When we hear the word “usury” in a conversation, we usually hear that it is illegal and inappropriate in the Islamic economic system, but what are the economic consequences of usury? Is the prohibition of usury solely a religious issue? On the other hand, we find some individuals touching and pointing out that this restriction is solely religious, and that it contains some unreality, because the capitalist economic system is primarily built on usury, also known as interest, which is a vital component of the production process.
In this article, we will present a distinct perspective in which we will demonstrate the economic impacts of usury as well as economists’ perspectives on usury and its impact on the economic system.
What is Usury?
In addition to a guaranteed increase in the amount in exchange for the borrower’s use of the money, usury is a conditional increase on the asset of money in exchange for the postponement of paying back, and the money does not participate in any risk because it is guaranteed by the borrower.
Usury is defined as lending a sum of money and then repaying it with a larger sum at a later date. We want to emphasise that the sin does not apply just to the person who suggested the increase, whether it was the lender or the borrower.
However, this loan has a number of economic consequences, including negative effects on the economy as a whole.
Clarification example:
Khalil received a $5,000 loan from Saeed for a six-month term, with the condition that he repay the $5,000 plus an additional $1,000, making it a $5,000 loan and a $10,000 payment!
Another example: When it came time for Khalil to pay the money, he didn’t have enough, so he begged Saeed for a month’s extension, but Saeed insisted that he increase the amount by $500.
The Economic Effects of Usury
Usurious lending is the principal source of funding in the capitalist system, which has evident consequences for the economy as a whole and even for people in personal transactions. Usury has the following economic consequences:
First: usurious financing leads to concentration of wealth
One of the most noticeable economic effects of usury is that money flows in one direction: towards the units that always earn the “lender” more money, while the borrowing units must commit to repaying the loan in addition to the benefits, whether the loans are for consumption or investment, and whether the loan made a profit or lost money during its investment.
As a result, wealth is concentrated in society, and we have a class system in which a small percentage of the population owns the majority of the wealth. According to the Italian scientist Pareto, only 20% of the population owns 80% of the wealth.
Second: Usurious interest costs are high contract costs
Interest-based lending adds a cost to the production process that the “entrepreneur” must pay to the financier “lender.” This cost is passed on to customers in the form of increased prices, which will almost certainly rise as a result of the rising costs.
Because capital is an essential component of the productive process, usurious financing will result in so-called cost attract inflation. Consider, dear reader, that in the 1960s, the interest share of production costs was estimated to be around 20%, implying that usurious financing will account for one fifth of production, or one fifth of the commodity price.
Third: Usurious Financing Lacks the Economic Efficiency
Because the return on usurious financing is guaranteed and unaffected by the success of the investment, there is no motive for the financier to allocate financial resources to the most cost-effective application. This will ensure the financial resource’s survival with the “borrower” as long as he is obligated to pay the interest and provide the required guarantees to the financier. As a result, the financier will be uninterested in how the money is invested by the borrower, whereas co-financing forces the financier to constantly seek out better investment opportunities.
As a result, the economic impacts of usury have an impact on how resources are allocated and diverted to ventures.
Fourth: Usurious financing is financing for those who have the money
Interest-based financing is typically skewed toward excess units of “those with money” who require liquidity, because they simply have the guarantees and mortgages to persuade the lender to lend to them. As a result, the granting of credit will be limited to the wealthy, confirming the class theory.
While there are renters who do not “have the money” and do not have enough guarantees to persuade the financier, they may be really efficient, but they do not receive financing!
Fifth: Usurious financing is not fair in the distribution of risks
One of the economic consequences of usury is that interest-bearing borrowing exposes the borrower to all risks, while the lender bears none. The lender takes steps such as guarantees and mortgages to ensure that the risk of non-fulfillment of the loan is kept to a minimum; however, the borrower bears all investment risks, and if the project fails, the borrower will be unable to repay the loan and pay the interest owed.
Placing all of the risks on borrowers makes economic activity reliant on the optimism or pessimism of financiers and their forecasting of the future of their investments, resulting in business cycles, whereas if capital shared in the profit and loss, it would be safer and provide a healthier environment for investment.
Sixth: Interest is an obstacle to real investment
When an investor makes an investment decision, he weighs the cost of financing, or “interest rate,” against the expected return on investment from the investment process; if the return on investment is higher than the interest rate, he will invest; if the difference between the investment cost and the expected return on investment is not convincing to the investor, he will not invest, and economic activity will lose an investment opportunity.
One of the economic implications of usury is that it has become a barrier to actual investment, but if the financing was done in participation, the investment environment would be safer since capital would be willing to take investment risks.
Seventh: Usurious financing tends to be short term financing
Despite the fact that real economic activity depends on long-term investment, usurious financing is directed to short-term investments and financial employment and away from actual long-term financing, which creates economic stability in society.
Eighth: usury causes economic crises
One of the most significant economic effects of usury is the occurrence of economic and financial crises and business cycles, which some economists have linked to usurious financing because usury gives the richest a larger share of the value of the output and impoverishes the masses of consumers who make up the majority of society, and when consumers are unable to purchase goods, goods accumulate in markets and the economy enters a downturn.
Economists pointed out that the way commercial banks offer loans to investors does not correlate to the society’s aims that the central bank is working on in another reason for economic cycles. Commercial banks boost lending when the economy tends to inflate, exacerbating the problem, and loans decline when the economy tends to contract, perpetuating the problem and not aligning with society’s interests in both circumstances.
This is the view of Western economists on the consequences of usury on the economy. All of these viewpoints linked usury to the current economic parasites plaguing societies. Usury discussion is no longer exclusively religious, but rather a necessary for the economy’s recovery from its insoluble challenges.
Finally, we recommend that you watch this episode of Mr. Ahmed Al-program Shugairi’s “Khawater”:
