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During early caliphate era (7th-13th century), Muslim traders dominated trade in Indian Ocean and the Mediterranean (see here and here for example). I think Islam's prohibition of interest or usury must have made raising investment difficult, why would people lend money for merchants to buy their goods if they can't get interest from it?

How did the merchants raise investments, like for buying goods, ships, funding sailors and employees? Were Muslim traders disadvantaged compared to their competitors due to the usury prohibition, and how didd they manage to compensate this disadvantage?

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DAvid Graeber went into this in Debt: the first 5000 years, though I don't recall exactly how it was supposed to work. –  mart Aug 26 '13 at 8:25
@jwenting by steal, you mean rob, like a pirate? But you need ships and crew for that, meaning you need initial investment.. –  Fitri Aug 26 '13 at 19:47
Also, the Indian ocean trade was mostly peaceful, before the arrival of the Europeans –  Fitri Aug 26 '13 at 19:48
There's profit sharing. There's also hibah, which means giving a reward. Someone could have an informal agreement that if they borrow $1k, they'll pay back $1k and a 'hibah' of maybe $100. In effect, it gives similar returns to interest, but is not enforced. –  Muz Aug 27 '13 at 6:20
@jwenting are you saying that it is the common way for merchants in this era to raise funds for their venture? That's completely new to me –  Fitri Aug 27 '13 at 16:01
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2 Answers

Usually islamic banks give loans for a share in the income of the business project as opposed to fixed percent of the loan sum (see mudarabah)

The consumer loans may utilize another scheme: the bank buys, for example, a car and it becomes the bank's property, then you use this car and slowly re-buy it from the bank for greater money. Once you finished, the car becomes yours.

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+1 - This is the correct answer and should be accepted - it is easily verifiable. BTW, religious Jews, who also abide by the same prohibition, use exactly the same workarounds. –  comeAndGo Aug 25 '13 at 18:32
Yeah, but references would be nice. –  Lennart Regebro Aug 25 '13 at 22:16
@Vector Sorry, Anixx is not a reliable source. I have no doubt to the correctness of the answer, but I'm not voting it up unless we get some reliable sources. –  Lennart Regebro Aug 25 '13 at 22:43
In fact, I know this is how Islamic banks today lend money (I added a wikipedia link), but my question is how about 7th-13th century, when there were no banks? How do we know that they also used these methods? –  Fitri Aug 26 '13 at 12:24
@jwenting Shhh...... –  Felix Goldberg Aug 26 '13 at 17:04
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When the law prohibits interest altogether, it does not prevent it. Many people must borrow, and nobody will lend without such a consideration for the use of their money as is suitable, not only to what can be made by the use of it, but to the difficulty and danger of evading the law. The high rate of interest among all Mahometan nations is accounted for by Mr. Montesqieu, not from their poverty, but partly from this, and partly from the difficulty of recovering the money.

["The Wealth of Nations" - Adam Smith]

It was not so much a question of being able to raise investments, but of being able to do so at an interest rate sustainable for business. Law, be it religious or not, increases artificially the interest rate, thus seriously crippling economic life, but it never effectively eradicates it.

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your conclusion does not follow from the quote. Smith quotes Montesque where the latter states that poverty leads to a high risk of non-recovery of loans which in turn leads to needing high interest rates to cover that risk. That has nothing to do with legal or religious climate, it's pure economics and equally valid in all legal systems. –  jwenting Feb 10 at 14:52
I was not drawing a conclusion from the quote. If one sentence follows another, it doesn't mean they form a reasoning. –  Andrei Albu Feb 10 at 15:02
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