1. INTRODUCTION
islamic banking Prayed interest free banking as it can be called, it could be understood simply as a banking process where no interest is charged. Slow money profits can only be made from a defined value creation process. Thus, interest-free banking legalizes only the profits. All other forms of charging interest are prohibited.
2. DISCUSSION/COMPARISM
To reasonably discuss this topic in this short document may be wise; make a comparative evaluation and thus compare interest-free banking with the conventional form of banking that prevails today. Therefore, compare the distribution of profits and losses with the collection of interest.
1 – Savings and Investments
These are the 2 most important determinants of economic growth and development in any economy. Contrary to general apprehension, which claims that the prohibition of interest can reduce the level of savings and, therefore, can retard economic growth and development. An increase in interest rates reduces the borrower’s income. Thus, it reduces his propensity to save/invest. This happens because of the cost (interest) of the funds you borrow.
2 – Unemployment and inflation
When rates are high, the cost of capital is high and eventually the cost of production is also high. This causes a drop in the volume of the company, which leads to the closure of production units, the reduction of personnel to reduce costs or because their services are no longer needed, and the producers may decide to increase the prices of their goods and services. to balance your needs. ‘cost/income’ trend. Therefore, inflation skyrockets.
3 – Profitability and Productivity
Profit sharing promises leverage benefits to risk-free companies and a return above the interest rate to the financier. Fluctuations in the rate of capital gains under profit-and-loss-sharing financing are likely to be less than the rate of capital gains under interest-bearing financing, and profit-and-loss transactions may have a small destabilizing potential for the economy as a whole compared to financing. we are interested. For financiers and the companies that lend them funds, the profit and loss sharing system is the best and most suitable.
3. DISTRIBUTION OF RISK
With the prohibition of interests; preferred stock, debentures, commercial paper, treasury bills, bankers’ acceptance will no longer exist (at least in their interest-bearing forms). This in no way limits the investment opportunities/portfolios available to banks. This is because other assets that represent profit-sharing arrangements will also automatically exist. Therefore, the names of preferred stock, commercial paper, etc. they cannot change, but their characteristics of interest will be abolished.
In an Islamic financial system, the availability of assets with a variety of risk characteristics is a distinct possibility, and there is no reason to suppose that there is a limit to the diversity of assets in such a system.
4. CONCLUSION
In light of the above justifications, it is quite obvious that interest-free banking is here to stay. I have no doubt that, from the inferences that can be drawn from the above comparisons, interest-free banking will succeed. This is because ‘profit sharing’ is superior compared to other macroeconomic policy tools (ie ‘interest charging’). Profit sharing has a quality that most other macroeconomic tools lack. This quality is stability.
