Some conceptual and practical aspects of interest-free banking

The Qur'an prohibits riba, or interest in all forms. An Islamic state that aims to eliminate riba must replace the dominant banking system with an interest-free one. Capital is a part of enterprise and does not exist as a separate factor of production. The separation of capital and enterprise has created practical, operational problems in economies. The theory of interest is extremely difficult to explain, but some explanations include the time-preference, abstinence, and liquidity-preference theories. Merging capital with enterprise can stop the excessive expansion of credit. Since riba is prohibited, a banking system consistent with Islamic precepts is necessary. Interest-free banking can be run on the basis of mudaraba (profit-sharing arrangement between suppliers and users of capital). Profit-sharing ratios among entrepreneurs, banks, and depositors should be determined through normal banking activities or the policies of the government or central bank. Deposits in commer