Page 5 - Islamic Finance Practices

Dangers of interest-based system

At the same time, the money lending system has
evidenced income disparity between the rich and

poor. Banks lend deposit funds to creditworthy

borrowers who usually make more money from the

loan. For example, a bank charges 7% interest on

a loan to the big corporation who use the money in

a business deal to make 40% profit while

depositors receive a meagre 1% or 2 % interest

income, hence a stark income inequality between

big business and households appears. One study
found that an increase in private bank credit in

Europe increased inequality, as measured by both

the Gini index and the top-income shares. Another

study in Indonesia found that loans extended to

big companies have increased income inequality

instead. A positive association between the

probability of banking crises and the level of
income inequality also has been found in as many

as 33 advanced countries.