THIS article builds on the earlier piece ‘Riba, Money and Interest Paradox’, which exposed the inconsistency of condemning interest as immoral while simultaneously benefiting from interest-based systems — such as earning salaries from banks or utilising public infrastructure financed by interest-bearing loans. It highlighted that institutions like the IMF and World Bank use such loans not to exploit but to foster economic growth and stability in developing countries. This follow-up argues that interest plays a vital role in modern economies by pricing risk, encouraging savings and facilitating large-scale investments essential for growth. It further contends that riba and interest may constitute a misinterpreted equivalence, stressing that denouncing interest while enjoying its benefits is logically flawed, ethically contradictory and economically irrational.
In today’s complex economic environment, few issues provoke more confusion than whether interest — on savings or loans — is morally defensible or economically necessary. The Qur’an, the Bible, and the Torah all warn against charging interest (usury or riba), associating it with injustice and exploitation. Yet, the financial architecture of modern economies tells a more nuanced story.
The Qur’an, particularly in Surah Al-Baqarah (2:275–279), explicitly condemns riba, distinguishing it from lawful trade. Classical Islamic scholars such as Abu Hanifa and Ibn Taymiyyah viewed riba as any predetermined gain on a loan unrelated to productive activity. Their concern was rooted in justice: profit should not arise from mere passage of time or from preying on financial vulnerability.
We respectfully contend that not all forms of interest constitute riba and that banning interest altogether may lead to unintended harm. A modern economy cannot function efficiently without a mechanism to reward savers and price the cost of capital — unless we accept more complex, opaque and potentially unjust alternatives.
Does today’s simple interest on bank savings or productive business loans truly resemble the exploitative lending practices condemned in ancient texts? We argue it does not.
Interest, when determined by competitive and regulated markets, serves vital economic functions:
It compensates lenders for deferred consumption.
It serves as a reward for saving, especially in inflationary environments.
It is the price of borrowing capital, helping allocate resources efficiently.
Underlying this is the fundamental economic principle of the time value of money: a dollar today is worth more than a dollar tomorrow. If left idle, money loses value due to inflation. Interest incentivises individuals to save and institutions to lend, making capital available for productive investment.
Interest also operates as a market signal. When a business borrows 6 per cent to fund a new factory, it signals confidence in generating a return exceeding that rate — leading to job creation and GDP growth. Without interest, credit allocation becomes subject to bureaucracy or favouritism, reducing efficiency and fairness.
While simple interest can be ethically sound, compound interest often crosses into moral hazard. By charging interest not only on the original principal but also on accrued interest, compounding creates a recursive and regressive debt spiral. High-income borrowers often refinance or repay early. In contrast, low-income borrowers who can only afford minimum payments see their debt balloon over time. They may end up repaying multiples of what they initially borrowed.
This aligns with the Qur’anic warning in Surah 3:130:
‘O you who believe! Do not consume Riba, doubled and multiplied, but fear Allah that you may be successful.’
The verse speaks directly to the exploitative nature of compounding, where time punishes the borrower and debt grows unchecked.
Another ethical concern is the interest rate asymmetry between deposit and loan products. Banks often offer depositors minimal interest while charging consumers high compounded rates. This imbalance disproportionately harms the poor, reinforcing systemic inequality.
In recent decades, Islamic finance has introduced instruments like mudarabah (profit-sharing) and murabaha (cost-plus sales) to sidestep formal interest. These models are grounded in noble intentions but face practical limitations, such as:
incurring high transaction costs and contractual complexity.
Ìýrequiring significant trust and oversight, difficult to scale.
mimicking interest — in structure and outcome — under different labels.
For instance, when a bank purchases a car and sells it at a markup to the customer with instalment payments, it effectively performs what conventional banking does through interest. The persistence of interest-like structures in Islamic finance signals that the economic role of interest is not easily avoidable, even in religiously guided systems.
Is an interest-free financial system possible? Yes — but at significant cost. Such a system would require:
State-controlled credit allocation, risking inefficiency and favouritism.
Heavy taxation on idle wealth spurs capital circulation.
Mandatory equity-based financing, spreading both profit and loss.
A profound shift in financial culture, emphasising trust, accountability and communal risk.
Implementing this across globally integrated markets would be extraordinarily difficult. It may slow economic growth, reduce transparency and limit access to credit — particularly for the underprivileged. Rather than banning all interests, a more ethically balanced approach is achievable and desirable:
Prohibit compound or usurious interest that multiplies debt unfairly.
Encourage transparent lending practices, with fair and fixed terms.
Promoting profit-sharing where feasible, without making it obligatory.
Leverage modern regulation to align finance with the public good, rather than private greed.
This framework maintains the moral spirit of ancient prohibitions while accommodating modern economic realities. The goal should not be dogmatic purity but justice, equity and economic functionality.
Simple interest, which applies a flat rate on the principal, avoids the dangers of compounding. It offers clarity and predictability: the borrower repays a fixed cost over time without additional burdens. It does not allow debt to grow autonomously, nor does it punish borrowers for extended repayment timelines.
From an Islamic ethical viewpoint, simple interest — especially when tied to productive use, agreed upon voluntarily, and adjusted for inflation — is not inherently riba. In fact, many classical Islamic contracts, such as murabaha, ijara (rent), and mudarabah, resemble simple interest in effect.
From a mainstream economic perspective, loanable funds theory provides further support. This theory explains that interest rates arise from the interplay of savings supply and investment demand. A moderate, fixed interest rate ensures that savers are compensated for postponing consumption, while borrowers access capital at a cost aligned with risk and inflation expectations.
Debating the structure of interest is more than a religious exercise — it speaks to how societies distribute capital, manage risk and advance fairness. To brand all interests as sinful is to dismiss a powerful and often equitable financial mechanism.
Modern, regulated systems using simple interest have helped millions finance education, homes, healthcare and small businesses. They empower upward mobility and asset-building. Rejection of these tools, without distinction, risk turning moral ideals into economic obstacles.
In reconciling scripture with the modern financial order, we must distinguish exploitative riba from justified compensation. A flat, fair, transparent interest rate — when used ethically — is not only permissible but essential to human development.
In the modern economy, no nation — including Saudi Arabia — operates without paying a rental cost for money, whether sourced from domestic savings or international lenders. This cost, commonly known as interest, underpins financial systems and supports the services, infrastructure and stability that citizens benefit from every day. Calling this rental cost equivalent to riba deem inappropriate and somewhat misplaced.
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Dr Abdullah A Dewan is a former physicist and nuclear engineer at BAEC and is professor emeritus of economics at Eastern Michigan University, USA. Humayun Kabir is a former senior official of the United Nations contributing from Toronto, Canada.
