Rational Behind Prohibition of Riba Other Than Religious Perspectice Islamic Finance is deeply rooted in religion.

The precept under which it operates is guided by the religious prohibition of riba and other Islamic teachings. While the prohibition of interest is not unique to Islam, it has been all but eradicated in other major religions. Capitalism is currently the dominating economic concept. In order for Islamic finance not follow the same route, it is imperative to understand not just the religious reasoning for this prohibition but the social, corporate and economic implications as well. From a social perspective, the use of debt and consequently interest as a tool to smooth consumption has led to higher personal bankruptcies, and the dependence on predatory lending practices that lower instead of improving the social welfare of individuals. Usury state laws have not successfully protected individuals from the evils of usury. In contrast, Islam promotes the redistribution of wealth through Zakat. It encourages each member of the community to contribute towards the welfare of its members eliminating the need to resort to debt, avoiding its negative effects. Zakat is no doubt plagued by issues pertaining efficient collection and administration, but the potential is enormous. Thus, it is imperative that current issues be addressed to realize its capability to promote social welfare. Consumer Perspective One of the primary arguments for the necessity of debt and lending at interest is that it helps to smooth consumption needs. When an individual experiences negative income shocks, he relies on debt to meet his short-term consumption needs, and when he has a surplus year he lends to others who are experiencing negative income shocks. The resulting levels of borrowings have led to a society that is overburdened by debt. Some of the most pressing issues in consumer debt include, but are not limited to, the rapidly increasing levels of credit card debt, swelling consumer bankruptcy & the practice of predatory payday lending. The poorer sections of society who have difficulty accessing credit markets turn to payday lenders. These lenders provide a high interest 2-4 week loan backed by a postdated personal check that a borrower promises to repay out of his next paycheck. The nature of payday lending is similar to the credit card concept of a revolving interest if the borrower is unable to make a full payment within the due date. The result is a continuous flow of interest-only payments at very short intervals that never reduce the principal. As payday loans are exempt from many state and local usury laws, it has become an easy access to funding for credit impaired households, and many become chronic borrowers. This practice has a serious wealth depleting effect on already financially fragile families. For those individuals that can access credit markets, they turn to alternative forms of funding like credit cards. In America, a recent study (Demos, 2005) revealed 31that Americas escalating $US800 billion credit card debt is incurred not just by the poorer sections of society but also by the middle class. Almost 70% of poor & middle class Americans are dependent on their credit

cards as a safety net to pay for basic living expenses and health. These are expenditures that are normally state-subsidized and evidence that current systems in existing capitalist economies are inefficiently distributing wealth across all sections of society. Corporate Perspective

Whereas the conventional finance focuses primarily on the economic and financial aspects of transactions, the Islamic system places equal emphasis on the ethical, moral, social, and religious aspects, to improve equality and justice for the good of society as a whole. It is a sound alternative to the conventional financial system already in place.