ABSTRACT
Islam prohibits institutions of interest, as the transactions in which any amount of interest is involved are completely invalid and prohibited. This chapter aims to investigate whether there is a significant relationship between interest and income inequality. While investigating this question, we argued that interest can affect income inequality by two main channels, namely real interest rate and bond yields. To test the abovementioned hypotheses, we used panel data consisting of 26 countries—which mostly comprised Central and Latin America countries and European countries—and 17 years ranging between 1998 and 2014. By using the Driscol-Kraay Standard Errors Method, we concluded that increases in both real interest rates and interest payments increases income inequality by increasing the Gini coefficient and transferring a proportional income from the bottom and middle-income groups—generally from the bottom 80%—to the top 20% and thus reducing social welfare, as this study reveals the exploitative nature of interest on the poor.
