Adil Hussain

“If you ask me what is the worst thing in the world, I will say it is compound interest”.

President Obasanjo of Nigeria, 2000

The story behind this quote is a textbook case study into why interest (riba) is so oppressive.

“All that we had borrowed up to 1985 or 1986 was around $5 billion and we have paid about $16 billion yet we are still being told that we owe about $28 billion. That $28 billion came about because of the injustice in the foreign creditors’ interest rates.”

In short, Nigeria had borrowed $5bn, repaid $16bn (over 3x the original amount) and still owed $28bn 14 years later!

The problem with interest

This is how interest perpetuates inequality.

It favours the rich by oppressing the poor and trapping them into a never-ending cycle of debt.

That wealth could have been used to develop the country and benefit its citizens. Instead, it was seized by the wealthy who likely used it for further loans.

This is why interest is forbidden in Islam (and the other Abrahamic faiths).

The PR campaign behind interest

For most of human history, the use of usury has been stigmatised. It’s only now that we see the rise of online finance gurus extolling the virtues of interest (most often in the context of making money on real estate).

At the same time, we witness countless people who are forced into the hands of dangerous loan sharks and vicious cycles of debt, leading to financial and psychological ruin.

There’s an infamous (and most likely fake) quote by Albert Einstein that best encapsulates the PR campaign to rebrand interest:

‘Interest is the eight wonder of the world’.

There’s a lot more to be said on this but I’ll leave that for a future piece.

As a practising Muslim however, I would be remiss if I didn’t share how the Quran conveys the magnitude of the sin of interest:

“O believers! Fear Allah, and give up outstanding interest if you are believers. If you do not, then beware of a war with Allah and His Messenger! But if you repent, you may retain your principal.” (2:278-279)

So, what’s the alternative?

There are two alternatives that could and should be used.

Let’s start with the concept of a loan itself.

Loans are acts of goodwill

Loans are a type of financial contract that shouldn’t be commercialised at all.

They are acts of goodwill, and tainting them by charging interest is undignified.

True lending (of the interest-free kind) is an act of compassion that fosters bonds between people and enhances your humanity.

Trade, not interest

Of course, not every financial arrangement can be a loan, and in many cases, it is more suitable for arrangements where people can earn money. This brings us to the second alternative: trade.

Wealth shouldn’t be amassed through the suffering of others but rather through fair, ethical, and equitable trade.

The Quran speaks to this directly with the following verse in Surah (Chapter) al-Baqarah:

“Allah has permitted trading and forbidden interest.” (2:275)

Now let’s go back to the original example. Suppose that instead of issuing Nigeria loans, the lenders had instead invested in specific projects.

Firstly, this would mean that the investors would be more diligent on how their capital would be deployed, which should allow capital to flow to the places where it can generate the most impact.

Secondly, if the venture was profitable, then we could reasonably expect this to lead to more business, which would lead to a more prosperous Nigeria and more profits for the investors. A win-win that doesn’t take advantage of either side.

Trade done correctly ultimately leads to better outcomes than interest-based lending.

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