Interest rate is the amount charged by a lender to a borrower for the use of money or credit. It is usually expressed as a percentage of the amount borrowed or lent, and can be fixed or variable. Interest rates can be applied to a variety of financial products, including loans, mortgages, credit cards, and savings accounts.
In general, interest rates are influenced by factors such as inflation, economic growth, and the actions of central banks. When inflation is high, interest rates tend to be high as well, as lenders require compensation for the reduced purchasing power of money over time. Similarly, when economic growth is strong, interest rates may rise as demand for credit increases.
Central banks also play a role in setting interest rates, as they can adjust short-term interest rates to influence the broader economy. For example, the US Federal Reserve sets the federal funds rate, which is the rate at which banks lend to each other overnight, and this in turn affects other interest rates throughout the economy.
Islamic banks follow the principles of Islamic finance which prohibits charging or paying interest, also known as riba. Instead, they use a profit-and-loss sharing system based on ethical and moral values to generate returns for their investors. This means that Islamic banks do not charge interest to Muslims or non-Muslims who use their services, but rather share profits or losses based on the terms of their contracts.