Crossfire: Islamic banking avoids interest payments and thus prevents rich investors profiting from the poor

Abstract

Dear Professor Harper, Islamic banking prohibits interest payments on loans, but permits a return from musharaka or ‘partnership’. This system generates higher profit to the poor entrepreneur who borrows capital, and also avoids massive profits for rich merchants via soaring interest rates. ‘Partnership’ is a limited period contractual agreement that combines the investment of skills, capital, and efforts of the entrepreneur with the financial resources of the banking partner, and divides any profit or loss in accordance with each of the partners’ share in management, follow-up, or capital. As a result, the net rewards (and the returns on capital) of this partnership arrangement to the entrepreneur are greater than the net income (and the returns on capital) than