Abstract
Riba is referred as a pre-decided increment on debt received by the creditor. The understanding of Riba is the major component of Islamic financing system. There is much debate on the understanding of Riba in the modern financial system, among Muslim scholars. There are two main schools of thought in this regard. At one extreme, “Liberal view” considers Riba as only a very high rate of compound interest or usury, and do not consider bank interest as Riba. On the other hand, the mainstream view includes usury as well as bank interest under the concept of Riba. There is consensus on the understanding of usry as Riba but so far as the matter of debate on liberal and mainstream views, both ignore one important component of interest rate, i.e., inflation. As deposit interest rate in the modern banking system is highly linked to inflation, so the relationship between inflation and deposit interest rate must be understood to decide the debate between liberal and mainstream views. This article analyzes the relationship between inflation and deposit interest rate, in Pakistan economy from 1960 to 2010. Findings reveal that average inflation was less than few types of deposit interest rates at the time when currency notes had gold backing till 1971 while average inflation was higher than all types of bank deposit interest rates since 1971 when the gold backing of currency notes was removed. These results create the urge for scholars to explore that whether to treat deposit interest rate below the inflation rate as Riba or not. The quest for this discussion will open new horizons for the understanding of Riba in the presence of inflation rate.