Interest (finance)

In finance , interest is the payment of a loan , usually in the form of a periodic payment from the borrower to the lender.
For the lender, this is the price of his temporary waiver of liquidity . For the borrower, it is a cost corresponding to an anticipated use.
A savings remunerated by interest is comparable to a loan made to a borrower, such as a bank or organization holding the savings.

Calculation of interest

Main article: Interest rate .

Interest is proportional to capital and increases with time. It can be calculated by applying an annual percentage, called the annual interest rate. This rate can be fixed or adjusted from one period to another according to an indexing formula. In this case, it can be revisable (fixed at the beginning of each period) or variable (determined at the end of each period). It varies according to the inflation and the risk underlying the financed capital, it is the risk premium .

Simple interest calculation

In the case of simple interest, the interest earned is not added to the initial capital {\ displaystyle C_ {0}}. Interest increases linearly. For an interest rate{\ displaystyle r}, after {\ displaystyle n} periods, interest is worth

{\ displaystyle I_ {n} = C_ {0} \ r \ n}

Calculation of compound interest

In the case of compound interest, interest earned is regularly added to the initial capital {\ displaystyle C_ {0}}. Interest is growing exponentially. After{\ displaystyle n} periods, interest is worth

{\ displaystyle I_ {n} = C_ {0} ((1 + r) ^ {n} -1)}

Terms of payment

Interest is usually paid periodically to the lender, for example at maturity (monthly, quarterly or annual) or, in the case of capitalization , paid only at the same time as the final repayment of the loan . It is then capitalized, in other words added to the capital at the end of each period (for example every year), to produce interests in the following periods.

Advantages and disadvantages

Various criticisms over time have focused on the interests themselves as well as on credit and money, accused in concert of impoverishing some for the benefit of others. In fact, prosperous economies rely heavily on a well developed and successful savings and credit sector. One of the factors of economic development is the establishment of such a system. [citation needed]

However, there is a need to monitor practices in these areas, resulting in provisions in various countries aimed both at protecting the saver and avoiding usurious rates for the borrower.

Taxation

In France , the corporation tax is calculated on the current result , whereas it is the gross operating surplus in other countries. The 2014 Finance Bill created a new gross operating surplus (EBITDA) tax , the latest version of which would be a “net surplus”, calculated by deducting the book depreciation , so as not to tax the investment of the investments. companies 1 and exempting SMEs . The new tax would therefore tax the profit before tax but also the accounting provisionsand interest paid to creditors, at a time when large publicly traded companies tend to go into debt to reduce their equity .

History and religious views

According to religions the relation to money and its use takes different forms:

Jewish Religion

In ancient times , very high interest rates were charged 2 . It could happen that in the death of a debtor , the creditor reduced in slavery his children [ref. necessary] .

It is to respond to this situation that Jewish legislation introduced bans on interest-bearing loans in the Pentateuch . The Bible strongly condemns the practice of interest – bearing loans and usury . This prohibition is expressed in the Old Testament , in the twenty-third chapter of Deuteronomy (23-19) v 1 : ” You shall not give any interest to your brother, interest in money or interest in food, of anything that is lends at interest ” . The following verse (23-20), however, adds an important limitation: ” You will be able to draw an interest from abroad, but you will not draw it from your brother, so that the LORD your God will bless you in all that you undertake in the land you come into possession of.  ” The ban on lending at interest is also in Exodus (22-24), Leviticus (25.35 to 37) and Ezekiel (18.8; 13.7; 22.12).

The rabbis Jews reacted to the biblical prohibition codifying things in the Jerusalem Talmud the iv th century , and the Babylonian Talmud at the vi th century , which bring great innovations on social organization, particularly the rate interest , the use of bills of exchange , and the limits of profit by introducing the concept of pricejust. The hallakha (rabbinic jurisprudence) authorizes to load the interest to the non-Jews but forbids to lend with interest between co-religionists going to strongly recommend the debt remission each schmitta.

The Jews practiced lending at interest under 23-20 verse from Deuteronomy : ” You can charge interest to a foreigner, but not an Israelite brother ” (23-20) v 1 . In France Philippe Auguste expels the Jews, then reinstates them in 1198 and authorizes the loan at interest. The ban is reestablished under Louis VIII in 1223 .

Catholic religion

In the New Testament , the wording of this prohibition is less explicit. In the Gospel according to Luke , the following verses mention the loan without speaking explicitly of interest: ” and if you lend to those of whom you hope to receive, what will you know? Sinners also lend to sinners to receive the same.  ” Then, ” But love your enemies, do good, and lend, expecting nothing. And your reward will be great, and you will be sons of the Most High, for it is good for the ungrateful and for the wicked.  ” In the Gospels, the passages mentioning the money are very numerous. They encourage the gift to the poor according to the principle of charity , or severely condemn those who do not make their talents fruitful , in the parable of talents . The use of money is not condemned, provided that it is not an end, but only a means, which joins the Judaic conception. In the Gospel according to Saint Luke , is it not affirmed: ” If you only lend to those whose restitution you expect, what is the merit? Because sinners lend to sinners to receive the equivalent ” v 2 ?

If Roman law allowed loan interest, the Roman Catholic Church forbids it to its faithful , canon law based on the Bible . In the West, the prohibition of interest-bearing loans is incorporated into secular law under Charlemagne and continues throughout the Middle Ages . She is criticized by some theologians and jurists to the xiii th century . The canon law is based on the criticism of chrematistic by Aristotle : for the philosopher Greek, money should not be able to ” make small. The forbidden is partially bypassed during the medieval period.

If the Roman Catholic Church continues to assert this prohibition among its faithful, it is clear that it is circumvented with innovation by Christian merchants and bankers 3 , 4 of their own confession 5 , 6 .

Protestant religion

The Protestant Reformation , through the voice of Jean Calvin in particular, contributes to the gradual lifting of the interest-free loan ban in European countries. From the pen of Calvin, in his letter on usury 7 in 1545, Protestantism justifies the legitimacy of interest: capital has a ” character property immediately productive ” and interest and acquires legality.

The laws against usury are officially [ref. required] repealed in these countries [Which?] that during the xix th century, mostly. In France, the loan at interest is completely liberalized at the beginning of the French Revolution . The canon law will condemn the loan interest until 1830 and that the Vatican has made the loan interest licit only in 1917 v 3 .

If a fungible thing is given to someone in property and must be returned after that same kind, no gain on the basis of the same contract can be perceived; but in the provision of a fungible thing, it is not unlawful in itself to agree on a legal profit, unless it appears to be immoderate, or even of a higher profit, if a right title and proportionate can be invoked v 4 .  “

Islam

In Islam, both loan and interest-bearing loans are clearly prohibited, as attested by verse 275 of the second surah of the Qur’an : ” God has made trade licit and unlawful .” The prohibition of the practice of interest is still found in verse 39 of Surah Ar-Rum ( The Romans ): ” All that you give to usury to increase your property at the expense of the goods of others does not increase them. to God, but what you give as Zakat , while seeking the face of God (His satisfaction) … These will see [their rewards] multiplied.  ”

Riba is opposed to trade in the sense that interest enriches the lender without risk-taking (risk-free investment). The lender is enriched by the passage of time. This is because of the concentration of wealth in the hands of the holders of capital and the alienation of the workers. Riba gives an unfair society.

A hadeeth of Muhammad exposes the rules of the legal trade. This hadeeth is general in scope because it refers to six products called ribawi : gold , silver , wheat , wheat , dates and salt.. Any exchange of identical products (gold against gold, wheat against wheat) with a benefit for one person constitutes a usurious operation, unlike the advantages resulting from the exchange of products of a different nature (gold against wheat). The other significance of this hadith is that the fiat currency system is not in keeping with tradition. The currency should have intrinsic value and be immediately convertible into commodities , for example gold.

If Islam continues to assert this prohibition among its faithful, it is clear that it is bypassed with innovation by Muslim traders and bankers. The Sukuk is an obligation which the underlying interest (riba backdoor) does not say his name being considered as a share of future profits guaranteed. In the mousharaka , the bank participates in the financing of the acquisition of real estate and the repayment obeys a depreciation schedule that includes, in addition to the principal capital, the “profits” drawn by the bank for this operation. There is a growing number of Islamic banks , including in Western countries, offering these so-called Islamic financial products.

Sources

Bibliography

  • Lewys Hyde, The Gift. Imagination and the Erotic Life of Property , New York, Vintage Books, Random, 1983 (Chapter VII on the issue of usury)
  • Benjamin Nelson, The Idea of ​​Usury, Chicago University of Chicago Press, 1969 (2nd ed.), 310 p.

References

  1. ↑ “Tax on the EBE: Bercy modifies its plans”, by Cyrille Pluyette in Le Figaro of 02/10/2013 [1]  [ archive ]
  2. ↑ ( in ) The origins of value: The financial innovations that created modern capital markets , chapter 1: The invention of interest, Marc van de Mieroop
  3. ↑ The benefit of Christian banking up 40%: Bacob guard apétits great.  [ archive ] , lesoir.be of March 23, 1996, accessed July 23, 2016.
  4. ↑ “Around 1650, the activity of Grasse is entirely based on credit despite the fact that the loan interest is prohibited. ” The Grasse (1963), Hervé Fontmichel, ed. Grasset, 1966, p. 28
  5. ↑ Why I’m leaving Goldman Sachs  [ archive ] , courrierinternational.com March 20, 2012.
  6. ↑ When a bank manager leads a Bible group  [ archive ] , on swissinfo.ch of 17 October 2009, accessed 23 July 2016.
  7. ↑ Michael Johner, ” Freedom and money: Calvinism and economy ,” Reformed Review , ( read online  [ archive ] )

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