CAN THE MODEL OF THE RIBA-FREE ISLAMIC COMMERCIAL BANK PROVIDE A NEW PARADIGM FOR THE FUTURE OF GLOBAL BANKING?: A THEORETICAL REVIEW

Nico P. Swartz ()
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Nico P. Swartz: University of the Free State

Journal of Global Business and Economics, 2011, vol. 2, issue 1, 86-94

Abstract: The study shows that there is a need for riba-free banks in all countries where Muslims live. However, most countries operate under conventional banking laws, and it is futile to expect the situation to change; and it does not need to change. The interaction between the traditional Islamic and the conventional Western bank will make possible the setting up of a new type of bank, i.e. riba-free commercial banks. This riba-free commercial bank will serve as a new paradigm for global banking. Under the riba-free commercial bank, all current account services rendered by the conventional model will be provided. The difference is that where, in the conventional system, six components (interest, services cost, overhead costs, risk premium, profit, compensation for inflation) are treated as a compound to justify riba, the riba-free commercial system treats these components separately in order to avoid riba. The result will be that interest stands to be charged, while riba is to be prohibited. Riba-free, but not cost-free, loans and advances will form the basis of riba-free commercial banking. It means that riba-free commercial banks must be free of the encumbrances of charitable loans. In this riba-free commercial model, interest is to be associated with trade or profit, which is permissible in Islam. In riba-free commercial banking, aspects of both conventional and Islamic finances are combined. This will allow Islamic societies to have the best of both worlds, and this is the model of banking the world is waiting for. It is now up to the Muslim and conventional bankers and others to take steps to establish such riba-free commercial banks (not interest-free) in all countries of the world

JEL-codes: M (search for similar items in EconPapers)
Date: 2011
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