Schools of Thought
Islamic Economics
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Islamic economics orders economic activity by the norms of Islamic law: riba, generally translated as interest on a loan, is prohibited, so finance is structured instead around profit-and-loss risk-sharing contracts such as mudarabah and musharakah; excessive uncertainty (gharar) in a contract is likewise forbidden; and zakat, an obligatory wealth levy, redistributes a share of accumulated wealth to the poor each year. Classical Muslim scholars, Ibn Khaldun among them, wrote on markets, taxation and the causes of prosperity centuries earlier, but the field as an organized modern academic discipline dates to the 1970s, institutionalized through Islamic development banks and the first international conferences on Islamic economics. Its central critique of mainstream neoclassical finance is that interest-bearing debt concentrates risk on the borrower alone, where profit-and-loss sharing distributes it between financier and enterprise.
Facts
Start YearDated to the First International Conference on Islamic Economics, held in Makkah in 1976, the field's founding moment as an organized modern academic discipline; the religious and juristic tradition it draws on is far older. Core TenetEconomic activity is ordered by Islamic law: interest-bearing debt (riba) is prohibited in favor of profit-and-loss risk-sharing finance, and zakat obliges an annual redistribution of accumulated wealth to the poor. 1 Learn More
Muhammad Baqir al-Sadr and the Case for a Third Way
This article records tradition as it has been passed down and reported. Its sources are not yet part of the atlas's verified catalogue.
Writing in Iraq in 1961, the Shia scholar Muhammad Baqir al-Sadr framed his task as answering a question the mid-twentieth-century world seemed to have already settled into two camps: capitalism, organized around private property and market prices, and socialism, organized around collective ownership and central planning. Iqtisaduna, Our Economics, argued that Islamic law offered a genuine third framework rather than a compromise between the other two. Private property and market exchange are permitted and central to the system, distinguishing it sharply from socialism, but riba, interest charged on a loan simply for the use of money, is prohibited, along with gharar, excessive contractual uncertainty, distinguishing it just as sharply from conventional capitalist finance. In place of interest, al-Sadr and the tradition he drew on prescribed profit-and-loss sharing contracts, a financier and an entrepreneur share the risk and the return of a venture together rather than the financier collecting a fixed return regardless of outcome, alongside zakat, an obligatory annual levy redistributing a share of wealth to the poor. The book became a foundational text for the modern Islamic economics and Islamic banking movements that grew rapidly from the 1970s onward.
Why Islamic Finance Shares the Risk Instead of Charging for It
This article records tradition as it has been passed down and reported. Its sources are not yet part of the atlas's verified catalogue.
A conventional bank loan works the same way whether the borrower's venture succeeds spectacularly or fails outright: the bank is owed the same principal plus interest either way, and the borrower alone absorbs the risk of failure. Islamic finance, built on the prohibition of riba, structures the relationship differently. Under a mudarabah contract, one party supplies capital and the other supplies labor and expertise, and any profit is split by an agreed ratio, while any loss falls on the capital provider alone, since the working partner has already lost their labor. Under a musharakah contract, both parties contribute capital and share both profit and loss in proportion to their stake. The underlying principle in both cases is that a return on capital must be earned by sharing genuine business risk, not collected as a fixed charge for the mere use of money regardless of outcome. Modern Islamic banks, a sector that has grown into the hundreds of billions of dollars globally since the 1970s, adapt these classical contract forms to modern retail and commercial banking, home financing structured as a joint purchase with gradually transferring ownership rather than an interest-bearing mortgage, being one common example.
Cross-Tradition Connections
Critiqued Here
Why this is disputed. Islamic economics rejects interest-bearing finance as central to how mainstream neoclassical theory models credit and capital markets, prescribing profit-and-loss risk sharing instead.
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Frequently Asked Questions
Why does Islamic economics prohibit interest?
Because a fixed interest charge places all the risk on the borrower; Islamic finance requires the financier to share genuine profit-and-loss risk instead.
Riba, generally translated as interest charged on a loan simply for the use of money, is prohibited because it guarantees the lender a fixed return regardless of whether the borrower's venture succeeds or fails, placing the entire risk on the borrower alone. Islamic finance requires instead that a return on capital be earned by genuinely sharing business risk, through profit-and-loss sharing contracts such as mudarabah and musharakah, rather than collected as a fixed charge independent of outcome.
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