মাসিক আত-তাহরীক Evil effects of Interest
Analyzing the history of mankind and various socio-economic studies at least fifty evil effects (small and big) of interest are found. These evil effects may be grouped under moral, social, economic and international category. Out of those most important evil effects are discussed below.
A. Moral and social evil effects:
1. Interest, the most powerful instrument of social exploitation:
In a non-Islamic society a group of people claims a portion of other's income by way of interest. The debtor is bound to pay interest whether he earns a profit or not. He is forced to pay the money back with interest selling everything he has. The law of the land is in favour of the creditor, not the debtor. He becomes poorer. The social class discrimination further accentuates. As the creditors or the money lenders claim the fruits of the debtors' hard work they have no real contribution to the society. On the contrary, they are the parasites of the society. Fact is that these money lenders have no positive participation in any economic activity.
2. Interest makes a man selfish and cruel:
Lust for money, miserliness and selfishness are among the important characteristics of the money lenders. Interest as an economic instrument was developed out of lust for money and aversion to work. Greediness to receive a regular and guaranteed income through interest without any physical efforts paralyze the conscience and self esteem of the interest receivers. Greed and selfishness have become so deep seated in them that their behavior changes so much so that they became targets of mockery and insult in the society. Their proverbial greed and tendency to grasp others property and wealth became the source of tales and stories. The money lenders and banks instantly grant credit to the people who are able to pay interest. But those who are not will not even get a little bit of sympathy from them let alone debt.
3. Interest creates idleness and promotes aversion to work:
In the interest based economic system just by depositing a certain amount of money with the bank one can earn a fixed regular amount without any risk and labour. This system turns capable, meritorious and otherwise hardworking people into lazy and idle one. The planning, the efforts and the ability to bear the risks that are essential to start a business or to establish an industry are lost. Instead they remain satisfied with the regular fixed amount of interest they receive against their deposits with the bank. Gradually idleness and inertia cripple them. Thus because of interest the society is deprived of the merit, ingenuity and capability of those who also have adequate capital. A simple sample survey will testify to the statement. Examples of such types of people are in abundance in the literature of the early twentieth century of Bengal. Under the prevailing interest system one can `earn' Tk. 10,000/= every month without any labour, risk and tension if he just keeps Tk. one million in time deposit account of any interest based commercial bank.
4. Interest discourages investment in socially necessary sectors:
All economic activities, be it production or service, do not yield profit at the same rate. In some cases, the rate of profit is higher than the rate of interest while in some cases it is equal to the rate of interest and still in some cases it is lower than that. Generally the rate of profit is higher in the cases of luxurious goods and goods those are harmful to the society. Cosmetics, fancy goods, alcoholic drinks and cigarettes are the best examples to the point. On the contrary, the rate of profit is usually low for goods and services those are essential for the society. Even it can be less than the prevailing interest rate. As a result, in the interest based economy where the rate of profit is higher than the rate of interest investment takes place.
Investors are not willing to take part in the initiatives where the rate of profit is equal or less than the rate of interest. Because after the payment of interest the entrepreneur will have nothing left for him. The situation inevitably leads to the contraction of production and supply of socially necessary goods and services. But investment in this sector is very essential in the interest of the society. If there were no interest investors and the suppliers of capital would have invested at the available rate of profit, however low it may be. Thus the welfare of the society and expansion of the essential sectors along with employment would have been ensured.
5. Interest, a cause for moral degradation:
In an interest based economy capital is invested in unsocial and unIslamic activities. It ensures a fixed income for the creditors. For example, huge capital is invested for hoarding, speculation, share market, amusement, even in pornography. As income is much higher than the interest to be paid the entrepreneurs make a huge profit. Hence they can easily pay the interest. This leads to expansion of unsocial and exploitative activities in the society. Eventually values and norms get shattered and moral degradation gradually takes root in the society. As the rate of profit is comparatively lower in the socially desirable goods and services getting finance for such ventures is always very difficult.
6. Interest creates hatred and malice in the society:
By means of lending money the capitalists and village mahajans unjustly appropriates a big chunk of the hard earned income of hundreds and thousands of people. Moreover, many people seek loans to meet the burning consumer need which is essentially unproductive. As the loan does not yield any income the debtors eventually become the worst sufferers. They are forced to sell their movable and immovable belongings to pay off the dubt. Even the ancestral properties are sold in auction by the court to pay for the debts along with the interest due. Thus the mahajans and the creditors turn into blood-sucker vampires. Social hatred silently mounts against them.
It is a matter of great regret that there is no way to get Qard Hasanah neither from the society nor from the government because the government treasury of the present day does not resemble the Baitul Maal of the golden days of the Islamic Khilafah. Moreover, the Islamic economic system is not in existence in our country. So the poor and helpless people are bound to take loans on interest to meet the current burning needs. Consequently, after a while the creditors become the owner of the properties of the debtors. Actually they grab the small cultivable land, the homestead, the cattle and the orchards of the poor victims. Gradually the creditors swell with their newly earned wealth. On the contrary, the marginal farmers drop below the poverty line and turns into hardcore poor. There are tragic instances of cultivating the land as share cropper whose previous owner was he himself. Naturally malice and anger develops in his mind and his mental peace is gone. This is no welcome situation for any society.
7. Due to interest the poor becomes poorer, the rich richer:
The ultimate consequence of interest is the increase in class discrimination. Finding no other alternatives the needy persons become compelled to take loans on interest. The loan is used for both productive and unproductive purposes. When the loan is used for unproductive purpose or just for family consumption the debtor becomes unable to repay the loan. As there is no opportunity to get Qard Hasanah in the capitalist economy, it is impossible to get loan without interest even for productive purpose, let alone for unproductive purpose. Consequently they take loans on interest and repay the debt with great effort and eventually become poorer. This leads to increased class discrimination and calls for class struggle.
In Bangladesh, a group of rich people is becoming richer because of the strategy and policy of loan disbursement of the interest-based banks and financial institutions. The poor and the middle class people do not get loans from these institutions although they have ability and entrepreneurship while the rich business class and the industrial entrepreneurs receive credit easily. A bank collects deposits from thousands of people but the collected sum is given as credit to a handful of people. A fat profit earned from this money is retained by them. Consequently thousands of people who saved the money sacrificing their current consumption are deprived of the actual share of the accrued income. Moreover, the industrialists and the businessmen realize the interest payable to the bank from the consumers in the form of price because interest is the cost of capital and every cost is to be realized while selling goods and services. Hence the slogan Goribi Hothao (Eradicate Poverty) will never be materialized so long the all pervading and far stretched tentacles of exploitation i.e., interest prevails in the society.
No prescription for the removal of poverty will work so long this deep seated, torturous and exploitative system of finance exists in the society. In Bangladesh exploitation, oppression and tyranny caused by interest and its extended tentacles have reached to such a height that noted economists of the country started to raise their voice against it. (The daily Naya Diganta, December 25,2011).
B. Economic evil effects
8. Exploitation of interest is all out, permanent and far reaching:
Huge capital is amassed through banking and insurance system by way of attracting small savings of a large number of people. The financial institutions use these savings to lend to the investors and businessmen at high rate of interest and earn a big profit. It is told earlier that the discrimination by the banks in the disbursement of funds is a cause for enhancing class discrimination. As a result, instead of lessening the class discrimination it is becoming widespread and permanent. Moreover, in Bangladesh, some interest based banks are trying to camouflage interest in the guise of profit. Eventually the religious minded people are deceived.
Here is an example to show how exploitation can be extensive and tactful in the interest based banking system. No bank keeps the entire money deposited with them intact in its vault. Generally the banks disburse 90% of the deposits among the entrepreneurs and businessmen and charge interest on it. They, in turn, realize the extra sum payable to the bank due to interest from the consumers in the form of price. As interest is the cost of capital and every cost is to be realized, this cost is added to the price tag of the goods and services. It may be mentioned that those who deposited money with the bank for a secure earning in the form of interest also have to pay this price. Neither can they be excluded nor are they exempted from paying interest.
Thus the banks earn through interest and pay the depositors a small return in the form of stipulated rate of interest. The difference between the two rates is the actual income of the bank. The bank authority keeps a certain portion of its income to cover operating cost and to make good for the mandatory reserves. A certain percentage is allotted for the depositors and the rest goes to the share holders as dividend. Thus the depositors become loosers in the long run. Do they ever think that they are paying a higher rate of interest in favor of the bank and receiving a lower rate of interest and thus becoming looser at the end? The answer is No. On the contrary, they become delighted on receiving the annual statement of account to see an extra amount of money added to the original sum deposited. The situation can be explained with an example.
Example No. 1
Description of transactions |
Rate of Interest |
(a) Depositor (=Consumer) pays interest to the businessmen in the form of price. (b) Depositor receives from the bank as interest. |
16%
8% |
(a)-(b) Net loss incurred by the depositor for his savings in the bank. |
8% |
Under the prevailing interest-based banking system and for the interplay of macroeconomic strategy this actual but hidden exploitation cannot be stopped.
9. Landless peasants are increasing due to interest:
In an agrobased economy even when the farmers have no food to eat they seek credit to cultivate lands due to the urgency to produce crops. Because it ensures him employment and food security for the next season. But they do not get institutional credit in times of need because of official ‘redtapism’. They are forced to seek help of the well- to-do people of the village and there are people who are ever ready to jump on this situation. In the rural areas they are popularly known as Mahajans. They are also seen in the towns and cities. They provide credit to marginal farmers, share croppers and small traders. They even supply paddy on loan for family consumption on hard terms and conditions.
Generally they charge Tk 200/= per month per thousand taka till the debtor repays the debt. In the case of paddy one must pay double the quantity he took on loan. The logic is: they help the farmers either by cash or by paddy to produce the crop. So it is very 'natural' that some reward is their due in return of such 'help`. It may be mentioned that in the period of Jahiliyah dates were given on loan in such a manner. However, the peasants are left with very little after the repayment of the loan, either by cash or by crop. So they are forced again to borrow to run the family. They are hardly able to come out of this vicious circle of debt. Gradually the credit accumulates and grows up beyond the repayment capacity of the farmer and ultimately he is to hand over his cultivable land to the creditor i.e. the village Mahajan.
Farmers also borrow from agricultural banks as well as from other commercial banks and cooperative institutions. They cultivate with the expectation of a good crop and good weather. But no one can be sure about it. Crops may be damaged due to sudden flood, hurricane, unexpected drought or severe attack by pests. But the farmers are to repay the loan plus the amount of interest in due time. In this situation either they are to go out for new loan or repay the loan along with interest by selling a piece of land or pawning their properties. Otherwise the banks and/or the mahajans will sue him in the court and get a decree to acquire his property.
It may not be out of place to cite an example here. Suppose, a farmer borrowed Tk. 10,000/= with 16% interest to grow potato. He will have to earnadditional sum of Tk. 1600/= along with the principal sum to pay for the interest. To compensate for the additional sum either there should be a rise in the price of potato or additional quantity of potato should be grown in the same period. If the average price of potato is Tk. 400/= per maund, an additional quantity of four maunds of potato should be produced. If there is an increase in production per acre of land there will be a fall in price level. If the price falls by Tk. 50/= per maund then there will be a shortfall of Tk. 200/= in the same four maunds of potato. The total sale proceeds will be well below the expected income. Eventually the farmer will face a set back. This is the fundamental reason for the increase in landless peasants in Bangladesh. In 1947, during the partition of India, among the peasants of East Pakistan 27% were landless. The scenario dramatically changed in less than 40 years. According to the agricultural census of 1983-84 the number of landless peasants of Bangladesh climbed to a staggering 69%. [Source: Statistical Pocket Book of Bangladesh, 1986; Bangladesh Bureau of Statistics (BBS), p. 179]. The scenario did not improve as yet.
It may be remembered that after the creation of Bangladesh the Agricultural Development Bank granted credit to the farmers on a continuous basis. During the period of President Shaikh Mujibur Rahman payment of rent of agricultural land up to 25 bighas (8 acres plus) was exempted. During the period of President Ziaur Rahman Tk. 1,000 million was disbursed among the agriculturists under IICP loan. Almost the entire money along with the interest due still remained unrealized. On top of it after being elected Prime Minister Begum Khaleda Zia condoned agricultural loans up to Tk. 5,000/= to keep her election promise. Why then the numbers of landless farmers are increasing? The answer is simple and straight. It is because of interest based loan. Not only in Bangladesh, in the countries where no major technological change has taken place or government special assistance to the agriculturists in the form of price support or input subsidy is not provided small and marginal farmers are reduced to landless peasants due to interest based credit.
10. Interest creates monopolists:
Small businessmen do not get credit from commercial banks and other financial institutions on the same terms and conditions and for the same time frame as do the big businessmen. Hence their ability to compete differs. Due to this discrimination and uneven opportunity to compete big businessmen become bigger one over time. Small businessmen fail to compete, lag by and ultimately are wiped out of the scenario. Not only commercial banks but also investment companies and financial institutions give special privileges and grant loans to big enterprisers at low rates of interest. The small industries are deprived of these privileges. As a result big industrialists enjoy all the privileges of a monopolist. Consequently economic disparity becomes more pronounced.
11. Interest helps circulate capital among few people:
Because of the ability to pay and to realize interest capital circulates and increasingly accumulates in the hands of the rich. It appears that commercial banks, investment companies, insurance companies and the rich class conspire among themselves in an interest based economy. They maintain strong connection which is apparently invisible. Moreover, if anybody can accumulate wealth through inheritance, miserliness or in unlawful ways he has the opportunity to increase it continuously by resorting to interest-based loan/investment system. There is no room for the people of small means. As a result the rich class exploit the society and monopoly dominates overwhelmingly. Consequently economic disaster befalls on the economy and the suffering of the toiling mass knows no bounds. That is why Allah, the Almighty proclaims in the holy Quran, "Let wealth do not circulate among the rich only" (Al Hashar: 7).
In the interest based economic system few people can really amass faboulous wealth. A recent study testifies to the fact. According to Wealth X, an independent research organization, out of the total world population of 7 billion just 185,795 person together are the owners of an incredible amount of wealth, nearly US $ 25 trillion (The daily Prothom Alo, Supplement, December 31, 2011). Never in history not so few people were the owners of such unbelievable quantity of wealth, not so few people enjoyed so much power in the past. Everyone agrees to the fact that the Wall Street controls the economy of the USA, even the world at large. That is why to stop such exploitation and uproot its sources the common people of the USA irrespective of sex, age, colour and status staged demonstration on the street from September, 2011 and called for a movement- Occupy the Wall Street. The demonstrators are still out in the street and their numbers are on the increase.
12. Interest, the main reason for price hike:
In an interest free economy the producer determines the sale price of his goods considering the production cost, transport cost, vat, tax (if any), storage cost and any other tangible cost plus a normal profit. But in an interest based economy it is logical and natural that interest is a component of price i.e., interest will be added to the sale price of goods and services. There are instances where interest is added twice or thrice to the sale price of a good before it reaches the final consumer.
Take the case of clothes. Cotton produced in our country fails too meet the demand of our textile industry. So cotton is imported from abroad. Businessmen import raw cotton from abroad and they add interest on its sale price to meet the amount of interest payable to the banks for the loan he took from the bank. Again mills that produce yarn from the same cotton add interest when they sell the yarn to the textile mills, because they also borrowed from the banks to buy the cotton. Again the textile mills add interest on the sale price of the produced cloth because they also took loans as running capital from the banks to buy the yarn. In this way interest continues to be added if the process lingers. The ultimate buyer bears the burden of this bundle of interest. He pays a higher price which is the result of adding interest to the actual cost.
Here is an example to explain the point. Suppose an importer borrows Taka one million from a commercial bank to import raw cotton from abroad. What will be the price of cloth made from this cotton when it reaches the ultimate consumer when interest is added at different phases? To understand the actual situation two assumptions are made: (a) at least at three stages- import, production and marketing bank financing was essential, and (b) the rate of interest was 16% in all the cases. Other essential expenditure made at different stages such as freight & forwarding charge, electricity and other fuel costs, storage, wages, vat and tax etc. are not taken into consideration just to get a clean picture.
Example No. 2
(a) If the purchase price of imported raw cotton stands at Tk. 1,000,000→ sale price of the same cotton would be Tk. 1,160,000/=
(b) If the purchase price of raw cotton by the yarn mills stands at Tk. 1,160,000/= sale price of the produced yarn would be Tk. 1,345,600/=
(c) If the purchase price of yarn by the textile mills stands at Tk. 1,345,600/= sale price of the produced cloth would be at Tk. 1,560,890/=
(d) If the purchase price of cloth by the dealers stands at Tk. 1,560,890/= sale price of the dealers would be Tk. 1,810,640/=
(e) If the purchase price of cloth by the retailers from the dealers stands at Tk. 1,810,640/= sale price of the retailers would be Tk. 2,110,034/=
From the above example it is clear that the ultimate consumers are to pay an additional amount of Tk. 1,100,340/= over the original import price of the raw cotton. The actual consumer bears the burden of this additional sum which is nothing but interest. If there were no interest the consumers would not have to pay this excess sum (Tk. 1.10 extra against actual Tk. 1.00).
Thus interest is interlaced with every consumer items, essential or non-essential, either directly or indirectly. Consumers are forced to pay this high price which is the result of interest based loan. There is no scape from it. On the contrary, if there were no interest i.e. if Islamic system of economics were in practice people would have relieved of this oppression. This would not only reduce their cost of living but would also add to their standard of living.
13. Interest is one of the biggest barriers to increase wage:
According to the law of demand and supply when the rate of interest remains high investment remains at the bottom. The entrepreneurs struggle hard to earn a satisfactory profit. Any attempt to increase wage would mean incurring loss for them. In the conventional economy number of willing investors may be great but the supply of capital remains limited if the rate of interest is low. Consequently savings inflow to the banks shrinks and eventually the banks fail to meet the demand for investment. As investment does not increase so is the case with the demand for labour. On the contrary, as the supply of labour almost always is greater than the demand for in most developing and underdeveloped countries the labourers can not raise their voice for a salary increase.
Even the trade unions would not normally venture in. Moreover, as there is continuous flow of labourers at the prevailing low wage the entrepreneurs do not yield to any demand for salary increase easily. But if life becomes miserable due to price hike and the labourers are united and become bold enough to press home their demand for an increase in wages, clashes become inevitable. The labourers take resort to such measures as 'go slow', strikes, hartal, sit down strike, abstention from work. As punitive measure industrialists sack some workers at the initial stage. But agitation increases and the owners of mills and factories adopt tough measures like lock out, closures, lay off etc. Production of the industry falls; factories fail to keep the contract and may have to incur loss as well. If in this situation the rate of wage is increased, the resultant rate of profit may go well below the prevailing rate of interest. In this situation industrialists or entrepreneurs cannot entertain any demand for an increase in wage if the rate of interest is not lowered by the financial institutions.
Examples to the fact can be cited from history. During the Meiji regime in Japan the Zaibatsu (a powerful financial oligarchy) did not accept consecutive demands for wage increase. Pure profit motive worked behind it. Interestingly the government also did not come forward to help the working class. In Britain the Corn Law enacted in 1815 in the interest of the farmers was repealed after thirty years to serve the interest of the industrialists. If the Corn Law prevailed the price of wheat would have increased which would benefit the farmers. But the increased price of wheat would ask for an increase in the wage rate of industrial workers which would inevitably reduce the bulging profit of the emerging industrialists. Their profit would have shrinked and opportunity for reinvestment of the excess profit would be at a stake. So they organized a strong movement to repeal the Corn Law and the ruling government duly obliged.
14. Interest discourages long term big investment:
In the interest based banking system banks show least interest to invest big amounts in projects which take long time to complete or the gestation period is long enough. This is why big industries cannot be established through interest based commercial bank financing. Big industries require large sum of money and if this is borrowed on interest a big amount of money would have to be paid for interest which is not feasible for entrepreneurs. Big mills and factories generally require three to five years to go into full scale operation. This include construction, installation of machineries, recruitment of personnel and gestation period. During this long time the amount of interest would increase in cumulative rate which is not feasible to pay by any industry. If the owner of the factory or mill incurs loss, he will certainly have to close down the enterprise. He will be a bankrupt. Only people with ill motive secure large bank loans, mostly through corrupt practices, to establish mills or factories but ultimately they do not repay the loan. Usually they default and reschedule the loan repayment scheme. Years roll on but they do not repay even the principal sum. In many cases they are political heavyweight. So the banks become helpless to realize the money. Thousands of crores of take remain with this type of debtors and the banks suffer from supply of capital.
15. Interest encourages investment of savings in unproductive government securities:
In the interest based banking system bankers usually buy treasury bills, government bonds and security papers with the money deposited by the people. These instruments provide a risk free, guaranteed income for the bankers. Mostly the government use this money to meet current expenses. Consequently shortage of capital occurs for investment in productive purpose. To attract more savings banks raise the rate of interest which also increases the cost of capital. Ultimately investment declines with the resultant impact on production. This leads to price increase of goods and services, shrinkage of employment and ultimately creates a negative impact in the economy.
16. Interest reduces the purchasing power of the people:
It is already discussed that because of interest price of goods and services increases incessantly and unmistakably. Moreover, interest is one of the most important causes of inflation. Suffering of the general people of knows no bound because of the twin effects of price hike and inflation. Labourers, small farmers, people with low salary and fixed income earners queue in this long list of sufferers. As their income remains almost static over the years their purchasing power decreases gradually leaving a negative impact on their standard of living.
In the long run effective demand for goods and services also decreases. The resultant outcome is absolute profit diminishes in the mills and factories and openings of new employment creation also hampers. In many instances, producers increase the prices of their goods to keep the profit intact which serves as a blow to the consumers. Thus the purchasing power of the toiling mass degrades one or two steps more. Middle class people increasingly drop below the poverty line.
17. The entrepreneurs suffer due to interest:
So long the entrepreneurs are able to repay the debt along with interest the banks grant them credit. Even the banks increase the amount of loan. But whenever the entrepreneur incurs loss the bank pressurize him to repay the entire amount instead of helping him by granting additional financial support. The entrepreneur suffers a serious set back. Because he borrowed from the bank many times than his own capital. Now it is almost impossible for him to cover this loss. Ultimately the mill or the factory in question is forced to close thus creating hardship for the employer and the employees as well.
18. Bankruptcy, the offshoot of interest, falls upon the nation:
Bangladesh is a glaring example of such situation. Rich entrepreneurs or industrialists obtain loans from banks or financial institutions many times against their collateral. For example, if he has asset valued at taka ten million he may receive credit to the tune of Taka 100 million. In most cases assets are overvalued, through shrewd maneuvering and the same asset is shown to different banks to get credit. Political affiliation plays a vital role in this respect.
It may be noticed that the depositors get a negligible share of the entrepreneurs' profit in the form of interest. The huge amount of profit earned by the industrialists is enjoyed by them. But in the case of closure or shut down of such industries the burden of financial implication falls on the economy at large. In Bangladesh, according to the reports published by various national dailies and financial magazines the total overdue from big industrialists and entrepreneurs would nearly be Tk. 1,000 billion. If the total collaterals and existing assets of the borrowers are sold out the debt will not be compensated for. It is also alleged that a large chunk of the credit is siphoned out of the country. Besides political affiliation, members of the board of directors of banks and financial institutions play a significant role to grant credit to their sycophants and relatives.
Although there is strong directives issued by the central bank of the country against the interference of the members of the board of directors to grant credit, either they did not pay any heed to or bypassed the directives. Moreover, in many cases the banks had to write off the loan under special circumstances. Many commercial banks suffer from shortage of loanable fund and fail to fulfill all the prescribed requirements of the central bank. In some cases, the central bank had to come forward to rescue the banks from grave financial catastrophy.
19. Interest is the cause of instability in the economy:
It is very well known to everyone that in the capital market if the demand for money decreases the rate of interest also decreases and if the demand for money increases the rate of interest also increases. It is observed from the analysis of time series data of various countries that the rate of interest cannot remain constant over time.
The demand for capital starts increasing in any country with the increase in economic activities and the suppliers of capital (i.e. the banks and financial institutions) take this opportunity to raise the rate of interest. As long as the rate of profit remains higher than the prevailing rate of interest the demand for capital remains constant. But the situation does not last long. As competition in the market increases rate of profit begins to fall. Consequently the demand for capital also starts to fall. In this situation the financial institutions start to decrease the rate of interest to attract new entrepreneurs. But the situation hardly improves. In this case the rate of interest paid to the depositors is slashed, in some cases by half. The situation worsens. Flow of savings in the banks falls dramatically while the banks' income also decreases because they had already enough liquid capital to invest. Such situation occurs in the economy periodically and creates uncertainty among the investors especially among the prospective new entrepreneurs. Very shaky and unstable situation occurs in the capital market, share market and also in the commodity markets. Ultimately the whole economy falls prey to this situation and severe reactions and economic stagnation affect the entire country.
The very glaring example of this situation in the present century is the economic catastrophe of the USA of 2006-2008. Many banks declared themselves bankrupt, many industries merged together to avoid closure while many more collapsed. Real estate business came almost to a halt, mortgaged buildings were offered for sale, one in 10 minutes. Ultimately the Obama government had to come forward to salvage the economy from deep financial crisis with a package programme of US $700/- billion. The USA economy still staggers and could not come out of the shock and its far reaching effects are felt in the entire European economy. In the G-8 countries the governments had to come forward to rescue their economy with astounding amount of financial support in the form of package programme.
20. The ultimate impact of interest is prolonged slum:
According to most market economists slum and boom occur in the economy in cyclical order due to interest. It is shown earlier that demand for and supply of capital are determined or controlled by interest in the conventional economy. In the ultimate analysis uncertainty and instability prevail in the whole economic scenario. This is not desirable for any economy. With the increase in the rate of interest investors do not easily seek credit from banks and financial institutions which creates direct impact on investment. This results in the reduction of production and ultimately sacking of labourers. The banks then reduce the rate of interest in the hope of attracting investors. This generates hope and prospect of earning profit among the old and new entrepreneurs. They seek credit and start operation. The government also plays a critical role in this respect from behind the scene. The slum begins to melt away and again the prospect of boom larks in the horizon. In the opinions of the great economists of the capitalist system the appearance of slum and boom in such cyclical order is not congenial for the steady growth of any economy rather it creates havoc.
Many people have the misconception that interest plays a vital role in the formation or accumulation of savings. It tantamounts to myth. Interest is rather a formidable instrument for exploitation of the capitalists and very much detrimental to economic growth. Lord John Maynard Keynes, the great prophet of the capitalist economy, has made it clear in his epoch making book The General Theory of Employment, Interest and Money that interest has no role to play in savings. Even if there were no interest people would save to meet their personal needs. To meet the expenses of the rainy days and to face unforeseen big expenses people would try to save at their own interest.
21. Interest is a great obstacle to full employment and uneven distribution of income:
Keynes has shown that investment is constrained by interest. An in-depth study of economic situation of any country would show that investment has shrinked coupled with decrease in employment generation when high rate of interest prevails. On the contrary, when the rate of interest was minimum demand for investment increased manifold along with economic activities. In the opinion of Keynes the target for full employment is achieved when the rate of interest becomes zero. A look into the present condition of the industrial sector of Bangladesh will testify to the fact. The owners of the garments and knitwear industries, who earn the largest chunk of our valuable foreign currency, have raised the demand to decrease the current rate of interest charged by banks.
They are of the opinion that if the current interest rate of 16%-18% charged by the commercial banks is not lowered to a minimum of 5%; they might have to incur loss. The smaller entrepreneurs may even have to shut down the enterprise. Owners of other mills and factories have raised the same demand. In the event, the Bangladesh Bank, the central bank of the country, issued necessary directions to the commercial banks to lower their rates of interest to a logical state (The Daily Sangram, February 21, 2008). If the export oriented industries are closed, hundreds and thousands of wage earners will loose their jobs, the government will be deprived of taxes and duties while the country will loose her valuable foreign currency.
Ability to pay interest coupled with adequate collaterals are the criteria to receive credit from banks. The small entrepreneurs can hardly expect a good amount of credit because they cannot provide adequate collaterals. This difference creates disparity in earnings and ultimately leads to uneven distribution of income. By nature interest based economy supports and co-operates imperfect competition that gradually drifts towards monopolistic competition which breeds, in its turn, economic disparity and ultimately leads to social disparity.
22. Interest directly adds to inflation:
One of the basic reasons for inflation in the economy is interest. It is already discussed that in the interest based economy price of goods and services continuously increase due to interest. When inflation occurs in such an economy price spiral becomes inevitable. Unfortunately income of the general people does not increase concomitantly with the increase in price of goods and services. Life becomes miserable.
Commercial banks create multiple credit against the deposit they receive. The debtors use the money for commercial purpose but actually there is no real supply of money. The entire transactions are done on paper but this adds to the buying or spending power of the clients which is reflected in the market. The natural outcome of the whole activities is inflation. There is no escape from it.
Commercial banks supply loan to the government to meet the budget deficit. Thousands of corers of taka are borrowed by the government from commercial banks to meet expenditure the development programmes proposed in the budget. But there appears no positive correlation between these expenditure and the production and supply of goods and services. Supply of money increases in the market but not the goods in proportionate quantity. Price soars up incredibly. No measure to control this price increase proves adequate or effective enough. The unscrupulous businessmen sell their goods, which were already in stock, at this high price and accumulates huge profit while miseries of the common people know no bounds. The degradation in their living standard cannot be stopped. When the government comes up with some corrective measures they fail to do anything tangible. The rate of growth falls along with the purchasing power of money.
23. Interest is the main obstacle to self-reliance through micro finance program:
Poverty alleviation through self employment is always welcome and is an age old practice. Recently this practice has gained momentum and spread to grass root level with the participation of the NGOs through their micro credit program. Policy of disbursing credit to help the poor to make them self-reliant has now spread all over the world. But the rate of success is questionable. Because the profit earned by the client through this program is very marginal, sometimes either it is zero or negative because of the condition of repayment attached to it. The rate of interest charged for the micro credit is much higher than the usual bank rate. Consequently the lion's share of the income earned by the client through hard labour goes to the NGOs in the form of interest. The actual rate of interest paid by the client is much higher than is normally claimed. Researchers claim that the rate of interest finally paid by the clients reaches as high as 142%. This is because the rate is charged on the total sum granted while a substantial amount of money is deducted in the form of subscription to the group fund, risk fund and savings before the actual disbursement of the loan. For example, if a client is granted a loan of Tk. 5000/= he/she will actually get Tk. 4000/= after all the deductions are made but he/she will have to pay interest on Tk. 5000/=.
Studies reveal that except a few cases the clients of the NGOs failed to be self reliant. They usually have nothing left in the form of savings which they can use further as capital. The grim reality is that once a man/woman becomes a client of any NGO, he/she becomes client of one or two more NGOs to keep the payment of installments of credit going. The so much publicized micro credit program could not bring the desired panacea for the poor. The truth has been reflected in the seminar of the Palli Karma Sahayak Foundation (PKSF) held in March 2010. Participants were of the opinion that unless the rate of interest is lowered down to a reasonable rate possibility of self-reliance will be far away. If one does not have his own capital he is to depend on others. He is to seek help of the mahajns, bankers or any other financier. The micro-credit people or the NGOs wait for this opportunity. These institutions never sincerely wanted that their clients be gradually really self-reliant. If that really happens they will loose their fertile field of income through interest. This is why they are not interested in profit-and-loss sharing (PLS) investment system. They are interested in giving interest bearing credit. In reality, they are not alleviating poverty rather cultivating poverty. According to Professor Muhammad Yunus, the Nobel Peace Prize winner, poverty was to be seen in the museum but the grim truth is it still exists and expands with all its evil tentacles.
C. Political and international evil effects
24. Interest increases the burden of foreign debt:
Governments of developing countries seek loan from developed nations and international financial bodies to build socio-economic infrastructures and for industrial development as well. These loans are to be refunded after the stipulated period of time along with the predetermined rates of interest. Unfortunately, most of the loans cannot be refunded in due time. The unhappy picture is the desired industrial and infrastructural developments are also not achieved. Consequently, it becomes difficult even to pay the interest, not to speak of refunding the principal sum. In such a situation governments reschedule the payment period and seek further loan to repay the earlier ones. Generally the new loan exceeds the previous one in volume. In many cases these loans once received are not used for the original purposes it was sought for. The governments divert it to other less important or unproductive sectors. But the real and ultimate burden of these credits, however soft or hard it may be, fall on the general mass along with the interest. People are to pay additional taxes levied on them through annual budgets to repay these loans.
If natural disaster or calamities strikes a country like earthquake, cyclone, unprecedented flood or shortage of food grains occurs the concerned governments seek aid and grants from friendly countries or take loan from consortiums. Apart from aid and special grants all other credits are to be repaid in due time. But as the loans are used mostly for rehabilitation and consumption purposes it neither contributes to production nor guarantees employment. Hence repayment of the principal amount becomes difficult. Many a time the government takes resort to debt servicing i.e. pays only the interest while the principal amount remains unpaid. Again the government reschedules the repayment scheme and additional tax burden is imposed on the general mass, mostly in the form of indirect taxes. The purchasing power of the people decreases and their standard of living falls below the previous level.
25. Relationship between the rich and the poor countries turns to be the exploiters and the exploited:
Countries of the world are broadly grouped into two categories – rich and poor, or in other words, developed and developing. Poor countries are actually not poor. Most of them have either adequate manpower or abundant natural resources. But they lack either adequate capital or modern technology to utilize these resources effectively. The rich countries tactfully use this opportunity in favour of themselves. The technologically developed and financially rich countries of Europe, the USA, the IMF, the World Bank and the Asian Development Bank leave no stone unturned to keep these poor but resource-rich countries in their clutches. The fine and attractive trick is to suggest the governments of these countries to undertake various million or billion dollar development projects.
Once the governments swallow the sugar coated pilles the developed countries and/or the international financial bodies send consultants and experts to chalk out the details. When the concerned government approves the project the question of fund arises. These bodies/governments approve the fund to be repaid in long term with the stipulated rate of interest. The interesting part to be noted is the fund is granted on stringent condition such as the consultants are to be paid from the fund in foreign currency, the plants, machineries and equipments and other necessary industrial and engineering items are to be purchased from the prescribed countries and, in some cases, the produced goods are also to be sold to the financing countries. The giant multinational companies (MNC) also play a vital role from behind the scene. They play their exploitative role under the umbrella of the world financial bodies. The developed countries try to augment the natural resources of the poor or so called developing countries as quickly as possible which are very crucial for their own economy.
With the agreement for credit signed the country is forced to obey the dictates of the financing country. Sometimes they even exert political pressure. As the credit is to be repaid in long term and through yearly installments the debtor country must pay the interest accrued to it annually. In the name of debt servicing i.e., payment of interest of the principal sum Bangladesh paid a total of US$ 190 million in the fiscal year 2009-2010 (Source: Bangladesh Economic Review, 2011, p. 46, Ministry of Finance, Government of the People’s Republic of Bangladesh, June 2011.)
It is alarming to note that the big financing countries gradually try to control all the important institutions of the country- the political parties, the newspapers, scientific research bodies, art and literature and even religious institutions. They decide which party should rule the country and most policies of the ruling party they maneuvered to install are framed according to their dictates. Sometimes these are done openly, but in most cases done in a subtle way. The IMF, the World Bank, the ADB give directives to formulate Poverty Reduction Strategy Paper (PRSP) or to draw a five year development plan to alleviate poverty or to reduce income gap but the ultimate outcome proves to be the otherwise. Poverty at the grass root level increases, more people drop below the poverty line and the income gap widens more than before.
In the final analysis the root cause of this situation is interest. Interest is to be paid from the income generated. But the lion's share of the project finance is taken away by the financier country in the form of consultancy service, price of capital goods and fees for technical know how. The money left for actual use is, it is alleged, some times zero or even negative. Meanwhile inflation increases manifold. The cost of the project also escalates. This necessitates more funds which again increase the burden of debt along with interest to be paid. Thus the interest based credit of the developed countries has turned into an instrument of exploitation which is a new facade of imperialism. This has created a new dimension of relationship among the rich and the poor countries. The rich is the exploiter while the poor is the exploited.
