However, from the standpoint of reason, is interest plausible? If it cannot be justified from the standpoints of reason and justice, then why do people insist on retaining such a practice?
Compensation for Elements of Risk and Sacrifice
The most favorite plea in support of interest is that the lender is actually taking a risk of the borrower defaulting. He lends money which he could have used himself which means that there is also an element of sacrifice. The borrower thus ought to pay rent on the money he obtains through the loan, in the way he does for a house. The interest charged covers this element of risk that the lender has taken and also acts as compensation for the lender’s sacrifice. If the borrower uses the loan in a profitable venture, the lender is even more justified in demanding interest.
It is absolutely correct that the lender risks the default of the money, and that there is also an element of sacrifice but how does this justify demanding five or ten percent extra as compensation on a regular basis? As for the aspect of sacrifice, if a lender is willing to sacrifice for someone in need, he should do it in the true spirit of sacrifice without seeking a financial return. Besides, to afford to advance a loan, a lender must have had money in excess of his needs. By extending a loan on interest, he is not performing an act of charity or benevolence, nor is it an act of sacrifice. Let us now examine the claim of equating interest with rent. Rent cannot be applied to consumer goods like rice or currency which is a medium of exchange for goods.
What the lender can logically claim, because he is offering the opportunity to benefit from his personal savings, is a share in the benefits. How is it rational for the lender to demand dividends on his loan from a time before the principal sum has even been used and when the borrower is not even sure of the amount he may gain or lose? How can one justify the lender’s right to predetermine and impose interest over a loan he extended from his excess finances, while entrepreneurs contribute their time, faculties, and resources while having no security at all of a profit or guarantee against loss? The only plausible option is for the lender to become a partner with the borrower and share the profit or the loss of the joint venture.