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As an economist, I get this question fairly often: What’s a fair rate of interest?
The rate of interest is an important concept in the economic field, but sadly it has become more of a method of exploitation rather a means of help—particularly to those who struggle to survive in a materialistic world.
Student loans are a good example. Some student loans charge outrageous rates of interest, putting poor students in tremendous debt. Average student loan debt in the United States, for example, is $20,000 per student. Paying those debts off can mean returning more than twice that amount to predatory lending companies.
But the world’s whole economic and banking system relies on interest to operate, so the question is: what is its origin and why has it become such a dominant factor in the economic system?
Governments, banks, pawnshops and money marts all charge a rate of interest. Some of those rates are so high that not only are they immoral, but they should be illegal. Interest has become one of the means of enslaving people. In some rural areas of our planet it is still being used to control the lives of others and force work out of them instead of paying wages. Those of us who have had to deal with student loans or personal loans, even though we live in industrialized countries, often feel a sense of entrapment. Interest can be a weapon with amazingly destructive powers in terms of control. But it can also be an angel of mercy to help the poor.
Governments use interest in their loans to other countries—generally the underdeveloped countries—to help them build infrastructure, support their military and feed their people. History is full of examples of how poor countries were exploited with these loans, and how the governments of wealthy debtor nations took advantage of the situation to force decisions in their favor and for their own benefit. These loans were used as a means of extortion, and rather than freeing developing nations economically, their high-interest loans kept them in bondage. If you think this was only done in the past, you may be surprised to know how prevalent this practice still is today.
In most developed countries the rate of interest is regulated by law—but in places where there is no regulation or supervision, private banks have charged huge, usurious rates of interest.
Unregulated money lenders have had no mercy on people, and often prey on the poor. In the absence of any regulation they have charged as high a rate of interest as benefited them. Lenders like pawnshops and so-called “payday lenders” often make their money from the poorest, most honorable and most uneducated segments of society. They are fully aware of the vulnerability of the people who come to them in times of great need when there is no other option for help—and some pawnshops see their misfortune as an opportunity to make a great amount of money from the poorest of the poor.
All of these predatory practices produce profit at any cost, without any other consideration. The bottom line is making money, and it does not matter who is being hurt or destroyed in the process. There is no consideration or room for morality in these actions.
What has religion done about these practices? It should come as no surprise that the Jewish Faith, Islam and Christianity did not encourage the practice of charging interest. Christ famously drove the moneylenders from the temple. Sadly, though, the followers of each of these religions eventually ignored the moral and spiritual principles involved, and began to charge interest to their fellow believers.
The Baha’i teachings allow the practice of charging interest—but apply certain conditions that must be considered. The most important condition is that it should be a “good loan:”
One can seldom find a person who would manifest such consideration towards his fellow-man, his countryman or towards his own brother and would show such tender solicitude for him as to be well-disposed to grant him a loan on benevolent terms … [Such loans as bear no interest and are repayable whenever the borrower pleases]. - Baha’u’llah, Tablets of Baha’u’llah, pp. 132-133.
Baha’u’llah wrote that charging interest was lawful, but said:
However, this is a matter that should be practised with moderation and fairness ... We exhort the loved ones of God to observe justice and fairness, and to do that which would prompt the friends of God to evince tender mercy and compassion towards each other. – Ibid., p. 133.
The Baha'i teachings recognize that a high interest rate on any loan is unfair, because it puts a heavy burden on the economic life of the individual or the nation, which, in turn, diminishes quality of life.
Baha’u’llah emphasized the concept of a good loan, meaning that the rate of interest had to be such that it did not unduly burden the borrower and that it benefited everyone. With a good loan, the person or firm lending the money gets an adequate amount of interest, and the person borrowing is happy because he can afford to pay it.
A good loan basically charges a fair, moderate and reasonable rate of interest, using the Baha'i principles of kindness and moderation to help our fellow human beings prosper materially and enjoy the necessities of life—and to put an end to extreme financial hardship for individuals and countries. We should decide the rate of interest by sympathy for others and not greed.