Salman Ahmed Shaikh
In this article, we briefly analyze the logical arguments that are usually presented in the defense of interest as a price of money capital in loans.
Interest is the price of risk
It is not correct to say that lending money involves risk. Because the lender gets interest in any condition, whereas businesses after taking entrepreneurial risk either earn profit or incur a loss. In any entrepreneurial investment, the investment has to go through the entire process of a business activity that involves risk taking at each stage and any compensation on investment is strictly dependent upon the outcome of the entrepreneurial activity. Time value of money is the problem for the investor to avoid keeping his money idle and to avoid forgoing the use of money that may bring positive value to his investment. However, it does not mean that the investor can demand an arbitrary increase as the cost of using money without taking the entrepreneurial risk.
Share in the profit of the borrower
Interest is not a share in the profit of the borrower because if money is borrowed for fulfilling needs rather than for conducting business, then, there is no question of a profit. But, even if money is lent for commercial purposes, then, how one can determine that the enterprise will be profitable let alone determining the level of profits. Businesses earn profits and incur losses, but why the lender does not share in the losses and what sort of an effort he has put in to demand a stipulated share in profits that is fixed and confirmed irrespective of the profitability of the business.
Interest is a rent on money
Those things on which rent is charged are used and given back in the same existing condition like homes and cars, while money and other consumption goods are consumed. When we borrow money, we consume it and have to regenerate it for repayment. When the money is consumed, the borrower has to regenerate it and the lender without taking any risk is entitled to receive the consumed money with interest. Can we borrow apples or mangoes on rent? We can borrow hammer, but not the nails based on the above classification.