Harmful Effects of Interest

Equity or loan financing?

Equity and loan financing impact the economy in different ways. In the case of equity financing these effects are beneficial. By comparison, the effects of interest-based loan financing are invariably harmful. The first adverse effect of loan financing is indebtedness. Additionally, delinking rewards paid to the providers of capital from the profitability of the enterprises receiving financing, a basic feature of loan financing, reduces the efficiency with which resources are allocated throughout the economy. Inefficiency emerges within the economy not only in reduced productivity. It also manifests itself in the form of inflation, unemployment, slow or declining economic growth, instability in the form of business cycles, and an uneven distribution of wealth.

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Issues in Islamic and Conventional Finance – Chapter III