Objections, Reservations and their evaluations:
The rational of prohibition of interest has already been discussed. Many people, however, argue that even if interest is prohibited in Islam. Interest-free banking is not practicable in the modern world as an economic system minus interest cannot be visualized. It is now proposed to discuss and analyze these objections and reservations.
The interest-free banking system will not be able to bring an optimum allocation of resources. It is argued that since funds will be available at zero rate of interest, the demand for money tremendously increase and in the absence of interest rates mechanism, there will be no tool for equating demand and supply of money.
This argument is based on a gross misconception. It is important to perceive clearly that interest-free banking does not mean that funds will be available free of cost to the entrepreneur for their business requirements. Islamic system of interest-free banking among other things, means that finances will be available on profit and loss sharing basis as against predetermined rates of interest. The rates of profit depending upon the operational results, will, therefore, replace interest rates in allocation of resources and will also provide a mechanism for equating the demand and supply of money.
The diversion of funds toward a project will largely depend, with in the Islamic framework, on the projected rate of profit i.e. greater the projected rate of profit, the greater may be the supply of funds to that project. If the actual profit is constantly lower than the projected profit, the entrepreneur is likely to face difficulty in securing funds for his project in future. The mechanism of profit sharing is, therefore, likely to be more instrumental in creating financial discipline, higher efficiency and would lead to a more careful and realistic feasibility and evaluation of projects as also of post-finance monitoring. This would result in not only higher rates of profit but would also provide a better and more efficient mechanism for allocation of resources as compared to interest-based system. in any case, there is not much evidence to support that rate of interest is an efficient mechanism for allocation of resources.
Islam discourages keeping funds idle. The Islamic system of Zakat (Poors lue) at a rate of 2.5% per annum, on specified assets, discourages the Muslims to keep the money in bank lookers or at home, as the savings is automatically consumed each year through the payment of Zakat. Further, an Islamic state can also impose tax or duty on idle assets. This will be a fiscal devise in lieu of interest. It will, therefore, be observed that while interest may be seen as a compensation for parting with money in the interest-based system, the expected profit sharing, duty if imposed, and Zakat in the Islamic system will discourage keeping the funds idle? This, coupled with the instinct of human beings to save for uncertain future, will ensure equilibrium in both, the commodity market and the money market.
The rational of prohibition of interest has already been discussed. Many people, however, argue that even if interest is prohibited in Islam. Interest-free banking is not practicable in the modern world as an economic system minus interest cannot be visualized. It is now proposed to discuss and analyze these objections and reservations.
The interest-free banking system will not be able to bring an optimum allocation of resources. It is argued that since funds will be available at zero rate of interest, the demand for money tremendously increase and in the absence of interest rates mechanism, there will be no tool for equating demand and supply of money.
This argument is based on a gross misconception. It is important to perceive clearly that interest-free banking does not mean that funds will be available free of cost to the entrepreneur for their business requirements. Islamic system of interest-free banking among other things, means that finances will be available on profit and loss sharing basis as against predetermined rates of interest. The rates of profit depending upon the operational results, will, therefore, replace interest rates in allocation of resources and will also provide a mechanism for equating the demand and supply of money.
The diversion of funds toward a project will largely depend, with in the Islamic framework, on the projected rate of profit i.e. greater the projected rate of profit, the greater may be the supply of funds to that project. If the actual profit is constantly lower than the projected profit, the entrepreneur is likely to face difficulty in securing funds for his project in future. The mechanism of profit sharing is, therefore, likely to be more instrumental in creating financial discipline, higher efficiency and would lead to a more careful and realistic feasibility and evaluation of projects as also of post-finance monitoring. This would result in not only higher rates of profit but would also provide a better and more efficient mechanism for allocation of resources as compared to interest-based system. in any case, there is not much evidence to support that rate of interest is an efficient mechanism for allocation of resources.
Islam discourages keeping funds idle. The Islamic system of Zakat (Poors lue) at a rate of 2.5% per annum, on specified assets, discourages the Muslims to keep the money in bank lookers or at home, as the savings is automatically consumed each year through the payment of Zakat. Further, an Islamic state can also impose tax or duty on idle assets. This will be a fiscal devise in lieu of interest. It will, therefore, be observed that while interest may be seen as a compensation for parting with money in the interest-based system, the expected profit sharing, duty if imposed, and Zakat in the Islamic system will discourage keeping the funds idle? This, coupled with the instinct of human beings to save for uncertain future, will ensure equilibrium in both, the commodity market and the money market.