The economic consequences of the interest-free Islamic banking systems (Ph.D. Dissertation)

This study addresses questions concerning the economic consequences of interest free banking systems in several Islamic nations. The objectives of this study are to analyze: the impact of interest-free banking on risk-raking and the savings behavior of households at the micro level, the effects of interest-free banking on the rate of aggregate investment and the level of output at the macro level, and the conduct of monetary and fiscal policies in an Islamic economy. The effectiveness of interest-free banking systems are compared for Islamic and regular economies. Moving away from the zero interest rate will increase net savings and improve the allocation of risk. The elimination of interest charges on savings deposits reduces the demand for equities and leads to a reduction in the rate of private investment. On the other hand, lowered interest on government bonds might lead to investors switching from government bonds to equity stocks. The increased demand for equity will raise equity