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Since Islam is a natural religion, What is the drawback of interset economically. Suppose a bank pays me 10% interset on my original, what is the ugly side of this?

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One of the most apparent drawbacks of interest based economy is that it enables accumulation of money in the hands of few people. Interest also decreases purchasing power of money and causes inflation.

In a healthy economy cash flow needs to match with that of goods and services. See, for example, "Circular flow of income" for a simplified reference model. Goods and services flow from producers to consumers, capital/cash flows from consumers to producers.

Suppose that total cash in an economy is 100$, 10$ out of which belongs to banks (i.e., sum of all financial institutions that operate on interest). Now, assume that banks lend all of their capital with 25% interest. After a one total circular flow, the society (i.e., individuals and companies that have borrowed the money) will need to return 12.5$ (10 + 2.5$) to the banks. After the second round the society will need to return 15.625$; after the 3rd - 19.53125$; after the forth - 24.4140625$; and so on, after 11th round that sum will become 116.4153218$. That's, someone(s) in the society will be in debt (16.4153218$) and go bankrupt because there will be simply not enough money in the economy to pay the debt.
Now the main problem.
Since all the money in the said economy is now property of banks, they will start to abuse their power (as is the case now in the world) by controlling the money flow. The banks will/can divert the cash flow to bubble economies which do not produce any goods or services. As a result total sum of money in real economy decreases and more individuals, companies and even countries go bankrupt (that, of course, will be shown to people as an unforeseen disaster). To "solve" this deficit problem, central banks of governments issue/print new money which are again will be given under interest. Such artificial increase of money supply decreases purchasing power of it and leads to inflation.

  • +1: not referenced but Beautiful example used.. – user263210 Aug 6 '14 at 17:30
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From an 'uneconomic' point of view:

  • Interest, gambling, insurance and theft are all haraam according to Islam.
  • When I think about theft myself, and what makes it 'theft', I think of it as an uneven exchange of value.
  • Interest, gambling and insurance are all uneven exchanges of value, i.e the value you put in is not exactly the value you get out...it might be more or less.

That is why, in my opinion all 4 are classified haraam. The drawback to interest on society would be the same as the drawback to theft.

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