research Journal of Finance and Economics, Issue 44, pp. 88-97.
Mirakhor, Abbas (1996). “Cost of Capital and Investment in a Non-Interest Economy”. Islamic Economic Studies, Vol 4 (1), pp. 35-47.
Modigliani, F. & Miller, M. (1963). "Corporate Income Taxes and the Cost of Capital: A Correction". American Economic Review. Vol 53 (3), pp. 433–443.
St. Thomas Aquinas, Summa Theologica, trans. Fathers of the English Dominican Province, (London: R. T. Washburne, Ltd., 1918), pp. 330-340, reprinted in Roy C. Cave & Herbert H. Coulson, A Source Book for Medieval Economic History, (Milwaukee: The Bruce Publishing Co., 1936; reprint ed., New York: Biblo & Tannen, 1965), p. 182
The Council of Islamic Ideology (1980), “Report on Elimination of Interest from the Economy”, Government of Pakistan.
Usmani, Muhammad Taqi (2007). “Historic Judgment on Interest”. Karachi: Maktaba Ma’ariful Quran.
Watt, L. S. J. (1945). “Usury in Catholic Theology”, Oxford: Catholic Social Guild.
Zaman, Arshad & Zaman, Asad (2001). “Interest and the Modern Economy”. Lahore Journal of Economics. Vol 6 (1), pp. 113-127.