Towards an Interest-Free Islamic Economic System

Abstract

The author, who is chief economist at the Banker's Equity Limited, an interest-free institution in Pakistan, earned his Ph.D. in 1983 from Boston University. This book, a revised version of his doctoral dissertation accepted at that university, is the first publication sponsored by the International Association for Islamic Economics in collaboration with the Islamic Foundation. The study contains important lessons for both interest-bearing and the interest-free Islamic societies. Theoreticians and practitioners in finance can equally benefit from this timely publication. It is therefore a very useful addition to the literature in Islamic economics and in the "signalling theory" in finance, which are both new and fast growing areas of study. Traditional banking is on the brink of crisis at present. The banks are failing at a post-depression record rate in the United States. Experts agree that a single event such as inability of the developing nations to service their debt, a steep fall in oil prices, withdrawal of petrodollars from the traditional institutions, or a significant rise in the interest rates, can lead to hture widespread failures of banking institutions. Traditional bankers in search of alternatives such as Islamic banking can benefit from Dr. Khan's rigorous cost benefit analysis. Muslim societies interested in Islamization can recognize some of the difficulties pointed out by the author, especially the information or disclosure costs associated with interest-free financing. Material incentives, which frequently exceed the moral teachugs of Islam in contempomy Muslim societies, may lead to dishonesty in reporting the costs and benefits of business projects among the concerned parties. Chapter one outlines the objectives and organization of the study. Readers are informed that the origin of the principles of Islamic economics lies in ...