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Thursday, December 07, 2006


Islamic banking

Islamic Banking

In accordance with Shariah (Islamic Law), Muslims cannot charge interest. This is a very detrimental law or rule to Islamic Banking systems and Islamic countries. Markets are everywhere, and there is no doubt that Islamic countries benefit from transactions in a market. But, I don’t think an Islamic country can come close to benefiting from the full potential of the market without allowing interest rates. In Mancur Olson’s book, Power and Prosperity, Olson suggests that a country needs a full range of markets that will allow the society to capture the most gains from all types of transactions. Olson gives an example: Suppose there is a young man that is interested in starting some type of business and he is fully willing and capable to make the business prosper, but he has no money. Now suppose there is an older man that has the money, but is not enthusiastic enough or willing to start his own business. Both men, the economy, and the country have a potential to become better off if the older man loans the younger man the money. But, the older man will not do this unless he is sure that the young man will not just keep all the money for himself. An enforceable contract (with interest added in) will allow this type of transaction to take place. I think there is a lot of room for more advantageous transactions and economic growth in many Islamic countries, if they are willing to take advantage of it.

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