Riba in Profit and Loss Sharing Financing: Policy Implications

Abstract

Islamic structural change in the banking sector, apparently initiated in the wake of international Islamic zeitgeist of 1970s, was formally launched phase-wise in Pakistan effective from July 1981 with the abolition of interest in the spirit of article 31 of the 1973 Constitution. But, the introduction of various Shariah-compliant financial instruments including the Profit and Loss Sharing which initially triggered instant stupefaction in the well-entrenched traditional interest-based economy, ultimately reconciled with the these quasi-conventional banking products based on different interpretations of the Islamic Law. This paper explores various constrains which hamper the potential growth of emerging Islamic banking system vis-à-vis elimination of riba in the context of monetary policy. The elements of interest constituting riba and the susceptibility of the profit-and-loss sharing to riba in the presence of market imperfections are being highlighted. Besides, while examining the connecting theme of riba, interest and profit sharing relevant to the mode of banking finance, the consequential policy implications are being empirically evaluated within the neo-classical paradigm in the domain of ideologically oriented epistemology.