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By P. Mills, J. Presley

This publication stories the Islamic competition to curiosity and assesses the feasibility of a non-interest economy in gentle of present monetary concept. The Islamic critique of curiosity is decided opposed to a dialogue of the method of Islamic economics and the competition to curiosity in the Judaeo-Christian culture. the variety of Islamic non-interest monetary contracts is then exact in addition to a evaluate of the functionality of Islamic banks to this point; a version of the allocation of finance inside a non-interest procedure is then offered. evaluation of the problems raised is made in the context of monetary literature relating debt as opposed to fairness finance; this comprises an exam of banking instability and the enterprise cycle, the determinants of degrees of saving and the results for public finance. The conclusions define the benefits and downsides of a theoretical non-interest economic system, confirm the theoretical case for the prohibition of curiosity, and draw sensible classes for modern Western economies.

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Lewis, 1955, p. 127; Bhadhuri, 1977). g. M. M. Khan, 1985). Modelling Profit-and-Loss Sharing 47 APPENDIX A: FIRST BEST 1. Riba …1 � †‰3 � u0 …c1 †Š ˆ 0 …A1:1† ‰3 � u0 …c2 †Š ˆ 0 …A1:2† …1 � †s1 ‡ s2 ˆ 0 …A1:3† �…1 � †u0 …c1 †e1I1 …x1 † ˆ 0 …A1:4† �u0 …c2 †e2I2 …x2 † ˆ 0 …A1:5† u0 …ci †‰1 � eiyi …xi †Š ˆ 0 …A1:6† 8i ˆ 1; 2: 2. Mudarabah …1 � †‰3 � u0 …c1 †Š ˆ 0 …A2:1† ‰3 � u0 …c2 †Š ˆ 0 …A2:2† …1 � †s1 ‡ s2 ˆ 0 …A2:3† …1 � †u0 …c1 †‰1 � e1y1 …x1 †Š ˆ 0 …A2:4† u0 …c2 †‰1 � e2y2 …x2 †Š ˆ 0 …A2:5† u0 …ci †eiIi …xi † ˆ 0 …A2:6† 8i ˆ 1; 2: 48 Islamic Finance: Theory and Practice APPENDIX B: SECOND BEST 1.

G. toll roads, power stations) can be funded on a PLS or equity basis. However, for other investment and expenditure requirements, there seem few alternatives to full tax-financing (Chapra, 1982, pp. 226±7). Once again, some theorists propose alternative methods of noninterest government borrowing, whilst others question the need for deficit financing altogether. 6 These proposals preserve a zero or uncertain real rate of return on loans, but appear casuistical (Presley, 1988, p. 305). Other suggestions would allow the government to borrow without having to pay any return at all.

G. Jensen and Meckling, 1976, pp. 333ff). First, debt finance might economise on informational requirements, but the capital supplier must still monitor the borrower. Bankruptcy is not only administratively 26 Islamic Finance: Theory and Practice costly for lenders, but may also involve capital losses through the borrower's assets being protected by limited liability or court orders, or because collateral may have been overvalued. Hence, lenders must still ensure that borrowers do not incur excessive bankruptcy risk.

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