The last four decades have witnessed a great eagerness in the Islamic world to establish an interest-free economy.
Since the Western countries introduced into the Islamic world a capitalist economy based on interest, a small group of people in the Islamic countries have insisted that interest on commercial loans is not ‘usury’ as prohibited by Islam. They argue that credit is a necessity in the present-day economic system, based as it is on the principle of free enterprise and this is so especially in the developing countries. The wide range of necessary economic activities cannot be carried out on the principle of qard hassan (interest-free loans) and Islam should not interfere with these economic activities.
This proposition has opened the door for debate on the question of whether commercial interest falls within the ambit of riba or not. It attracted the attention of scholars throughout the Islamic world and the question was thoroughly examined in seminars, conferences, study circles and research institutes. Being engaged in this debate, which continued up to the 1960s, Muslim scholars could not pay due attention to working out a banking system which would operate without interest and substitute for the present modes of financing those conforming to the Islamic Shari’ah principles.
Following an intensive debate between two sides, it was concluded that commercial interest was not allowed under the Shari’ah as it fell within the definition of riba, which is strictly prohibited by the Qur’an and Sunnah. This view was accepted at the level of the Shari’ah scholars in a large number of seminars and also gained wide acceptance among the majority of Muslim economists.
What can be regarded as the final verdict in this respect is the resolution adopted by the Islamic Fiqh Academy of the Organization of the Islamic Conference in its second session, held at Jeddah which was attended by outstanding Shari’ah scholars representing more than 45 Muslim countries. They unanimously adopted a resolution that banking interest was riba and that Muslim states must try to abolish interest from their economy and base the transactions of their banks and financial institutions on Islamic modes of finance only.
When the prohibition on banking interest was, by and large, accepted in the Muslim community, several attempts were made to establish Islamic banks and financial institutions which could provide a practical example of Islamic modes of finance. The task was not easy. The difficulties in this respect were manifold. On the one hand, the Islamic banks were expected to provide all the basic services were to conform to the Islamic injunctions. On the other hand, most of these services in their present form had no precedents in the heritage of Islamic fiqh…
End of Part 1. Continue on Part 2.