Salman Ahmed Shaikh
Sometimes, arguments are made in favour of the justification of interest. These arguments are not potent from the perspective of economics. This section looks at some of these arguments and shows how they do not justify the institution of interest from even the economics standpoint.
- Interest is the Price of Risk
Lending money for stipulated interest does not involve risk. The lender gets interest in any situation, no matter whether the borrower earns profit or loss. Even when the borrower takes a loan for meeting health expenses or buys essential food intake from the borrowed money, the borrower is required to pay interest. Even when the loans are provided to commercial businesses, the returns from enterprise in the real economy are uncertain. After taking the risk, businesses either earn profit or incur loss.
- Share in the Profit of the Borrower
Interest cannot be regarded as the profit share in the business of the borrower. Not all borrowing is for commercial purposes. Even when borrowing is sought for commercial undertakings, the lender does not agree on sharing profits. Rather, the lender stipulates a pre-determined rate of increase demanded over the principal amount of loan. For sharing in the profit and loss of the business, the appropriate way of engagement is to provide investment funds on equity financing basis. In genuine equity financing, profit sharing ratio is agreed at the beginning. If the profit is earned, it is shared on the basis of profit sharing ratio. If there is a loss, it is shared on the basis of investment share.
- Interest is a Rent on Money
It must be noted that the assets on which rent is charged are used and given back in the same existing condition after the use, such as homes or cars. On the other hand, money and other consumption goods are consumed. When we borrow money, we consume it and then regenerate it to repay our liabilities. In a loan transaction, when the money is used by the borrower, it is consumed. The borrower has to regenerate it and the lender without taking any risk is entitled to receive the consumed money with interest. An example here would illustrate the difference between rentable and non-rentable goods. Can we borrow apples or mangoes on rent? The answer is ‘no’ since these are consumption goods. Thus, we can borrow a hammer, but not the nails based on the above classification between rentable and non-rentable goods.
Categories: Articles on Islamic Economics