Time to shoot from the hips.
With almost zero knowledge, I’m going to posit two extremely cynical theories of Islamic banking and its prohibition on charging interest (usury)
- Plain Vanilla Public Choice
- Public Choice w/ Anti-semitism
As anyone with basic financial knowledge can guess, when you prohibit interest, it doesn’t just disappear. It gets hidden behind multitudes of other arrangements. Wall st may seem like a recent invention, but financial trickery is as old as whoring. You can find explanations of how profit is made on loans when ‘interest’ is prohibited by googling. The question we are asking here is
How did that come about?
The traditional theory is that Judaism and Christianity, charging interest was seen as exploitation and hence, evil. The term usury was reserved for this practice which we find harmless today. And due to this precedent, Islam being largely a derivative religion, simply adopted this ethos wholesale. This sounds reasonable (and, is probably true) but its boring, so who cares? Lets get to the fun part.
Muhammad probably had banker friends. When he was crafting his religion (sorry, receiving verses from God himself), various interest and ethnic groups
probably vied for power and influence when it became clear that the Muslims were not going anywhere, and were in fact growing rapidly.
We need to make peace with this new menace! Who cares which God he asks us to worship? Thats for those fools in the desert. Us elites will simply lobby for some favors and accept his religion and retain our elite positions within society.
So the bankers got together and formed their lobby – Medina Bankers Society and hired the best Jewish lawyers! They met with the Muslims and asked them for a meeting with Muhammad. The Prophet agreed and so they met. The bankers offered financing for Muhammad’s raiding expeditions and for his companions in Medina.
Muhammad agreed and Allah promptly sent down verses condemning usury. voila!
In the more cynical imagination, banking (and finance generally) was probably dominated by Jews. The Arab bankers noticed Muhammad’s feud and conflict with the Jews in Medina, and set out to exploit this enmity to deal a non-market blow to their ethnic banking competitors. They approached Muhammad, let him know of the ‘treachery’ of them Jews! And voila, Allah sent down verses condemning and banning usury, which was simply copied over from the Old Testament (oh the irony!) , which wiped out the Jewish bankers and let the Arab bankers design a complicated regulated framework for finance thus cartelizing the industry in the Muslim world since then.