I know this has been asked a LOT of times, but mine is slightly different (I believe). First of all, a little background about myself: Not a Muslim, probably somewhere between agnosticism, Christianity, and atheism. I live in a multiracial society though, and a recently-made Muslim friend has piqued my interest in religion.
Why is interest such a bad thing? I tried searching this on Google, most explanations simply state "because it is forbidden in the Quran" which in my opinion (no offense intended) is not really much of an explanation. From my understanding, it's because it allows wealth to accrue in the minority rich elite while exploiting the majority. So simply put, it's forbidden on the basis of equality.
a. In this case, shouldn't it be beneficial for the majority to receive interest from savings accounts and the like? Wouldn't the interest promote equality by awarding wealth to the majority?
b. Furthermore, banks and customers have a mutually-beneficial relationship. Banks safe-keep the money of individuals and provide convenience (ATMs, online banking, etc.), while they invest or provide loans using the funds deposited by individuals. On the basis of equality, shouldn't interest be encouraged so as to share the profits of the bank with the people who made it possible in the first place?
Isn't interest an effective mechanism in allocating resources in an economy? Corporations issue bonds to raise funds for activities like research and development. At any point, it's a fair assumption that the demand for money is higher than its supply.
a. Without interest, why would anyone want to lend money to corporations who may well generate large profits subsequently without receiving anything in return? Yet they take on the risk of loan default should the corporation fail or go bankrupt. From a mathematical standpoint, expected value is negative. And if there is no investment in an economy, progress and development will be stunted. Think about modern innovations like the mobile phone, personal computer, self-driving cars, etc. They all require extensive research and development that is only possible with investments.
b. Even assuming that people are generally willing to provide loans out of goodwill, what would decide where funds are allocated to? Interest is generally an effective mechanism in resource allocation - ventures that are expected to be more productive will pay out higher interest and thus attract more funding. As a whole, interest can be said to maximize the productivity of an economy by allocating resources (funds) to their most productive uses. In such a case, having interest can produce a win-win - the lender receives interest (a compensation for the "renting" of his money), while the borrowing company generates value for society at large (e.g. through technological innovations that increase the efficiency of a process such that the same amount of raw materials can produce more goods and services).
Without interest, wouldn't inflation be a silent killer?
a. On a basis of equality, if I lend you a sum of money (e.g. $10,000) out of goodwill without any for-profit motivations, I should be returned the same sum in real value. With inflation, however, I'd receive the same nominal amount but less in real terms. So, equality-wise, shouldn't all loans carry an interest rate that matches inflation? This will ensure that in every loan transaction, there is no "winner" or "loser". Otherwise, the loan-taker would be "profiting" at the expense of the lender. I tried searching this on Google; again, hardly any decent answers.
b. Why is interest forbidden if it helps to protect against inflation? I'm referring to interest on savings account. In fact, they are generally much lower than inflation (I invest my money in stocks to protect against inflation), which means that without interest, the average individual will have the value of his savings halved in 24 years (assuming a very modest 3% annual inflation).
Overall, I agree that the basis for forbidding interest may be sound in the past when economies aren't quite as developed. However, considering the context of today's modern economies, is the forbiddance of interest still justified and relevant, and if so, why?