Contributions in Eighties & Nineties

The most significant new idea contributed during the next fifteen years (1980-94) is the inherent relative stability of the Islamic financial system in contrast to capitalism notorious for its tendency towards instability.

It was argued that a switch over from interest to profit sharing removed a basic contradiction from the conventional system. The entrepreneur (the firm) has to pay back fixed amounts of money at specific dates to the financier (the lender). But the revenue accruing to the entrepreneur from sale of products is uncertain in amount and not bound by any timetable. When revenue falls short and fails to occur in time the resulting default by the borrower destabilizes the whole system.

Not so in the interest free system. The synchronization between payment obligations and revenue in a two tier mudarabah model of Islamic banking would greatly weaken if not removed the forces causing big fluctuation in economic activity in a free economy.

Another distinctive feature of interest free Islamic system was expansion in money supply through investment process rather than lending process, as in case of capitalism. As a result expansion in money supply had a much greater chance of being accompanied by increase in real production. This feature made further contribution towards stability of the system.

Source: Dr. Muhammad Nejatullah Siddiqi, Economics An Islamic Approach. Republished with permission.