Islamic and Western finance

Do you know what the extra money owed to a lender beyond the original sum is called? Interest. It is a cornerstone of modern Western financial systems, embedded in law, banking, and global markets. Yet in Islamic finance, it is strictly prohibited.

Sharia is the religious law and moral code of Islam. Literally meaning “the clear, well-trodden path to water,” it governs many aspects of a Muslim’s life and is derived primarily from the Qur’an and the Sunnah, the teachings and practices of the Prophet Muhammad. Within it, financial activity is structured around specific ethical constraints, which define what is considered lawful (halal) or unlawful (haram).¹

In Islamic finance, one of the central prohibitions is riba (interest). Instead of generating wealth from money alone, profit must arise from real economic activity such as trade, asset ownership, and shared investment. Closely linked to this principle is profit-and-loss sharing, where risk is distributed between parties rather than transferred entirely to a borrower.²

Other key principles include the prohibition of excessive uncertainty (gharar) in contracts, the rejection of gambling and pure speculation (maisir), and restrictions on investing in industries considered harmful, such as alcohol, tobacco, gambling, and pornography. Together, these rules create a financial system grounded in ethical responsibility and tangible economic activity.³

Western finance, by contrast, is built on different foundational assumptions. The time value of money holds that a sum today is worth more than the same sum in the future due to its earning potential. From this follows the legitimacy of interest, which compensates lenders for time and opportunity cost.⁴

Alongside this are principles such as the risk-return trade-off, where higher risk is associated with higher expected returns; the law of one price, which assumes market efficiency will eliminate price discrepancies; and the idea that financial markets are driven by cash flows and the rapid incorporation of information into prices.⁵

Both systems aim to regulate how wealth is created and distributed, but they diverge on a fundamental question: whether money itself should generate more money independently of real economic activity.

The disagreement is therefore not only technical, but philosophical.

Islamic finance frames wealth as a trust, where prosperity carries moral responsibility. In this view, concepts such as barakah (divine blessing) and zakat (obligatory charity) link financial success to ethical conduct and social obligation. Wealth is not purely private accumulation, but something that must circulate and benefit society.⁶

Western finance, meanwhile, prioritises efficiency in capital allocation, risk management, and profit maximisation. It treats money primarily as a tool whose value lies in its ability to generate returns within competitive markets.⁷

Is interest a moral issue or a neutral financial tool?

The answer depends largely on what one believes money actually is.

If money is merely a tool, then interest appears reasonable. A lender temporarily gives up the use of capital and expects compensation in return. Under this view, interest is no more morally significant than rent paid for the use of a house or machinery.

If, however, money is viewed as a social instrument whose purpose is to facilitate exchange rather than generate wealth independently, then charging interest becomes more controversial. Islamic finance reflects this perspective, arguing that profit should arise from productive activity and shared risk rather than from the passage of time alone.

Neither system emerged by accident. Both are attempts to answer the same question: how should wealth be created, distributed, and justified?

The debate over interest is therefore not merely economic. It is a debate about justice, responsibility, and the moral limits of profit.

“Fundamentum autem est iustitiae fides, id est dictorum conventorumque constantia et veritas.”⁸

(The foundation of justice is good faith—that is, truth and fidelity to promises and agreements.)

—Cicero, De Officiis

Whether interest aligns with that principle remains an open question.

Footnotes

1. Muhammad Hisham Kamali, Shariah Law: An Introduction (Oneworld 2008) 45–47.

2. Frank E Vogel and Samuel L Hayes III, Islamic Law and Finance: Religion, Risk, and Return (Kluwer Law International 1998) 72–75.

3. Mahmoud A El-Gamal, Islamic Finance: Law, Economics, and Practice (Cambridge University Press 2006) 33–38.

4. Richard A Brealey, Stewart C Myers and Franklin Allen, Principles of Corporate Finance (13th edn, McGraw-Hill 2020) 27–30.

5. Burton G Malkiel, A Random Walk Down Wall Street (12th edn, Norton 2019) 112–118.

6. Abbas Mirakhor and Zamir Iqbal, An Introduction to Islamic Finance: Theory and Practice (Wiley 2011) 58–62.

7. Frederic S Mishkin, The Economics of Money, Banking and Financial Markets (12th edn, Pearson 2019) 41–45.

8. Cicero, De Officiis (Walter Miller tr, Harvard University Press 1913) 1.13.41.

Disclaimer: The content of this post is intended purely for educational, academic discussion, and theoretical research purposes. It represents analytical speculation based on historical and legal frameworks and does not constitute legal, financial, economic, or political advice.

Image Disclaimer

The image displayed above is an artistic interpretation created entirely using artificial intelligence (AI) technology. It is a work of synthesis and imagination generated through complex algorithms and does not represent real-world photography, physical artifacts, or specific historical events. All elements within the composition are synthetic.

© 2026 Lex in Tenebris. All Rights Reserved. No part of this publication may be reproduced, distributed, or transmitted in any form or by any means without the prior written permission of the author.