This is a re-telling of a conversation taken place in one of Usrah Buku session at The Peak Coffee between Firdaus Ariff & Azam Yaacob.
FA: What allowed bank to collect interest on loan given out?
AY: Well, it’s the law of course!
FA: I mean, let’s rewind a bit before the law was enacted. It certainly doesn’t magically appear in legislations worldwide.
AY: Oh, you mean what justified the law in the first place? I’ve no idea.
FA: In the book Debt by David Graeber he explained that the word interesse originally meant a fine for late payment.
AY: Late payment as in if you promised to pay in 30 days but you only managed to do so ini 40 days?
FA: Yes, that was the beginning of. But then a twist happen. As long as you require a certain period of time to pay back you will be fined. The difference is that your fine is pre-determined. If you are required to pay back in 30 days then there’s certain interest fee to be paid. More if you exceed it.
AY: You are fined even if you pay in time? How do they justified it?
FA: Remember that most ealry lenders were merchants. Each of them know the ROI rate for their own business. Say for every 10 dollar spent they can make 4 dollar profit. Thus the justification is that the money he lent deprives him the opportunity to generate profit. So the borrower must compensate him in part if not in full.
AY: Uh oh, now I start to see the fallacy in their justification.
FA: As you are well aware there’s no guarantee the lender will enjoy the same ROI every time. In fact he might even lose money on a business he’s been doing his whole life. Market could change, theft could happen or he can simply misplace the money. In this case the borrower is doing him a favor by keeping the money safe.
AY: Ah yes, it is clearly absurd. I certainly wouldn’t accept it if you want to charge me 40% interest simply because your business profit rate is as such.
FA: Exactly, that’s how absurd it is! As Muslims this justification is even more troublesome because it implies that you know the future & rizq that’s coming to you.
AY: It’s crazy that they twisted the concept of profit as a basis to charge interest. There’s no guarantee in profit so how come it can justify a set interest rate.
FA: This craziness is exactly what being condemned by Allah in the Quran!