Interest Free Banking

It was in early 1950's when I was a young lecturer in the Department of Economics, University of Dacca, that the issue of the application of Islamic ideology used to agitate the minds of thinking citizens in general and the academicians in particular. Some senior colleagues including Dr. M. N. Huda (who later became Minister of Finance and then Governor, East Pakistan, and is presently Member of the Advisory Council of the President of Bangladesh) encouraged me to do some research on Islamic framework of banking. Similarly, late Mr. Zahid Hussain, the first Governor of the State Bank of Pakistan who used to visit Dacca (being the President of Pakistan Economic Association) encouraged and gave his blessings for carrying out research on 'Interest-free Banking'. It was with this background that I started thinking and doing some research work on the subject of 'Interest-free Banking’.

It took me quite some time to study the relevant literature of Islam. Fortunately I knew Arabic and thus had no difficulty in going to the original source material on Islamics. However, there was no guidance or help in this research pursuit. I am indebted to Mufti Saiyid Ameen-ul-Ihsan, of Madrassa-e-Aaliya, Dacca, for providing some guidance in the study of relevant and pertinent literature. After a while I felt my feet on firmer grounds and was able to develop in my mind a picture of the framework of banking without interest in keeping with the injunctions of Islam. In 1954 I started writing on the subject; and by 1955 I had prepared a manuscript under the title of A Groundwork for Interest-free Banking. However, it was not published in the form of a book, partly because no publisher was interested in publishing the book of a new author written on a new subject which would not attract a wide market. By that time the interest of publishers in Islamic ideology was dwindling, and the emphasis had shifted to politics and 'balanced' economic development in the country. Two things happened towards the end of 1955: I was able to get a summary of the manuscript published in the form of a booklet entitled An Outline of Interestless Banking, which is included in this book as an Appendix.

This booklet was well received and was translated in various languages. However, no second printing of the original English edition was done. Since the detailed manuscript of the proposed book could not be published, I permitted the then editor of monthly Voice of Islam (an organ of Jamiyatul Falah, Karachi) to serialize the manuscript in their issues. Thus, nine chapters of the manuscript appeared as nine articles in the said journal between January 1956 and November 1958. Some Arabic journals translated these articles into Arabic and published the same. A certain publishing house in Kuwait even published a booklet in Arabic, reproducing chapter eighth, or to be more exact, the eighth instalment of articles published in the Voice of Islam. Evidently, the people interested in the broad field of Islamic economics had read these articles. This was confirmed when during my second visit to USA in 1961 (for my Ph. D.) I met a young Arab student who had not only seen the articles but had brought with him micro-films of some of them. This was a pleasant surprise. However, there was not much interest shown by the people back home; and the articles were never put together between two covers for publication. The matter rested there. Neither the old articles were published-although some friends casually made the suggestions in the form of a book, nor did I write anything new on the subject.

Things, however, changed since 1975. I received an invitation to write an article on Interest-free Banking for the first International Islamic Economics Conference held in Mecca in February 1976 under the auspices of King Abdul Aziz University, Jeddah, and of course, with the blessings and support of His Majesty King Khalid. Thus after about two decades I started thinking on the subject once again and wrote a paper: Some Conceptual and Operational Aspects of Interest-free Banking. Some new points were brought in this article, and the paper was appreciated by the participants, including this good old Arab friend of mine whom I had first met in USA. It was a nice re-union, too. Another interesting thing that happened in this conference was the discovery that I was the first professional economist in the entire Muslim world to have written on the subject of interest-free-banking in the form of a booklet published in 1975. The scholar who made this revelation in his paper was not this old Arab friend of mine, nor a Pakistani friend. His paper was 011 A Survey of Literature on Islamic Economics. After this conference I started thinking of publishing the said booklet as well as my old articles, if nothing else, for the purposes of record and for reproducing something of historical importance. Finally, the mental climate in Pakistan changed since the beginning of the year 1977, especially so after July 5, 1977, when the Chief Executive of the country started talking about Islam and even specifically mentioned the need for thinking on Interest-free Banking. Bankers and other friends started contacting me for copies or at least references about my old articles. Quite a few of them even discussed the subject at length and wished that all my writings on the subject were available in a convenient form. I, therefore, finally decided to get the book published, containing my old articles as well as some more recent writings.

This is the background as well as an apology for bringing out this book. The old articles have been included simply for their historical value, although these would seem to be rather elementary in the context of present-day economics. On the whole the present volume attempts to make available to the interested people the background work that has been already done, This can be taken as a starting point and an indication as to how much more remains to be done. Now that the question of interest-free banking has come up seriously in writings and discussions, some readers may find the book useful and interesting. One thing that the readers must bear in mind is that interest-free banking presumes a different conceptual as well as operational framework of mind and practical life. The question presupposes an altogether different context of things rather than a minor or partial departure from the existing scheme of things either at conceptual level or in operational sphere. This last point was briefly touched upon in the Epilogue of the booklet: An Outline of Interestless Banking-the first publication of any economist on the subject. Any comments and suggestions would be most welcome.

Now, a few words about the plan of the book, First of all there is a brief chapter of Introduction, discussing the frame- work of Islamic economics and the position of Capital therein. Then comes the article Some Conceptual and Operational Aspects of Interest-free Banking read at the First International Islamic Economics Conference held at Mecca in 1976. After this there are two chapters on Central Banking and Strategy for practical introduction of interest-free banking. These titles are covered in Part One of this book. Part Two contains the nine instalments published in Voice of Islam magazine. At the end we have the booklet: An Outline of Interestless Banking, being the first attempt by any student of Economics on this subject. Some of the old writings have been included mainly for the purpose of record. The reader may perhaps find some inevitable repetitions, for which I apologize.