How does the Islamic banking system affect economic growth, borrowing and lending and stock exchanges?

Answer 1

Islamic banking system prohibits the use of interest rates when making a loan, however to make it worthwhile for a bank to lend money a fee is usually paid to the bank to cover expenses.This means that while that if people default on loans, the bank can't charge raise interest on other borrowers loans to make up for the shortfall, which could leave the banking system in jeopardy if a large number of peolpe defaulted on their loans.
The system makes it easier for small business to raise capital to fund new ventures, as the fee for borrowing money is usually paid upfront and isn't conditional on the outside market.
While Islamic law prohibits the collection of interest, it does allow a seller to resell an item at a higher price than it was bought for, as long as there are clearly two transactions.That's all I know on that front mate!

Answer 2

As the previous answer noted, an Islamic bank may not charge interest. That significantly reduces its flexibility in creating financial instruments.

(The Christian world was in the same position for a long time - when the word "usury" was taken to mean "any non-zero interest rate". The Church eventually changed the theological interpretation to "unreasonably high interest rates" and the economic development bloomed.

I generally use Wikipedia as my on-line source:
http://en.wikipedia.org/wiki/Usury

But in this case, you might prefer a Church Encyclopedia instead:
http://www.newadvent.org/cathen/15235c.htm
)

So one of the major development issues facing the Islamic countries is how to provide financing for business and consumers (houses, cars, etc.)

Ownership, even partnership, is allowed, so there have been several banking programs designed to replace loans with ownership agreements of various forms:

"I'll invest X in return for a fraction Y of the company under the condition that you buy me out for Z by D."

http://en.wikipedia.org/wiki/Islamic_banking

But these are yet to become as popular as loans are in industrialized countries, which has contributed to the difficulty of economic development.

As for stock exchanges, stocks signify ownership, so there is no direct effect. There is, of course, the indirect effect, that if you can't get a loan, you have less of a choice about going to the stock exchange to finance your business.

One last point. Islamic banks are not supposed to invest in anything that is not "proper". That includes breweries, pornographic magazines, etc.

Since the "entertainment" industry is a big factor in any economy, this also has implications.

Answer 3

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