A critical review of the interest rate theories presented by Islamic economic scholars

Despite more than four decades since the enactment of the Usury-Free Banking Act in Iran, major challenges persist in designing a coherent, operational, and Sharia-compliant framework for determining the profit rate in the Islamic financial system. A critical review of the literature shows that existing theories—despite their considerable diversity—suffer from several fundamental limitations. First, a lack of comprehensiveness: many approaches focus on sector-specific or contextual issues within Iran’s economy and therefore lack generalizability to the broader system of Islamic monetary policy. Second, theoretical shortcomings: several theories do not adequately incorporate macro-policy dimensions or the institutional requirements of an Islamic central bank. Third, limited engagement with contemporary monetary policy literature: many contributions overlook recent developments regarding the role of the policy rate in macroeconomic management and expectations-guidance. Fourth, insufficient attention to the real sector: although Sharia principles emphasize linking the profit rate to the real return on capital, many theories lack mechanisms grounded in actual economic activity.

Using analytical and documentary methods, this article reviews and evaluates both domestic and international theories of profit-rate determination and demonstrates that none of the existing approaches can, on their own, satisfy the three foundational criteria of Islamic finance—Sharia compliance, linkage to the real sector, and applicability in monetary policy. The findings highlight the need for a hybrid, institutionally grounded framework that preserves Sharia principles, employs real-sector indicators, and enables the central bank to conduct effective monetary policy and extract a unified policy rate. The study concludes that progress toward such a framework requires integrating valid elements from existing theories and establishing essential institutional prerequisites, including enhanced financial transparency, development of the sovereign sukuk market, and strengthening the operational mechanisms of monetary policy in Islamic central banking.