M. Umer Chapra^1. Introduction
Four of the world’s major religions (Judaism, Christianity, Hinduism and
Islam), having a following of more than two-thirds of the world’s population,
have prohibited interest.^1 In sharp contrast with this prohibition, the entire
international financial system is now based on interest and has been so for
more than two hundred years. However, protests have been, and continue to
be, made against interest.^2 These protests have been particularly prominent in
the Muslim world where an effort is underway to replace the interest-based
system of financial intermediation with the Islamic system.
The introduction of a new model of financial intermediation based on
profit-and-loss sharing (PLS) is not an easy task. The difficulties involved in
the changeover justifiably raise the question of why should we try to replace
the conventional system which has been in existence for such a long time and
has by now become highly sophisticated. Is the case against interest
compelling and is there a strong rationale behind the transition? One reason
for the change is the imperative of abiding by a religious value. This reason,
though of prime importance to committed Muslims, may not have any appeal
for those who are not so highly committed. It is, therefore, necessary to show
that the interest-free financial system is superior to the interest-based system
(^) Dr. Umer Chapra is presently working as Research Adviser at the Islamic Research
and Training Institute (IRTI) of the Islamic Development Bank (IDB). The paper,
prepared for presentation at the International Conference on Islamic Banking and
Finance scheduled to be held in Brunei, has drawn heavily from the author’s previous
writings. He is grateful to Sheikh Mohammad Rashid for the secretarial assistance
provided by him in the preparation of this paper.