Interest-based financial systems are the essence of the modern world economy, but their contribution to structural inequality is also a highly debated issue, especially in the new-economy countries. This essay will discuss how interest-based global finance fosters endemic poverty, inequality, and financial instability through sovereign debt, domestic credit markets, and international capital flows. The research based on existing academic sources before 2017 suggests that interest-based finance lacks value addition, transfers value from developing economies to developed economies at the expense of developmental outcomes in the former, and requires a focus on fixed financial returns rather than developmental outcomes. The debt crisis, household indebtedness, and post-2008 financial turbulence evidence illustrate how the loss of control over society’s expenditure by interest commitments, the decline in domestic capital formation, and the exposure of emerging economies to asymmetric risks. The paper also highlights ethical concerns in interest-based finance, including exploitation, power imbalances, and the socialization of financial losses. Last but not least, it addresses the issues of reform and alternative financial models, such as risk-sharing and interest-free models, concluding that significant curbing of global inequality requires a systematic re-evaluation of the ethical and structural foundations of interest-based financial systems.
Hashim Hirani (Tue,) studied this question.