Interest

Interest is the cost paid for borrowing funds or the return earned on deposited or invested capital. It represents compensation for the risk and opportunity cost of lending money. Interest rates are typically expressed as a percentage of the principal amount over a specified period.

There are two primary types:

• Simple Interest: Calculated solely on the principal amount.

• Compound Interest: Calculated on the principal and accumulated interest.

For businesses, interest expenses from loans and lines of credit directly affect profitability, while interest income from deposits and investments contributes to earnings.

In regions like the UAE, where the Central Bank sets benchmark rates and Islamic finance structures prohibit conventional interest (relying on profit-sharing instead), understanding interest mechanics is essential for financial management.