Islamic Aspects Of Interest: Financing Strategy

Abstract

Allah made trade lawful and forbade riba†(the Holy Quran 2:275). Islamic literature interprets “riba†to “interestâ€. Moslims perceive interest forbidden and avoid it. This affects adversely money and capital markets. ï¬scal and monetary policies. financing projects and eventually growth strategies and causes worse economic conditions of even rich Moslim countries. Many research projects, dealing with various aspects of rihu have been carried out aiming at ï¬nding a solution to the problem. Most of these pojects deal with deferral charges imposed on overdue loans, perceiving this charge as a penalty. hence legal; while some scholars declare it as unlawful and reject it.

Interest, however, consists of three elements. These elements are: “time value of money premium (I_tvp)". “risk premium (l_rp)" and “inflation premium (l_ip)â€. Therefore, the following equation establishes: l = I_tvp + l_rp + l_ip. The I_tvp is the same for all classes of borrowers and is almost constant. l_rp and l_ip, however, are functions of “the riskiness of the loan†and “the inflationary conditions of economyâ€, respectively. This article intended to analyse each element as well as their mixture from an Islamic point of view in order to clarify which element of interest best matches with the meaning of riba, what types of transactions fall within this domain (hence are forbidden); and what types fall