Interest-Free Financial Intermediation and Economic Systems: A Critical Review of Stability, Efficiency, and Distribution

Hilman Dwi Saputro

Authors

Hilman Dwi Saputro State Islamic University of Sunan Gunung Djati, Bandung, Indonesia

Keywords:

Interest-Free Intermediation, Islamic Finance, Financial Stability, Allocative Efficiency, Income Distribution

Abstract

Interest-free financial intermediation is often presented as an alternative to conventional debt-based finance, yet its systemic benefits remain contested and depend on contractual design and institutional conditions. This article critically examines how Islamic financial intermediation may shape financial stability, resource allocation, income distribution, and economic governance. A qualitative critical literature review and comparative conceptual analysis were conducted using theoretical contributions, empirical banking studies, and institutional reports. Rather than treating Islamic finance as a uniform profit-and-loss-sharing system, the analysis distinguishes equity-based partnerships from sale- and lease-based financing arrangements. The synthesis identifies the potential of risk-sharing contracts to align financial returns with business performance and reduce rigid repayment obligations during economic downturns. However, liquidity risk, information asymmetry, and the prevalence of fixed-obligation financing may constrain these benefits. Empirical findings concerning banking resilience and efficiency remain mixed, while improvements in income distribution cannot be attributed to the prohibition of interest alone. Regulatory capacity, contractual composition, governance quality, and access to financial services emerge as important conditions. This study develops a conditional analytical framework for evaluating interest-free intermediation without assuming its automatic superiority over conventional finance.

Downloads

Download data is not yet available.

References

Ariss, R.T. (2010). On the implications of market forces in banking: Evidence from developing countries. Journal of Banking & Finance, 34(4), 765–775. https://doi.org/10.1016/j.jbankfin.2009.09.004

Askari, H., Iqbal, Z., Krichene, N., & Mirakhor, A. (2022). Islamic Financial Stability: Creating a Resilient Financial Environment for a Secure Future. Wiley. https://www.wiley.com/en-us/The+Stability+of+Islamic+Finance-p-9781119820452

Bank Indonesia. (2022). Indonesian Sharia Financial Development Report 2022. Bank Indonesia. https://www.bi.go.id/id/publikasi/laporan/Pages/LPKSI-2022.aspx

Beck, T., Demirgüç-, A., & Merrouche, O. (2013). Islamic vs. conventional banking: Business models, efficiency and stability. Journal of Banking & Finance, 37(2), 433–447. https://doi.org/10.1016/j.jbankfin.2012.09.016

Borio, C. (2014). Financial cycles and macroeconomics: What have we learned? Journal of Banking & Finance, 45, 182–198. https://doi.org/10.1016/j.jbankfin.2013.09.011

Chapra, M. U. (1992). Islam and Economic Challenges. Islamic Foundation and International Institute of Islamic Thought. https://doi.org/10.2307/2936316

Cihak, M., & Hesse, H. (2010). Islamic banks and financial stability: An empirical analysis. Journal of Financial Services Research, 38(2–3), 95–113. https://doi.org/10.1007/s10693-010-0089-0

El-Gamal, M.A. (2006). Islamic Finance: Law, Economics, and Practice. Cambridge University Press. https://doi.org/10.1017/CBO9780511753756

Gheeraert, L. (2014). Does Islamic finance spur the development of the banking sector? Journal of Economic Behavior & Organization, 103 (Suppl.), S4–S20. https://doi.org/10.1016/j.jebo.2014.02.013

Greuning, H. V., & Iqbal, Z. (2008). Risk Analysis for Islamic Banks. World Bank. https://doi.org/10.1596/978-0-8213-7141-1

Hasan, M., & Dridi, J. (2010). The effects of the global crisis on Islamic and conventional banks: A comparative study. IMF Working Paper WP/10/201. https://www.imf.org/external/pubs/ft/wp/2010/wp10201.pdf

Hidayat, S.E., & Abduh, M. (2012). Did the financial crisis impact Bahrain's Islamic banking performance? Panel data analysis. Journal of International Economics and Finance, 4(7), 79–87. https://doi.org/10.5539/ijef.v4n7p79

Iqbal, Z., & Khan, T. (2020). Islamic financial reform to achieve sustainable development goals. Journal of King Abdulaziz University: Islamic Economics, 33(1), 3–21. https://doi.org/10.4197/Islec.33-1.1

Iqbal, Z., & Mirakhor, A. (2011). Introduction to Islamic Finance: Theory and Practice (2nd ed.). Wiley. https://doi.org/10.1002/9781118390825

Islamic Financial Services Council (IFSB). (2023). Islamic Financial Services Industry Stability Report 2023. IFSB. https://www.ifsb.org/download.php?id=6921&lang=English&pg=/index.php

Kahf, M., & Khan, T. (2021). Principles of Islamic Financing: A Survey. Institute for Islamic Research and Training, IDB. https://www.islamiccenter.kau.edu.sa

Mirakhor, A., & Zaidi, I. (2007). Profit and loss sharing contracts in Islamic finance. Islamic Banking Handbook, 49–63. https://doi.org/10.4337/9781847205414.00010

Mobarek, A., & Kalonov, A. (2014). Comparative performance analysis between conventional and Islamic banks: Empirical evidence from OIC countries. Applied Economics, 46(3), 253–270. https://doi.org/10.1080/00036846.2013.839863

Morduch, J., & Roodman, D. (2014). The impact of microcredit on the poor in Bangladesh: A review of the evidence. Journal of Development Economics, 110, 189–201. https://doi.org/10.1016/j.jdeveco.2014.06.003

Nienhaus, V. (2021). Islamic financial ethics and Sharia law after a crisis. Thunderbird International Business Review, 63(1), 73–84. https://doi.org/10.1002/tie.22176

Financial Services Authority (OJK). (2023). Indonesian Sharia Financial Development Report 2022. OJK. https://ojk.go.id/id/berita-dan-kegiatan/publikasi/Pages/Laporan-Perkembangan-Keuangan-Syariah-Indonesia-2022.aspx

Piketty, T. (2014). Capital in the Twenty-First Century. Harvard University Press. https://doi.org/10.4159/9780674369542

Reinhart, C.M., & Rogoff, K.S. (2009). This Time Is Different: Eight Centuries of Financial Ignorance. Princeton University Press. https://doi.org/10.2307/j.ctvcm4gqx

Rosman, R., Wahab, N. A., & Zainol, Z. (2014). Islamic bank efficiency during financial crises: An analysis of Middle Eastern and Asian countries. Pacific Basin Financial Journal, 28, 76–90. https://doi.org/10.1016/j.pacfin.2013.11.001

Smaoui, H., & Salah, I.B. (2020). Islamic bank profitability and stock market development. Economic and Financial Quarterly Review, 78, 73–83. https://doi.org/10.1016/j.qref.2019.12.003

Stiglitz, J.E., & Weiss, A. (1981). Credit allotment in markets with imperfect information. American Economic Review, 71(3), 393–410. https://www.jstor.org/stable/1802787

Tabash, M. I. (2022). Islamic banking and economic growth: New evidence from the panel's estimates. Economics & Convincing Finance, 10(1). https://doi.org/10.1080/23322039.2022.2027610

Werner, R.A. (2016). Lost centuries in economics: Three banking theories and conclusive evidence. International Review of Financial Analysis, 46, 361–379. https://doi.org/10.1016/j.irfa.2015.08.014

Zins, A., & Weill, L. (2017). Islamic banking and risk: The impact of Basel II. Economic Modeling, 64, 626–637. https://doi.org/10.1016/j.econmod.2017.05.003