Interest is unconscionable when the interest rate is dictated by any of the participating parties, when the borrowing party is inCompetitive market forces determine interest used in modern finance. But if the competition is imperfect, i.e., if the suppliers of funds can unilaterally influence or dictate the interest rate that they use in their transactions , then the interest rate becomes unconscionable to the borrowers.
Whether any economic charge – price or interest – is unconscionable can also be judged in the light of the overriding fundamental principle enunciated in the Quran about social justice or good we need to observe. The Quran mandates that we strictly maintain justice or equity in all of our affairs , including business dealings. It directs us to do business in particular to our mutual benefit . And it strongly urges us to respect the norms of social justice and compassion, wherever appropriate.
Modern-day Islamic finance and banking is only a recent innovation. The first Islamic bank was established in Egypt in 1962/63. Such banking took off in the 1970s, coinciding with an oil boom in many Arab countries, and made rapid inroads in other Muslim countries. It spread to other regions with sizeable Muslim populations, growing worldwide in double digits annually in the recent decade. Its increasing popularity has led some large Western banks to open Islamic windows.