Linking effort and reward
A well-regulated economic system requires incentives that reward productive and withhold rewards from unproductive activity. Such incentives are put in place by means of legislation and enforced with the help of regulatory agencies. A well-managed system will allocate resources more efficiently than a system in which income may be gained without active participation in economic activity, by lending at interest in particular, which invariably increases the prices of finished goods without, however, adding any value. Despite many adverse macroeconomic effects of debt financing, lending at interest occupies a prominent place in conventional banking and finance and, to a lesser extent, in Islamic finance, in a replicated form. This should be of concern. What should be of even greater concern, in particular to policymakers in Muslim nations, is that to the extent that Islamic finance replicates mainstream finance, it also replicates the latter’s harmful effects.