Pakistan Institute of Development Economics



Interest Free Banking and Economic Stability

Since the end of World War II most colonial and semi-colonialcountries have regained their political independence. These countriesare now in the process of reorganising and restructuring their economicsystems based on their religious, historical and cultural values. Today,there are approximately 50 countries with roughly one billioninhabitants that profess Islam as their religion. During the past twodecades an attempt has been made, in varying degrees, in many of thesecountries to reconstruct the economic structure within the framework ofan Islamic system. The economic system, in an Islamic society, is notsignificantly different than a welfare state in a capitalist system.Such an economic system is based on the principle of justice (AI Adl) inwhich the means of production are privately owned, freedom of domesticand international trade is emphasised and one is required to part with2.5 percent of savings each year to support the needy. The Islamicsystem differs from the modern capitalist system in a significant way inthat borrowing and lending money, based on a predetermined interestrate, is strictly prohibited in Islam, while interest rates have playeda major role in the development of the modern banking system and thedevelopment of other financial intermediaries.

Habib A. Zuberi

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