Islamic Banking for Me

Today read a paper Interest and Modern Economy, by Dr Asad Zaman and Arshad Zaman. Dr Asad Zaman is a PhD in economics from Stanford University. He's currently a professor of Economics at International Islamic University, Islamabad.

It has dispelled many doubts about what Islamic banking is. What more could i get from the paper, after studying finance, was a penetrating anti-thesis of debt or interest based economy, and how efficient it would be if we completely ban interest in modern economy. Please download the paper from here.

In a nut-shell, there are two ways you can go about financing your business:

1. Loan from a bank: you pay fixed interest to the lender

2. Equity based financing: simply, you put your money or someone else - you don't give interest, but share profit or loss

Surprisingly, i was taught great deal about interest rates, debt, and also about equity, but never told that most of the companies in US and Japan go for equity than loan. Why not 100% go for equity? Because, as i am taught, there's an artificial tax advantage given to loan. For instance, in US 40% tax is deducted on 1 dollar of loan. Dr Zaman argues that if this advantage is shed off, share of equity will be maximum.

For me, reading up how efficient and less risky Islamic mode of financing is, which's # 2, that's a sigh of relief. All that is worrisome, as pointed out in the paper, is some deception, that is, some Islamic financing is islamic by name only, while undercover it is not different from conventional interest-based, prohibited banking. This is especially true for how government of Pakistan's mode of financing, which is not implementing shariah on itself.

One proof of viability of islamic banking and its market is that Dow-Jones has introduced islamic banking stuff to capture huge market of religious Muslims. Once Muslim governments take islamic financing serious, there's no doubt islamic banking can dominate globe and finish off interest based banking, which was banned in Pakistan for centuries only introduced 50 years back!

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