Interest is detrimental for an economy as well as the society in many forms. Interest based financing creates debt, and debt leads to instability in the economy. It also creates inequity in the distribution of income and wealth, leading to inefficient allocation of resources.[1] The frequently cited menace in the European debt crisis of “privatisation of profit and socialisation of loss” underscored the dangerous effects of debt to society and civilization. Debts, with the interest or profit to be paid over the capital borrowed, causes inflation. National development declines due to lesser expenditure from the government. Similarly there will be a sharp decrease in investment, as the wealth created is spent to pay out debts.[2] Higher cost of living due to inflation increases distress among the citizens, hampering their productivity and national growth.
References:
[1] M. Nejatullah Siddiqi, The Economics of Tawarruq: How its Mafasid Overwhelm the Masalih, available at: http://www.siddiqi.com/mns/Economics_of_Tawarruq.pdf.
[2] For a detailed discussion on the effects of debt, see Abdul Karim Abdullah, “Debt and Economic Activity,” Islam and Civilizational Renewal (ICR), vol. 4, (3), July 2013, 407-22.
Related article:
The Legacy of Debt: Interest Costs Poised to Surpass Defense and Nondefense Discretionary Spending
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