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In finance and economics, interest is the payment of an amount over the principal sum (that is, the amount borrowed) to a lender or depositor at a set rate by a borrower or deposit-taking financial institution. It is not to be confused with a fee that the borrower may pay to the lender or a third party. It differs from a dividend given by a business to its shareholders (owners) from its profit or reserve, but not at a fixed rate, but on a pro-rata basis as a portion of the reward received by risk-taking entrepreneurs when revenue exceeds total expenditures.

For example, a client may pay interest on a loan from a bank, resulting in repayment to the bank that is greater than the loan amount; or a customer may receive interest on their savings, allowing them to take more than they initially placed. When it comes to savings, the consumer is the lender, while the bank is the borrower.

Interest is different from profit in that interest is paid to the lender, whereas profit is paid to the asset, investment, or business owner. (While interest may be a portion of the entire gain on an investment, the two notions are separate from one another in accounting terms.)

The interest rate is calculated by dividing the amount of interest paid or received over a certain period by the principal sum borrowed or lent (usually expressed as a percentage).

Interest is earned on past interest in addition to the principle in compound interest. The total amount of debt increases exponentially due to compounding, and its mathematical research led to the discovery of the number. Interest is most commonly computed daily, monthly, or annual in practice, and the compounding rate has a significant impact on its impact.

According to historian Paul Johnson, the loan of “food money” was prevalent in Middle Eastern cultures as early as 5000 BC. Interest was justified by the premise that acquired crops and animals could reproduce themselves, while ancient Jewish religious laws against usury (NeSheKh) indicated a “different view.”

Compound interest was first documented in writing about 2400 BC. The yearly interest rate was around 20%. Compound interest was required for agricultural growth and was critical for urbanization.

While conventional Middle Eastern attitudes on interest were shaped by the urbanized, economically sophisticated cultures that created them, the new Jewish interest prohibition reflected a pastoral, tribal impact. The Laws of Eshnunna imposed a legal interest rate on dowry deposits in the early 2nd millennium BC because silver used in payment for animals or food could not increase independently. This was referred to as riba by early Muslims, which means “interest charging.”

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