Towards an interest free Islamic economic system: a theoretical analysis of prohibiting debt financing (Ph.D. Dissertation)

The author investigates the implications for a debt financing-free economy underscored by the desire of Islamic societies to eliminate the principle of interest or Riba from their respective economies and replace it with a profit/loss sharing alternative. However, the author's consideration is for production loans only; but some preliminary thoughts are given on the consumption side. An analytical framework that compares the present financial system to the proposed one is presented, and under a set of constraints, it is demonstrated in this analysis that the Islamic financial system is superior. The author concludes that this is possible because there is a greater and more equitable spreading of risks under the Islamic system. Debt, the author proposes, creates a 'moral hazard' situation in the credit markets. Hence, it is then very costly for the financial institutions to monitor the projects they finance. Although monitoring costs are incurred in all financial contracts, debt