INTEREST (RIBA) AND ITS CONSEQUENCE ON THE ECONOMY

Abstract

Interest or Riba is regarded as the reward of the factor of production or return from the loaned fund. However, it causes more harm than good, and Islamic religion categorically prohibited any form of activity involving interest or Riba. Therefore, the objective of this study is to assess the consequence of interest on economy and differentiate profit from interest. The study adopted library research, and conceptual approach as the method of analysis. The analysis revealed that the consequence of Riba within an economy includes low investments, distortions in distribution of wealth, and encouragement in the exploitation of the needy as well as the economic instability. It can be said that interest rate is only baited by creditors to transfer the wealth of the debtor which serves as a tool for exploitations. The study concluded that the conventional financial activities appeared to be an agent of exploitations and to some extent brings economic destabilisations. Therefore, for the economy to be free from the negative influence of interest, countries are encouraged to adopt Islamic finance which is based on profit and loss sharing as an alternative financial intermediary. Islamic finance must be adopted in Muslim countries to abide by Islamic ruling.