Interest, Usury, and the Transition from “Muslim” to “Islamic” Banks, 1908–1958

Abstract

This article examines the creation of the first privately-owned Muslim banks in the first half of the twentieth century and the legal debates they instigated among Muslim communities. Whether in Bosnia or India, these banks appeared suddenly in the years immediately before the First World War. They were envisioned as a way to free up Muslim capital for productive ends, and as the means to jumpstart a Muslim economic renaissance. Far from masking their interest transactions, the banks' founders and customers pointed to a range of Islamic legal rulings that justified interest levied on deposits and loans. These rulings varied from one geographic locale to the next, and were expressive of diverse Muslim institutional and legal histories. Yet in an age when the formerly diffuse discursive terrain around interest, usury, and the Islamic foundational sources was shifting towards a consensus that rejected any interest/usury distinction, some of these banks faced acute challenges, particularly in India. There, novel notions of interest-free Islamic economics were articulated from the interwar period, which rejected any form of Muslim interest-banking. In time, the earlier iteration of Muslim interest banking became overshadowed by the new paradigm of “Islamic banks” which purportedly eschewed all financial interest.

Beyond Economics! The (Evolving) Role of Law in the Eradication of Extreme Poverty

“…Lee cites as an example a statute that authorises the charging of interest by banking and non-banking financial institutions to enable financial growth may not be effective in an environment that considers charging interest for any service unethical (Lee, 2017 ). Charging interest or riba is considered unlawful ( haram ) in Islam (O'Sullivan, 2020 ).…”