Islamic Banking - The Long Run

In the wake of the credit crisis the call was made, here and there, for the adoption of something called "Islamic banking," operated according to principles laid down in the sharia. Now the Prophet Muhammad certainly objected to taking interest. But he did not object to borrowing, and was familiar enough with the credit mechanism, since without it the longrange trading across the Arabian Peninsula, in which he participated, would have been impossible. And of course the rule against interest has been circumvented from the earliest days of Islamic jurisprudence by the use of convenient legal fictions.

What Muhammad objected to, however, lies deeper than the practice whereby a lender compensates for the temporary loss of his money by demanding a rent. He objected to the growth of what one might call "unreal estate." It seemed to him, as it has seemed to many before and since, that you don't make a contribution to the economy merely by owning things. We flourish as a community because goods are produced and distributed among us, and because each person is able to satisfy his needs by contributing his labor. But the person who is simply sitting on a pile of money is doing nothing, so why should he be rewarded? Let him spend his money by all means, since this is a stimulus to production. But why should he be rewarded for not spending it?