JavaScript is disabled in your web browser or browser is too old to support JavaScript. Today almost all web pages contain JavaScript, a scripting programming language that runs on visitor's web browser. It makes web pages functional for specific purposes and if disabled for some reason, the content or the functionality of the web page can be limited or unavailable.

Thursday, July 24, 2025

Understanding Islamic Finance

by

20140723

Next week, Mus­lims in T&T and around the world cel­e­brate Eid-ul-Fitr. The cur­rent up­heavals in the Mid­dle East bring to the fore a num­ber of dif­fer­ent is­sues, but there is one as­pect of the re­li­gion of Is­lam that is of par­tic­u­lar in­ter­est to stu­dents of fi­nance in the West.

Imag­ine a world with­out ei­ther the re­ceipt or pay­ment of in­ter­est. In oth­er words, rather than deal­ing with the is­sue of the lev­el of in­ter­est rates, con­sid­er a sce­nario where in­ter­est is nei­ther paid nor col­lect­ed.

The pro­hi­bi­tion of re­ceiv­ing and pay­ing in­ter­est is well doc­u­ment­ed in Is­lam, even if it is not as wide­ly prac­ticed as it is sup­posed to be. How­ev­er, this is not a con­struct that is unique to Is­lam­ic the­ol­o­gy and stu­dents of the Old Tes­ta­ment can cite many ref­er­ences where in­ter­est is ei­ther pro­hib­it­ed or lim­it­ed to some de­gree.

In­ter­est is born out of the is­suance of cred­it. How­ev­er, cred­it (bor­row­ing) is not nec­es­sar­i­ly a bad thing. Con­ven­tion­al fi­nance ar­gues it is the rate of in­ter­est that is the ar­biter of cred­it. The rate of in­ter­est should re­flect the risk as­so­ci­at­ed with the lend­ing. In oth­er words, the per­son's abil­i­ty to re­pay as well as lev­el of avail­able cred­it with the high­er the de­mand for cred­it, the high­er the rate of in­ter­est and the low­er the de­mand, the low­er the rate of in­ter­est.

In­ter­est is there­fore the com­pen­sa­tion paid by the bor­row­er of cap­i­tal to the lender, for per­mit­ting him to use his funds. A typ­i­cal eco­nom­ic de­f­i­n­i­tion puts in­ter­est as the rent paid by the bor­row­er of cap­i­tal to the lender to com­pen­sate him for the loss of the op­por­tu­ni­ty to use the funds when it is on loan. It can be likened to the de­ci­sion not to live in an apart­ment or house that you own. One would, in such cir­cum­stances, rent it out to a ten­ant.

?


Related articles

Sponsored

Weather

PORT OF SPAIN WEATHER

Sponsored