Could capitalism work without being able to charge interest?

Question:

Could capitalism work without being able to charge interest?

Islamic banking

Islamic banking is a type of banking system based on Sharia law. Islamic banks practice non-interest banking. An Islamic bank still loans out money. However, instead of getting paid interest, Islamic banks earn money through profit sharing. Businesses share their profits with the lending banks. Since Islamic banks follow Sharia law, they do not fund activities related to alcohol, gambling, pork and other activities prohibited by Islamic law. An example of a tradable debt security compliant with Sharia law is the Sukuk bond, which does not pay interest but profit.

Answer and Explanation:

The concept of interest is not a necessary idea for capitalism. Capitalism relies on private ownership of property and the ability to determine the use of the property. The financial system would look very different if charging interest were not allowed but the markets would still function. Goods and services will still be produced and traded. However, companies and individuals will have to find a different way to finance their activities.


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Loanable Funds: Definition & Theory

from Introduction to Business: Homework Help Resource

Chapter 25 / Lesson 29
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