Why Does Islamic Finance Reject Interest?

Abstract

Financial crises are one of the most critical problems faced frequently in the recent history of humanity. After each severe financial crisis, decision-makers are inclined to more regulations and interventions in the financial system. In response, we observe deregulation processes following the inadequacies initiated by the previous interventions. It is well known that different monetary regimes and regulations have been adopted during the past two centuries while repeatedly experiencing the paradoxical loop of regulations and deregulations. These considerations bring us to the point that the contemporary financial system needs reforms outside the box because the reforms attempted inside the box could not propose a remedy with adequate satisfaction. Through discussions on the reforms outside the box and their possible implications, this chapter aims to explain a potential economic rationale for the prohibition of interest. The first section asserts the foundational perspective adopted while approaching finance. The second section elaborates on Islamic finance-inspired reforms. An economic rationale for the prohibition of interest, with a particular focus on the distinction between Islamic finance and interest-based finance, constitutes the context of the third section. Lastly, the fourth section presents the implications of implementing the Islamic financial system on development, stability, and sustainability. The chapter ends with concluding remarks.