Prior to the Canadian convention of the Islamic Society of North America, there was a two-day conference on Islamic banking, finance and insurance. The underlying principle was the Qur'anic prohibition of interest, called usury in the Qur'an: "Allah had permitted trade and forbidden usury." However, during the convention it became clear that it is necessary to parse interest into component parts to see what is permitted.
In a loan, as an example, there are costs of administering the loan, such as bookkeeping. Those costs are permissible. As well, one may charge for inflation and still be sharia-compliant. Then, there is the risk factor, where allowance may be made for bad debts. What is haram, not permitted, is the profit element in interest. Since the actual rate of inflation and of bad debts can only be known after the fact, if the total cost due to these two items is less than forecast, a rebate is due the borrower.
There are difficulties with this scheme, however. Suppose the forecast underestimates inflation plus bad debts. As well, since these two elements can only be detected after the fact, we are faced with a permanent regression. At the time a final determination is made, the inflation rate and default rate will be for a previous time period, not the most recent.
Dr. Yahia Abdul Rahman, a banker and scholar and CEO of American Finance House (LaRiba), provided a history of religious attitudes toward interest, documenting scriptural opposition to it in the three Abrahamic faiths.
From Arab American News.