An Economic Explication of the Prohibition of Ribā in Classical Islamic Jurisprudence

This paper presents an economic argument that the prohibition of Ribā in classical Islamic Jurisprudence can be explained by appealing to precommitment and economic efficiency considerations. Our starting point is an argument provided by ’Ibn Rush ̄ d in Bidāyat alMujtahid wa Nihāyat al-Muqtas . id. ’Ibn Rush ̄ d provides a juristic explication of the “Objectives of The Law” (Maqās . id al-Sh ̄ ar̄ı‘a) in the prohibition of Ribā, which is of a highly economic nature. It is shown that this rare instance of economically sophisticated discussion of the Maqās . id anticipates not only neo-classical economic notions of efficiency, but also recent studies of “Law and Economics”. Building on the intuition provided by ’Ibn Rush ̄ d, mainly with respect to the prohibition of Ribā al-fad. l, I argue that various legal methods of avoiding Ribā al-fad. l are in essence pre-commitment mechanisms which ensure economic efficiency through “marking to market”. I extend the analysis to Ribā al-nas̄ı’ah, utilizing recent experimental results on individual discounting anomalies. The assumptions of the model are simultaneously supported by verses from the Revealed Qur’ān, as well as recent experimental evidence. Given those assumptions, individuals are known to exhibit dynamically inconsistent behavior. The logic of the prohibition of Ribā al-nas̄ı’ah is shown in this context to endorse the use of pre-commitment mechanisms inherent in equity-based financing, which are efficiency enhancing in the presence of dynamically inconsistent agents. ∗Chaired Professor of Islamic Economics, Finance, and Management, and Professor of Economics and Statistics, Rice University, MS-22, 6100 Main Street, Houston, TX 77005. [email protected], http://www.ruf.rice.edu/∼elgamal