The case against the forbiddance of interest

In-Depth Analysis

The author addresses a live situation most people are cognizant of: the interest rate charged by conventional banks on personal loans ranges between high single to lower double digits (8-13% per annum) on a reducing balance basis. A client availing a conventional credit card facility would be required to pay between 39-35% per annum on a reducing balance basis, creating a difference of 22-27% between the two types of credit. Adding the penalty interest rate, the variance may widen up to 39%. Despite such a yawning gap between them, the high rate on credit cards is still referred to as 'interest' and not 'usury' since it is the rate committed to be paid by the bank's client in the credit card application. The usury is classified as the rate over and above the agreed rate, and not based on the high level of the interest rate approved by the client. Applying this logic, one would assume there is rarely any likelihood to apply the usury on a credit transaction since every rate — irrespective of how high it may be — will still be an agreed rate and hence regarded as interest. The author explores arguments in favor of the application of interest in an economy, including inefficient allocation of resources (without interest, it is alleged that it may not be possible to assign monetary resources proficiently), the relationship between interest rates and the fluctuation in demand and supply of loan capital, and the argument that in the absence of an interest rate mechanism, funds will be available 'free of cost' to the 'eligible' debtors leading to nondiscriminatory allocation of resources. The risk capital argument states that the declaration of profit by an enterprise having received risk capital from investors automatically ensures that the originally invested risk capital continues to remain intact. Protection of the risk capital is assured from within the Shariah structure and without relying on external support in the shape of collateral, guarantees, securities — which, if obtained, may nevertheless add to investors' protection.