Gujarat University Economic System of the Islamic Companies Discussion

The discussion of Iran’s economy includes a review of the nation’s banking system, which is partly based on the mudarabah concept from Islamic economics. As the authors note, banks operating under this system act more like business partners than lenders to their business customers. The banks earn a share of the profits from the borrower rather than collecting interest payments. Versions of this partnership approach can also be found in other economic systems. For example, some European banks and their borrowers invest in each other as a way to form closer business relationships. Consumer loans can be arranged in a similar fashion if the lender collects a share of future income instead of interest payments. For example, some people are eligible to arrange for income-based repayment of federal student loans. If the borrower has relatively low income after they graduate, their initial loan payments are reduced, and their monthly payments increase over time as their income grows. The repayment term may extend longer than the usual 10 years under this system, but some of the debt may be forgiven if the borrower’s income remains relatively low over time. Suppose banks extend this approach to other forms of consumer credit like auto loans. Would this be a reasonable way to help borrowers handle income disruptions like lay-offs or temporary reductions in their normal hours? Would there be any problems with the income-based repayment scheme when applied to consumer credit? Would you prefer this system?

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