chapter  7
11 Pages

The Islamic Financial System and Banking: Some Theoretical Considerations

Islam possesses its own paradigm of economic relations within the context of an entire Islamic system based on injunctions and norms called the Sharia. The Sharia specifies, inter alia, rules that relate to the allocation of resources, property rights, production and consumption, the workings of markets, and the distribution of income and wealth. Similarly, rules and requirements have been specified that define the framework within, which the underlying monetary and banking system can be designed.') The central requirement of this framework is the replacement of the rate of interest with the rate of return on real activities as a mechanism for allocating financial resources. For this purpose a variety of methods and instruments, based on risk-and profit-sharing, are suggested to give effect to the requirements of such a system.