by Yasmeen Naseer

Created on: December 25, 2011   Last Updated: December 26, 2011

The main difference between Islamic Banking and Conventional Banking arises on the charging of interest on loans without the lender taking a share of the risk involved in the investment of the loan; something traditionally known as usury. Usury is making money by lending money; put in other words, it is making money from absolutely nothing, and is exactly what is happening around the globe today on an absolutely massive scale.

Before the advent of Islam in Makkah, Jews were the main money lenders in the area, and it was common practice among them to lend money at high rates of interest. The coming of Islam however, condemned this practice in the following words, “Do not devour usury that doubles and redoubles. Be careful of your duty to Allah, that you may be successful in achieving what you want.” But why exactly does Islam, and not only Islam but even Christianity label usury as massive sin? Or put differently, how are we as people affected by the practice of usury?

Firstly, the charging of interest discourages people from working to earn money, and the value of work is undermined. Therefore money lies idle in banks as people are earning money over their bank deposits. This discourages investment, and risking money in business. It also discourages the borrower from borrowing money for investment, because the risks involved in borrowing are not shared by the bank so the borrower has to return his loan to the bank with the interest whether his business results in failure or success. Islamic banking on the other hand, is based on the concept of risk sharing. The bank enjoys a share in the profit of the company if it thrives, but also provides extensions for loan repayment if required, and shares the loss if the business fails, and in extreme cases, it may forgive the loan altogether.

Usury can also be seen as negative where morality is concerned. Unlike an Islamic Bank, a conventional bank, like any other business or company is interested in profit, and therefore interested in lending money to businesses that it expects will not fail, and in doing so, it does not take into consideration the moral hazard that the business may pose, or whether or not the business will bring with it any social welfare. For example, if a bank were to choose between lending money to an alcohol manufacturer, and a man looking to set up a school, the bank would choose to lend to the alcohol manufacturer, because it probably goes without saying that he will earn more profit

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