The protagonists of an interest-based system speak of the benefits that accrue to individuals and institutions and are of the view that interest is an economic necessity, without which the economy cannot achieve progress. The supposed advantages are summed up as follows:
The economy is entirely dependent on the pooling of financial resources and interest is the incentive that encourages people to save money and invest in lucrative schemes. It allows the accumulation of capital to serve the needs of economic development.
It is the easiest access to capital for business and commerce. The lure of easy money earned through interest makes people take their wealth from safe custody and pass it for commercial needs rather than keeping it idle.
Interest helps not only in stimulating investment and attracting capital to business and trade but also in preventing unproductive uses. It facilitates the free flow of capital automatically towards the most lucrative options available.
A loan is among the inevitable needs of human life. It is needed by the common man, entrepreneurs, governments, and institutions. If you do not offer the capitalist the incentive of interest, how can you compel him to hand over his wealth? Would not such a blockade of loans be disastrous for economic life?
Need and Utility of Interest?
The first misperception about the “utility” of interest concerns the actual worth of frugality and money-mindedness. To save money by hook or by crook is regarded as being in the interests of individual and national economic health. Actually, it is just the opposite. Economic growth and prosperity actually depend on maintaining the balance and pace of the cycle of production and consumption. This is only possible when people utilize their earnings properly and are magnanimous enough to spend their income in excess of needs to help the needy and the indigent of the community by enabling them to purchase required items. The national wealth thus shifts automatically to the areas where it is most needed. Conversely, the interest-based system teaches people to stockpile their wealth by being miserly. Thus, consumers with less purchasing power are unable to get the goods they desperately need, while those with a better purchasing capacity and the moneyed class keep their wealth hoarded in bank accounts and coffers. This decline in consumption leads to a decline in job avenues causing a decline in income and a further decline in the consumption of finished goods. The accumulation of wealth for a few thus leads to the economic ruin of many.
The actual economic requirement is to remove the causes and factors due to which people stockpile their income. There should be a sound arrangement to allow every member to get the required assistance in times of need and Zakah should be levied on the surplus saved to discourage the effluent from amassing wealth and providing a way to channel for capital to reach those who have lagged behind. The protagonists of an interest-based system let the economy suffer a double loss; the first caused by preventing capital from flowing into the market and the second through the return of that accumulated wealth to the economy as loans on society’s entire trade and industry. The capitalist is thus the sole beneficiary enjoying a legally guaranteed rate of profit, while the community is faced with the dilemma of how to get rid of the rising burden of interest and loans.
Advocates of an interest-based system say that interest is helpful to utilize capital gainfully to seek out the most lucrative channels for investment. The first setback of this system is that the concept of ‘profit and gain,’ today simply means ‘material gain’ and ‘financial profit.’ Capital thus flows to channels where it is sure to reap profit for investors at a predetermined rate. Another setback is that the sole criterion of capital’s fruitful use is now the gains reaped by the capitalist and not the community. Furthermore, a businessman is often tempted to use even unethical means to keep his profit higher than the interest level. Once interest is declared unlawful and the state adopts the economic and social systems of Islam, then it will be evidently clear how easy it is to get a loan. This is a historical fact that centuries of experience of an Islamic social order has practically vindicated. The Muslim society continued to manage its affairs for centuries, without recoursing to interest.
Demerits of Interest
In relation to this verse, Ribā promotes traits of selfishness, miserliness, and heartlessness while Sadaqāt (including benevolent loans) results from noble attributes of magnanimity, compassion, and large-heartedness. From a civilizational point of view, it is quite easy to understand how weak the social fabric of society will become if individuals treat each other selfishly and are only concerned with their personal benefit, as opposed to a society based on compassion, trust, magnanimity, and cooperation. From an economic angle, interest-based loans can be of two types: those taken by the needy for personal needs and those obtained by entrepreneurs to support their ventures. The first category of loans plays a devastating role in the lives of poverty-stricken people where unbearable burdens of interest leave many with too little to satisfy even their basic needs. There are many adverse effects of the second category of loans as well:
All financial resources flow towards the most lucrative ventures that offer better rates of interest, regardless of their usefulness and advantage for the country and community. The capital invested in an enterprise, for which the lender might have been offered a guaranteed rate of interest, can never be free from the risk of loss and default. Investors are unconcerned with the losses or gains of a venture, only keeping in view the interest they will earn. Whenever he senses a threat, he withdraws his capital and hence investors are often instrumental in actually causing recessions through their speculative behavior.
Contrasted with the economic impact and advantages of Sadaqāt, if the affluent members of society get used to following the prescribed path of generosity, one can imagine how healthy the mindset and lifestyle would be for the prosperity of the country and community. The overall national economic growth of such a society will be much higher compared to that of an interest-based one.