Theoretical Studies in Islamic Banking and Finance

Islam proposes that the banking systems that operate on the basis of an ex ante fixed rate of interest be replaced by a profit-sharing system in which the rate of return to the financial resources is not known and is not fixed prior to the undertaking of the transaction. While in Islam interest is forbidden, trade and profit are permissible and in fact encouraged. An uncertain rate of return based on profits would thus be consistent with Shari'ah. The replacement of an interest-based system by an alternative profit-sharing system raises a number of fundamental theoretical, practical, and policy questions. The papers in this volume all address one or more of the basic questions at the theoretical level.