Question: I want to ask you a question about interest. Actually I have an Indian friend, who gave me a simple example to justify interest: Suppose Ahmad borrows some money from Ali and promises that he will refund it within a month, but fails to do that. Because of Ahmad’s failure to return t on time, Ali charges 10% as interest! Would this be unfair? If it is unfair to Ahmad that interest be charged, then wouldn’t it be unfair to Ali also that interest not be charged because he waited more than their decided time period. So, we can say that this 10% is a reward for Ali’s patience, and if he were able to obtain his money from Ahmad on time, he could have completed many of his urgent tasks by his money. Now, I am unable to refute this justification. Can you help me in the points raised by my friend? 

   Answer: I am afraid the example given by your friend is not analogous with interest-based transactions. Interest deals do not work the way this example describes. 
    In the example, the borrower is in default by virtue of his non-payment at the appointed time. Therefore, a penalty cannot be objected to if it is agreed upon by both the parties beforehand. However, in all interest deals, the borrower is liable to the penalty (ie the interest amount) even if he returns his money on the appointed time. For example, if I borrow Rs 5000 from you and return it to you within the stipulated period, I will still be required to pay an extra amount to you. So, you see, this is different from the example your friend has given.