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The purpose of this paper is to examine the relationship between war and interest-based transaction by analyzing the case of the late Ottoman Empire from a historical economic perspective. It also attempts to provide a deeper understanding of the Quranic verses where Allah has declared war against people who deal with interest.

It provides a snapshot of major economic events that occurred in the last phase of the Ottoman rule that contributed in shaping the fate of the empire and, then, systematically explores them.

A careful study of the chain of events reveals that there exists a strong relationship between war and interest-based transactions, as indicated in the parable given in the Quran where dealing with interest has been described as equivalent to waging war against Allah and His Messenger. The paper claims that Muslims are sure to be defeated in the hands of disbelievers if they themselves are at war with Allah and His Messenger by being involved in interest-based transactions, as validated by the case of the Ottoman Empire. The paper goes on to argue that this is why no specific punishment in this life is mentioned for this crime; rather extreme psychological pressure is imposed, so that the believers do not even consider getting close to dealing with interest.

This paper addresses a missing component in the existing literature of Islamic economics where the political economic aspects of interest has seldom received due attention. A careful analysis of these issues is expected to help people better understand the dire consequences of dealing in interest on a micro level. On a macro level, it can always help to formulate prudent foreign policy by learning from the mistakes of our ancestors.