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An Alternative to Usury?
Despite the global dominance of the ‘Western’ finance values of usury, alternative methods, such as Sharia-compliant products, are gaining in popularity.
By Philip Evans
There can be no justice without good law – and the same is no less true of social justice. In the UK regulators play catch-up, trying to ensure the fairness of credit industry innovators. Across the developing world, countries continue to resent the imposition of ‘Western’ values, including our financial systems. Is there an argument, therefore, for looking whether to see the source of the troubles is not embedded in the foundation of our financial structures?
If that is a step too far for you, consider the growth of Sharia-compliant financial products around the world begs the question. The major distinction of Islamic finance is its prohibition of usury – the very practice that underpins the Western system.
What is Usury?
Usury is widely understood in the West as excessive interest on a loan. But this is a relatively modern concept created to defuse an ancient prejudice. Usury is actually any interest on a loan that is predetermined and not based on the actual profit and loss of the investment.
In the ancient world, there were two generally approved methods of lending money. If the loan was to relieve poverty, the lender was to expect nothing more than the return of the principal amount. The idea that the lender should be compensated for the period of the loan, when he or she could not use the money, or because the amount had less purchasing power when it was repaid, carried little weight. First, the loan was voluntary; second, it was a duty before whatever god you served to help your neighbour in need.
If the loan was for a business venture, the lender was to receive an agreed percentage of the actual profit made. If the business made £1m profit, the lender got the agreed percentage; the same percentage applied if the business only made £100. If the business made a loss, the lender lost his or her money in the same way as the burrower ‘lost’ his or her time and effort. This created a shared risk, closer to a traditional partnership than a modern banker-burrower relationship.
The greatest challenge to Islamic finance today is that neither of these models has much relevance to the modern concept of consumer credit. If a person has all his or her essential needs met and enjoys a reasonable standard of living, should it not be possible to ‘rent’ money for increased indulgence? After all, why should conspicuous consumptions be the privilege of the rich?
Usury Law through the Ages
Throughout history, various communities invented money independently but it was always as a means of exchange and never as a commodity. This is not to say that its purpose could not evolve.
In ancient Israel, the laws against usury were an attempt to prevent it but the testimonies of Israel’s prophets is evidence of failure! In the societies that permitted usury, it was regulated to limit its potential.
Usury was legalised in Europe because the original meaning of the word was lost in the centuries leading up to the 16th century Reformation. Growing commercialism forced a change of thought and change of terminology followed. Wealthy people were lending money at interest, knowing full well that it was regarded by the church and by society in general, as a sin.
Various ploys were used to disguise usury, including gratuitous transactions through foreign currencies and charges for contrived default. As both State and Church benefited, they tended to ignore usury – unless there was a heavy fine to extract from the usurer.
Henry VIII was the first European ruler to legislate to allow interest to be charged on a loan, but it was seen as legalising usury and repeatedly attacked until repealed. It was not until the Usury Act of 1571 that it finally began to lose its stigma. Highlighting the confusion of the times, or perhaps exploiting it, an MP said that there was no true definition of usury. When the Act Against Usury 1624 was passed, the new meaning was enshrined because it curbed excessive interest.
Religious alternatives
Usury is now so finely woven into the fabric of Western financial systems that the Islamic alternatives are seen as the oddities. In fact, we see the Muslim alternatives as ploys to circumvent an ancient prohibition they would do well to ignore. Indeed, this was one of the arguments put to Supreme Court of Pakistan as it considered its historic judgement on usury (‘riba’ in Arabic) in 1999. However, Islamic finance does not stand as a religious anomaly but an example of the sort of system many Western economists see as more robust than our usury based-one.
A personal note may be useful here. I first came to the issue from a theological angle. When I read modern translations of the Old Testament that have ‘excessive interest’ instead of ‘usury’, they simply did not make sense.
The 16th century theologian John Calvin, was a little closer to the truth than his contemporaries by defining usury as interest on a loan intended to relieve poverty. But even this did not quite add up. After all, whether usury was excessive interest or improper interest, what was the Hebrew word legitimate interest? There was not one, because the concept of equitable investment was something else entirely.
It was not until I began developing personal finance teaching materials for Muslims that I discovered the original meaning of usury had been retained within Islam. Here was a definition that made sense of the Old Testament passages.
In the 6th century, Jews, Christians, and Muslims shared a common understanding of usury. So, did the ancients have a lesson for us? I realise we cannot take civil laws from past agricultural communities and hope to apply them to modern industrial societies, but some prohibitions are common to all civilisations – murder and theft, for example. Is usury another?
Cato thought usury worst than theft and believed that while thieves should be fined twice what they stole, usurers should be fined twice as much again! But why? Was the objection more philosophical? Is it that trading in money fuels the sign of avarice – the unnatural desire of wealth and possessions that kill the soul, the real you? Or that it facilitates social evils such as peony? Or is it enough that trading money creates a ‘virtual’ economy that could undermine the real economy?
Was this the cause of Great Depression? Some thought so and recommended that money should no longer be traded as commodity. Today’s economies are not so vulnerable, but might a future generation find all they have to live on a virtual pension?
Is usury dangerous?
To begin to answer this we must consider why usury was considered dangerous, even in places where it was sanctioned.
In the ancient Jewish law, the bar on usury was integral in broad provisions for the poor and for the most vulnerable in that society – widows, orphans and strangers. While there are some laws in the Torah that defy understanding today, on the whole it was a progressive and compassionate system of legislation designed to protect people who could not protect themselves.
This has always been the purpose of laws to prohibit or control usury – and the Qur’an is another instance. Usury is the systematic transfer of wealth from poor to rich that breeds other social evils.
But now I come to crucial point. Does any of this really matter? If usury is unjust then it is a respectable injustice that we are well used to. Avarice spirals down into its own ruin. In business Gordon ‘Greed is Good’ Gekko lives and trades to the extent that ‘integrity’ is often reduced to little more than observable compliance with regulations. In personal finance education, I too often detect a subconscious belief that its purpose is to empower people to die rich.
Credit is the life-blood of consumerism but living on credit is living on tomorrow’s resources. While there will always be a tomorrow, already many people are trapped in a cycle of over indebtedness that is similar to peony. Globalism is sucking usury from developing countries including those with an Islamic heritage where it tastes particularly sour. While some many acquire the taste, as we have done in the West, it more readily fuels resentment and, at times, extremism.
Whether all this leads to the eventual collapse of our financial structure, or to transformation from within, remains to be seen. As does whether Islamic finance emerges as a viable alternative.
But the one comfort is that if usury is something to worry about, it is a bit like worrying about global warming in the 1960’s – something better left to a later generation. CCR
Philip Evans is a practitioner of holistic financial education
Email: philipevans@ndirect.co.uk
