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Question:
What is the difference between interest
and rent. Why can’t the amount demanded for a loan given be classified as
rent? After all you are using the money the way you use an item rented out to
you.
Answer:
If the nature of the transaction is such that the asset
given for a period of time is to be ‘used’ by the receiver, but, by the
nature of the transaction, cannot be ‘used up’ by him, the predetermined
gain would be categorized as rent not interest.
Consider the hypothetical situation where Mr A leases
out his house to Mr B for one year at a rent of Rs. 5000 per mensem. In the
third month, Mr B is unable to pay the rent, and, in accordance with the terms
of his contract, he has to vacate the premises. To do this, he does not have
to ‘re-create’ the building as the nature of the whole arrangement was
such that he could not ‘use up’ the property.
On the other hand, Mr A gives a sack of wheat to Mr C
for a certain time period, during which Mr C has to pay Rs. 50 every week to
Mr A over and above the value of wheat. Now, in the second week Mr C is unable
to pay Rs. 50. In this case, he might have to ‘re-create’ the sack of
wheat to return the loan as he might have consumed it, or ‘used it up’.
To use accounting terminology, one might say that interest
is charged on circulating capital whereas Rent on fixed capital.
It is also important to note that it is the nature of
the transaction, not the nature of the commodity, which determines whether the
capital is circulating or fixed, that is whether it can or cannot be ‘used
up’. For example, a machine hired to produce goods may be categorized as
fixed capital as, by the nature of the transaction, it cannot be ‘used
up’, whereas the same equipment borrowed as stock-in-trade for sale by a
fellow trader may be categorized as circulating capital as, by the nature of
the transaction, it may be ‘used up’ to generate revenue.
Consequently, one can say that in case of an interest
bearing transaction:
i)
there is a gain at a predetermined rate on the loan, and
ii)
the nature of the transaction is such that the commodity borrowed can be
‘used up’ to generate revenue.
It
is needles to say that money is a commodity which, by its nature, involves
transactions in which the loaned capital sum may be ‘used up’ by the
borrower. Therefore, whenever money is lent, any gain at a predetermined rate
on the principal is interest.
(Asif Iftikhar) |