Islamic Banking Industry-Growing Amid Challenges Why Murabaha (Cost-plus Finance) Is Allowed Whereas Lending On Interest Is Prohibited In Islam? release_vcv2xfct4jc73e3xnqxir3un3m

by Ahmed Siddiqui, Zahid Syed, Ahmad

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Abstract

Islamic banking has proved over time that it is based on firm and sound economic principles and has a good potential for become an alternative system of banking especially in view of the global financial crises. However, there is a need for dedicated research & steps from the government to develop a sound legal and regulatory framework for Islamic financial industry. Attempts should be made to modify the existing structure to provide better products and quality service within the ambit of Islamic laws. While interestbased banking has taken hundreds of years to mature to the level where it is today, expecting the same maturity from Islamic banking in its nascent stage will be expecting too much. To develop an economic system truly reflective of the sacred principles of Islam, all stakeholders should understand the limitations at this stage and work towards its advancement. Abstract Opponents of ban on interest have been accusing Murabaha, the Shariah approved methodology of trade from the earliest times to be no different from earning interest. They also viewed earning through trade to the quite similar to lending on interest and dubbed trade as usury. However the Holy Quran has repeatedly expressed in forceful terms against the practice of Riba and permitted trade. The article has limelighted twelve particular differences between loan on interest and Murabaha. It has also illustrated the economic advantages of cost plus finance over lending on interest. It has also enumerated several other advantages of the system.
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