The Issues And The Controversies
The way conventional banking institutions have attempted to perform these functions has been a serious source of concern, since their functions are premised on the institutions'. Interest rates which are less humane in outlook are exploitative in practice. This has led to financial exclusion, low financial depth and poor access to financial services with its attendant negative impacts on the economic development in d several countries.
Interest Rate : A Controversial Concept in Economics
The origins of "interest" are deeply connected to the changing meaning of "usury". Canon law in the middle Ages forbade usury, which was generally interpreted as a loan repayment exceeding the principal amount. The modern term "interest" is derived from from the Medieval Latin interesse. The Oxford English Dictionary explains that interesse originally meant a penalty for the default on or late payment of an otherwise legitimate, non-usurious loan. As more and more sophisticated commercial and financial practices spread through Europe, "interest" became the generic term for all legitimate and accepted payments on loans.
The concept of interest rate which has undergone several transformation in contemporary economic thought started in the early 16th century with wide condemnation. In the era of Adam Smith the smith, the rates were put at a maximum of 5%.
In the 18th century, the position of Jeremy Bentham was total elimination of interest rate ceiling. Within the same period many States restricted it on loans between persons and corporations, while others condemned it out rightly. But now it has been defined as rental income of money.
Some classical Economics rationalise interest rate on the basis of abstinence theory, as in considered a compensation for waiting or delayed consumption or sacrifice of savers.
Keynesians rationalise it on time preference of money. They suggest that a rational economic agent prefers the present to the future. For this reason, he needs to be compensated for discounting his future holding. It is compensation to the lender and impatient cost to the borrower. However, these positions have been faulted by Siddiqi (1983) who deserves that this position suggests that there is no existence of a voluntary sector where individuals advance a good without anticipating a reciprocal benefit..
