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International Journal of Islamic Financial Services Vol. 1 No.1

ISLAMIC FINANCE: A WESTERN PERSPECTIVE
Humayon A. Dar and John R. Presley

There is a great deal in Western Literature that focuses upon the major issues in the Islamic economic paradigm, such as, the prohibition of interest and the causes of the business cycle. There is much to be gained from utilizing also the empirical approach of Western economic literature. Rather than develop in isolation from Western literature, Islamic scholars would do well to exploit the wealth of supportive arguments found in Western Literature.

1. Introduction and Background The new Islamic economics paradigm has developed almost in isolation of contemporary Western economic literature. Islamic economics and finance has so far failed to capture the interest of Western writers. Unfortunately also Islamic writers have focused upon the Koran and mainly Asian literature without utilising a wide body of literature in the West which would assist with the development of the Islamic paradigm. This article begins to rectify the latter deficiency by exploring three key issues -support for the prohibition of interest in Western literature, the blame attached to interest based systems in the creation of business cycles in capitalist economies and empirical evidence on attitudes towards Islamic finance. In seeking to achieve an economic system based upon fairness and justice, Islam dictates that prohibition of rib a (interest) must be established. All incomes, from whatever source, whether it be provision of land, labour, capital or enterprise, must be determined by the supply of work effort associated with the factors of production. If money is lent for interest then capital is augmented without effort; money is unable to create surplus value by itself. In the context of money, work effort is defined to include the taking of risk in whatever project that money is invested; hence Islam decrees that it is fairer if the provider, of capital shares in the profit or loss of the project in which the borrower invests the capital rather than receiving a fixed return which is independent of the use to which that capital is put. The Islamic literature employs a number of arguments to justify prohibition of interest, some of which are also a feature of Western literature. First, interest as a reward for saving is not considered to have any moral foundation or justification. Second, abstinence from consuming out of present income is not regarded as being sufficient reason to merit a financial reward. Third, a' distinction is made between money and capital; money in essence becomes potential capital; to transform money to capital requires the application of enterprise, that is the risk taking and the knowledge required to bring factors of production together in order to create profit (or loss). [Presley 1988, pp.68-9]. If the lender provides enterprise in whatever form, he justifies a profit (loss) share, but not a fixed or guaranteed return; the reward, that is the profit share, is determined by contribution in terms of enterprise. The creditor/debtor relationship is redefined in Islam with the creditor becoming a partner in the project, not distanced from the use to which the money is employed. Fourth, it is fairer for both creditor and debtor that they each have a share of profits or losses; a profit share, for example, may exceed the market rate of interest and be more in keeping with the input of the creditor. Therefore profit shares not only serve the debtor more fairly but also the creditor.

International Journal of Islamic Financial Services Vol. 1 No.1

Lending money represents a transfer of property rights (Presley, 1988, p.70); unless the loan is used to generate incremental wealth there is no claim to additional property rights to either borrower or lender; the creation of incremental wealth justifies a claim from both borrower and lender to a share of that additional wealth, but...
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