Riba : an economic perspective


What is riba? According to sharia law, riba means charging interest on loan. To put it simply, someone loan a certain amount of money to the bank, and within certain period of time the person must pay off the debt annualy, including the added amount of money which is accounted from certain percentage of the borrowed money known as “interest”

This “riba” is prohibited in sharia-law because it is presumably to be the number one factor in the economy colapse.

But, is taking interest in loaned money is really as bad as its sound?. This topic itself has been disscused over and over again by many experts both in economy and islamic point of view.

Roughly saying, there is two type of money lender. One lending because of consumptive reason and one because of productive reason. Consumptive reason, to put it simply is as tyler durden said in the fight club “people buy things they dont need, with money they dont have, just to impress people they dont like”

Productive reason is also known for business reason. They lend because of the needs of capital to start a new business, expanding existing business, or to innovate.

Lets talk about riba from peoples perspective. A man lend $30.000 from a bank with 15% interest to buy a car. The man has to pay off the debt monthly in 3 year period. So this means by the end of the period, the man pays off $34.500 to the bank. But for some reason, the man failed to pay off his debt, and the bank confiscated his car and forced to auctioning his house. Is this fair? Debatable.

Now for the second perspective; the bank perspective. A man comes asking for a $30.000 loan. The bank then analyze his track record; annual income, assets, etc. The bank approve his request with 15% interest. By the end of loan period the bank gets 34.500.

Is 15% interest fair? Talking about money, there are several factor to consider from the bank perspective; the time value of money, TAX, government regulation, and Earning.

The time value of money; is the current $30.000 has the same value with $30.000 3 years from now?. Nope, inflation rate made the money has lower value in the future.

Tax; the banks has to pay tax for every cent they earn.

Government regulation; the minimum interest rate of saving and loan.

Earning; the income that will be used to pay the banks operational cost and turned to profit.

In conclusion, does interest a necessity?. Lets just say its better to loan money for productive cause rather than consumtive cause.

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