As the world has recently passed through the global financial crisis that begun in 2008 in the USA with the banks’ collapsing, analysts are giving different opinions and making new economic hypothesizes about the origin of, as well as the process of different countries escaped from the crisis. Among all these new “theories”, the case of Islamic banks is interesting in terms of its nature and consequences. In my essay, I will try to highlight the basic principles of the Islamic finance, the reasons of the restriction of interest, the most important tools used by Islamic banks in economic activities and brief explanation of them, and finally my view point of the probable future improvement of the Islamic financial system.
First of all, let
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It is fair, since the lender has no guaranty that, he will not be in the position of borrower in the future, and he probably would not like to see any pressure against him through interest. This is directly related with the term of Islamic PLS (means profit and loss sharing) which states that the relationship between borrower, lender and intermediary are rooted on financial trust and partnership . Here banks are in the role of intermediary, and individuals become lender through investing on the bank or borrower through taking debts.
When it comes to the economic impact of the interest (riba) on the whole economy and individuals, I think interest is a negative factor. Despite of the fact that especially in western economies, thinking of an interest-free system is quite difficult for current (Example banks) and potential lenders, analysts and academicians emphasize the possibility of non-interest based economy. As an example Arshad Zaman and Asad Zaman argue that “The economic function which the interest rate performs can be fulfilled without using the particular form which it takes in modern banking”. As a proof they refer to one of the well-known economic work - Obstfeld and Rogoff 1996: ‘the ban on … interest … would not interfere with the efficiency of the economy’.
Another critical principle is about