Lecture 9: The Evils of Interest

For more readings on interest see subpage {INTEREST}

It is widely believed that interest is necessary to the functioning of a capitalist society. In fact, the capitalist economy can function quite well without interest. However, interest-based financial transactions help the rich and the powerful in the society. This essay demonstrates the evils of interest and provides Islamic alternatives.

TITLE: Interest and the Modern Economy.

First Paragraph:

Can the modern economy function without a market for interest-based credit? This question has acquired some urgency in the wake of the recent Shariat Court ruling banning interest in Pakistan. Some pundits have pronounced that great harm will result from the banning of interest[1]. Actually, such pronouncements are based on a lack of understanding of both the modern economic system, as well as the nature of the Islamic prohibition of interest. As we hope to demonstrate clearly below, the modern economy can function very well, indeed better in some ways[2], with a prohibition on interest rate payments of the Islamic type.

[1] For example, H. Alavi writes that the ban on interest rate is a “threat to the stability and viability of the Pakistan economy,” in an article in Dawn on 9 Feb 2000. Unfortunately, instead of providing the economic basis for his statement, Alavi writes mainly about principles by which the Quran should be interpreted, stepping far outside his own field of specialization.

[2] For example, M Khan (1986) has shown that interest based credit increases the risk of ranking crises. Our results below support this conclusion, though the mechanism producing crises is different in our paper. Also, Presley and Sessions (1994) have shown that mudarabah financing enhances capital investment because of its efficiency as a revelation device, relative to conventional interest based finance.