Interest-free banking within the capitalist economy: a model for decision making within interest-free financial intermediaries (Ph.D. Thesis)

This thesis reviews Islamic economic literature and traces the origins of riba. Different models of profit-and-loss sharing are compared to the Islamic model of mudaraba and musharaka. After identifying the theoretical foundations and historical developments of interest-free banking principles, the evolution of Islamic banking principles is described. The relationship between banks and depositors is analyzed using a microeconomic static mathematical probabilistic model developed in the thesis and tested using various risk-sharing schemes allowing for different attitudes towards risk and probabilistic beliefs. Interest-free banks are a viable theoretical alternative to interest-based banks and can provide services that are nearly equivalent to those of conventional banks. The thesis also examines interest-free economies at the macroeconomic level using findings derived at the microeconomic level. Interest-free economies benefit from a 'risk-adjusted reward' that may largely replace the