The Problem of Interest and Islamic Banking in a Comparative Perspective: The Case of Egypt, Iran and Pakistan

Abstract

As a growing economic sector in many Muslim countries, Islamic banking has its roots in the application of the Shari’a. This is because Islamic banking is, in principle, based on legally recognized financial contracts and transactions that should be free of riba and gharar, both of which are interpreted somewhat differently by major Sunni and Shi’i schools of law. The objective of this study is (a) to shed light on the development of the debate on riba among Sunni and Shi’i scholars and the position of governments on the problem of interest-free banking in the twentieth century in Egypt, Iran and Pakistan; and (b) to study the implications of this debate for Islamic financial contracts. It is concluded that the expansion of a modern and viable internationally orientated Islamic banking and finance depends mainly on the development of financial capital markets, more independent and transparent central banking in Muslim countries, and a more innovative and flexible approach to Shari’a by different schools of law in Muslim countries.