Much more solid proof that interest lending was hardly illegitimate, than parsing Quranic verses, is provided by the historical experience of the Muslims. There is overwhelming evidence that throughout most of it money lending at interest was wide-spread, popular and approved by both religious and political authorities.
Thus, the Ottoman Empire, whose economic history has been studied in greater detail than that of any other Muslim land, was characterized by both large-scale money lending (sarraf) and consumption-oriented interest lending throughout its history. What’s perhaps most interesting is empirical evidence that even Islamic religious organizations, such as the vakif (waqf) endowments, were themselves involved in lending money at interest. Research by the Turkish economist Sevket Pamuk and others, for instance, shows conclusively that these “cash vakifs” were lending their cash assets at 10% or more interest per annum as early as the 15th century and as late as the 18th century and using the interest proceeds to fulfill their religious obligations.20 In the one known case when some ulema questioned the legitimacy of an Islamic institution charging interest, the controversy was settled by the highest Ottoman Islamic authority in favor of interest.21
Both the practice of lending at interest and support for it from influential Islamic scholars has continued in the modern era with the most recent fatwa justifying interest issued by the mufti of Egypt, Sheikh Muhammad Sayyid Tantawi (currently head of Al-Azhar), in 1989. It is only in the past few decades with the dramatic rise of radical Islam and its growing ideological dominance that the pendulum has swung back with those opposing interest gaining the upper hand to the point where today opposition to interest is the one thing all Islamists and “Islamic” economists and financiers have in common.
To understand how this came about requires a short discussion of the invention of Islamic Economics and its offshoot Islamic finance as a concept. And invention is not an exaggeration for what happened when the radical Islamist ideologue Maulana Abul Ala Mawdudi took it upon himself in the 1940s to chart out a course for Muslim cultural and political reassertion in the face of what he saw as an onslaught of Westernization that ostensibly threatened Muslims with the loss of their religious identity. 22 Mawdudi saw the solution to this existential threat in a return of the Muslims to authentic Islam. To do that, he advocated building a separate, self-sustained Islamic order with its own Islamic ideology, Islamic politics and Islamic economics that taken together would guarantee an Islamic way of life and ultimately the Islamic state as the first step toward establishing Muslim rule worldwide.
Calling for a return to Islam and the cultural separatism this entailed was, of course, nothing new and had been practiced by earlier Islamic scholars such as Muhammad Abduh, Jamal ad-Din alAfghani, Sayyid Ahmad Khan, Rashid Rida and others, but none of them evinced the slightest interest in the Islamization of economics.23
Mawdudi’s novel call for Muslim economic reassertion, was promptly taken up by others like the prominent Muslim Brotherhood ideologue Sayyid Qutb in the 1950s, who like Mawdudi, knew very little about economics, but saw clearly its utility in mobilizing support for the cause of Islamism.24 Qutb’s contribution, if it is one, was to steer Islamic economics further in the direction of socialist, collectivist principles by urging the nationalization of natural resources and most infrastructure. 25 And so through the writings of Mawdudi, Qutb and a few others the concept of Islamic Economics became firmly established in Islamist discourse despite the obvious fact that there was no substance to it and that Islamic economics made no more sense logically than Christian physics or Buddhist biology. To the extent that neither Islamic economics nor Islamic finance had even been heard of, let alone practiced, before Mawdudi, this was a purely intellectual invention, yet one with disturbing future implications as we’re now observing.