Riba and the cost of interest

Riba, usually translated as interest or usury, is forbidden in the Qur'an: “Allah has permitted trade and forbidden usury” (2:275). Modern economics, by contrast, treats interest as a neutral price for credit that balances saving and investment. This paper asks whether that view holds up, and argues that interest is a structural force with real winners and losers.

The authors begin with history. Aristotle called interest unnatural because money cannot breed, Thomas Aquinas called it unjust, and medieval canon law treated usury as a sin; even Adam Smith supported limits on interest rates. Only later did interest come to be seen as a neutral tool. The paper then draws on modern critics: Hyman Minsky, who showed how long periods of easy credit build up to sudden crashes such as 2008; Thomas Piketty, who argued that when returns on capital outpace growth, wealth concentrates at the top; and Joseph Stiglitz on how finance shifts risk onto borrowers. It links this to the Qur'anic aim that wealth should not “circulate only among the rich” (59:7).

At the level of households and firms, the paper argues, heavy debt holds back investment, pushes firms to cut wages and favours large companies that borrow cheaply. At the level of countries, interest payments crowd out spending on health and education and trap developing nations in debt. The authors also connect interest to wider problems: high discount rates make long-term climate investment look worthless, and price support in rich countries leads to food being destroyed. Case studies from Greece, Spain, Ghana, Malaysia and the United States illustrate these points.

Against this the paper sets Islamic finance, where financiers share profit and loss instead of charging a fixed return. Citing IMF data, it reports that Islamic banks kept growing during the 2008 crisis while conventional banks shrank. The authors accept that Islamic finance still faces problems of standardisation, regulation and scale, and close with policy proposals: more risk-sharing instruments such as mudarabah, musharakah and green sukuk, debt restructuring, and tighter limits on predatory lending.