The Pitfalls of Riba or Interest-Based Financing

Interest-based financing presents a number of pitfalls to individuals, business firms, as well as governments. Each of these pitfalls alone constitutes a compelling reason for abandoning this hazardous mode of financing and replacing it with financing on the basis of risk sharing, such as the mudarabah and musharakah. The major pitfalls include the inherent inefficiency of lending at interest, the profoundly destabilising effects it has on economic activity, and the crippling indebtedness of nations, firms, as well as individuals that it brings about. The paper investigates these shortcomings, and recommends utilising risk sharing partnerships as a way of avoiding the pitfalls of interest-based financing.