The twenty catastrophic effects of interest based banking system – the need for Islamic banking system

Interest, also known as usury, according to known records, has been practiced in various parts of the world for at least four thousand years but it is repeatedly condemned, prohibited, scorned and restricted on moral, ethical, religious and legal grounds by major religious institutions like Islam, Christianity, Hinduism, Jainism and Buddhism as well as ancient philosophers like Aristotle and modern economists like Adam Smith. The rationale for such prohibition is that interest causes moral hazard to mankind, results in social injustice, exploits needy, creates financial economy, deterrent to full employment of resources, causes non inclusive growth etc. Interest based economy, though, has enormous disadvantages; economists have failed to design and implement an interest free economy and demonstrate a better substitute to it. Islamic Finance and Banking, is an interest free economic system which is based on the commandments sent by our Creator – Almighty through revelation to Prophet Mohammed (Peach Be Up on Him) that are compiled in Holy Quran, and the teachings of Prophet Mohammed (Peach Be Up on Him) based on these commandments. It is now evolved as an alternative to currently practiced flawed interest based economic system and proved as to how an interest free economy can be designed and implemented without compromising on the ethical and moral standards. In this article, an attempt is made to critically examine the standpoints of various economists on interest, rationale for interest prohibition, major effects of interest based banking system on economy and ability of Islamic banking system in resolving these problems.