This paper compares the transactions costs in two economies, one conventional, the other Islamic. The conventional economy is characterized by borrowing to finance some current purchases, while the Islamic economy disallows interest-based lending and operates on the basis of universal banking that mixes commerce and commercial and investment banking. To finance current purchases, it provides customers with credit purchase agreements, which entail that the bank buy the commodities and assets from suppliers and resell them on credit to customers satisfying conditions of creditworthiness similar to those that conventional banks require for borrowers. The paper uses simple calculations to compare transactions costs in both economies. It argues that under competitive competition, credit purchase arrangements occasion lower transactions costs than borrow-and-purchase arrangements in the conventional economy. The most important implication is that a policy that lifts entry barriers in the Islamic banking market and allows banks to combine commerce with banking activities contributes to social welfare. The paper concludes with suggestions for further points of research.

When it comes to definitions of ethics, and business ethics in particular, we have relied in this paper on a quick survey of the literature. We also referred to other writings to explain how interest-based lending escaped religions morality in the west. After providing an Islamic perspective of ethics and business ethics, the article directs itself to the moral responsibilities of system participants. Naturally there is a great deal of soul searching to do and there are tough questions that must be answered by everyone. In this regard, more questions than answers are provided. As a result, the Islamic finance system is found to have deviated from its own ethics and must put some efforts in their regaining. In order to gain the ethics of Islamic finance, the article proposes some modifications in the current system, with a special attention on the process of certification of members of Shari'ah boards before their appointment. In addition, a new system of human resource development is proposed, based on comprehensive treatment of shortages in both knowledge and skills. Rating agencies are called upon to introduce the Shari'ah aspects in their rating systems and specific elements have been proposed in this regard.