This study aims to investigate the validity of the foundational premises behind classifying loans, according to their intended purpose of use, into consumption and productive loans, as one of the presumed propositions in the context of ethically justifying the time value of money within lending activities.
This study uses a conceptual analysis of prominent economic texts to explore the evolution of the purpose-based loan classification in the history of economic thought. The paper delves into the early attempts that postulated the idea of money capital productivity, which subsequently led to the positioning of interest as an indispensable cost of capital in economic thought.
By examining the relevant literature on early economic thought, which was often intertwined with religious discourses, it seems that classifying loans based on their intended purpose of use is ill-founded from a theoretical standpoint. Notwithstanding, the concept was pragmatically applied by certain theologians and economists, who used it to advocate for the elimination of interest rate restrictions or to mitigate moral criticism against charging interest on consumption loans.
From a theoretical perspective, this study offers novel insights and observations regarding the evolution of interest rate theory. It posits a form of falsification in the justification of interest-bearing loans, asserting that these loans were predominantly productive rather than consumptive in nature. Practical implications may encompass, but are not limited to, critical insights regarding the actual presence of interest-bearing consumption loans with exploitative rates. Moreover, it seems plausible to incorporate the religiously derived legal identification of financial contracts into economic thought, particularly in the context of interest-bearing loans. This also may prompt revisions in the practices of contemporary microfinance and religious-based financial institutions, which are significantly impacted by the widespread relaxation of interest-bearing loans. Such revisions should address these institutions’ divergence from the legal identification of contracts doctrine, which ought to serve as their primary source of theorization and legitimacy. The research explores the classification of loans based on their intended purposes within primary economic schools, beginning with Mercantilism and culminating in Keynesian economics. The scope of this analysis is restricted to this particular timeframe because, following the Keynesian era, the practice of imposing interest on loans has become a standard economic convention.
This study adds to the existing literature on the theory of interest by revealing the ethical and religious discourse that accompanied the development of the concept of interest in early economic thought. It contends the idea that interest-bearing loans are solely an economic phenomenon, highlighting the fact that early attempts to justify such loans in economic essays were intertwined with various ethical and religious considerations. These considerations may have directed economic exegeses toward the adoption of loan classification according to the intended purpose of use to mitigate religious and ethical concerns.
