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A
Short Review of the Historical Critique of Usury
Wayne A.M. Visser and Alastair McIntosh
Centre
for Human Ecology
First published in Accounting,
Business & Financial History, 8:2, Routledge, London, July 1998, pp.
175-189. See www.AlastairMcIntosh.com
for more material like this.
Wayne A.M. Visser is the Manager of the Environmental
Consulting Unit in KPMG's South African Office and a Fellow of Edinburgh's
Centre for Human Ecology.
Alastair McIntosh is a Fellow of Edinburgh's Centre for
Human Ecology.
Abstract
Usury - lending at interest or
excessive interest - has, according to known records, been practiced in various
parts of the world for at least four thousand years.During this time, there is
substantial evidence of intense criticism by various traditions, institutions
and social reformers on moral, ethical, religious and legal grounds.The
rationale employed by these wide-ranging critics have included arguments about
work ethic, social justice, economic instability, ecological destruction and
inter-generational equity.While the contemporary relevance of these largely
historical debates are not analysed in detail, the authors contend that their
significance is greater than ever before in the context of the modern
interest-based global economy.
Keywords: usury, interest, debt, discounting,
Islamic banking
INTRODUCTION
The concept of
"usury" has a long historical life, throughout most of which it has
been understood to refer to the practice
of charging financial interest in excess of the principle amount of a loan,
although in some instances and more especially in more recent times, it has
been interpreted as interest above the
legal or socially acceptable rate[1][1].Accepting this broad definition for the
moment, the practice of usury can be traced back approximately four thousand
years (Jain, 1929), and during its subsequent history it has been repeatedly
condemned, prohibited, scorned and restricted, mainly on moral, ethical, religious
and legal grounds.Among its most visible and vocal critics have been the
religious institutions of Hinduism, Buddhism, Judaism, Islam and
Christianity.To this list may be added ancient Western philosophers and
politicians, as well as various modern socio-economic reformers.It is the
objective of this paper to outline briefly the history of this critique of
usury, to examine reasons for its repeated denouncement and, finally, to
intuitively assess the relevance of these arguments to today's predominantly
interest-based global economy.The scope will not extend to a full exploration
of some of the proposed modern alternatives to usury, except to describe the
growing practice of Islamic banking as an example.
HISTORY
OF THE CRITIQUE OF USURY
Usury
in Hinduism and Buddhism
Among the oldest
known references to usury are to be found in ancient Indian religious
manuscripts and Jain (1929) provides an excellent summary of these in his work
on Indigenous Banking in India.The
earliest such record derives from the Vedic
texts of Ancient India (2,000-1,400 BC) in which the "usurer" (kusidin) is mentioned several times and
interpreted as any lender at interest.More frequent and detailed references to
interest payment are to be found in the later Sutra texts (700-100 BC), as well as the Buddhist Jatakas (600-400 BC).It is during this
latter period that the first sentiments of contempt for usury are exressed.For
example, Vasishtha, a well known Hindu law-maker of that time, made a special
law which forbade the higher castes of Brahmanas
(priests) and Kshatriyas (warriors)
from being usurers or lenders at interest.Also, in the Jatakas, usury is referred to in a demeaning manner:
"hypocritical ascetics are accused of practising it".
By the second
century AD, however, usury had become a more relative term, as is implied in
the Laws of Manu of that
time:"Stipulated interest beyond the legal rate being against (the law),
cannot be recovered:they call that a usurious way (of lending)" (Jain,
1929: 3-10).This dilution of the concept of usury seems to have continued
through the remaining course of Indian history so that today, while it is still
condemned in principle, usury refers only to interest charged above the
prevailing socially accepted range and is no longer prohibited or controlled in
any significant way.
Usury
in Ancient Western Political Philosophy
Among the Ancient
Western philosophers who condemned usury can be named Plato, Aristotle, the two
Catos, Cicero, Seneca and Plutarch (Birnie, 1958).Evidence that these
sentiments found their concurrent manifestation in the civil law of that period
can be seen, for example, from the Lex
Genucia reforms in Republican Rome (340 BC) which outlawed interest
altogether.Nevertheless, in practice, ways of evading such legislation were
found and by the last period of the Republic, usury was once again rife.It was
the Democratic party in Rome who rededicated themselves to the cause of those
suffering the burden of debt, and under the banner of Julius Caesar, a ceiling
on interest rates of 12% was set, and later under Justinian, lowered even
further to between 4% and 8% (Birnie, 1958).Clearly, this left fertile ground
for the assault on usury which the Church would mount following its
Christianisation of the Roman Empire.
Usury
in Islam
The criticism of
usury in Islam was well established during the Prophet Mohammed's life and
reinforced by various of his teachings in the Holy Quran[2][2]dating back to around 600 AD.The original
word used for usury in this text was riba
which literally means "excess or addition".This was accepted to refer
directly to interest on loans so that, according to Islamic economists
Choudhury and Malik (1992), by the time of Caliph Ulmar, the prohibition of
interest was a well established working principle integrated into the Islamic
economic system.It is not true that this interpretation of usury has been
universally accepted or applied in the Islamic world.Indeed, a school of
Islamic thought which emerged in the 19th Century, led by Sir Sayyed, still
argues for a interpretative differentiation between usury, which it is claimed
refers to consumptional lending, and interest which they say refers to lending
for commercial investment (Ahmed, 1958).Nevertheless, there does seem to be
evidence in modern times for what Choudhury and Malik describe as "a
gradual evolution of the institutions of interest-free financial enterprises
across the world" (1992: 104).They cite, for instance, the current
existence of financial institutions in Iran, Pakistan and Saudi Arabia, the
Dar-al-Mal-al-Islami in Geneva and Islamic trust companies in North
America.This growing practice of Islamic banking will be discussed more fully
in a later section as a modern application of usury prohibition.
Usury
in Judaism
Criticism of usury
in Judaism has its roots in several Biblical passages in which the taking of
interest is either forbidden, discouraged or scorned[3][3].The Hebrew word for interest is neshekh, literally meaning "a
bite" and is believed to refer to the exaction of interest from the point
of view of the debtor.In the associated Exodus and Leviticus texts, the word
almost certainly applies only to lending to the poor and destitute, while in
Deuteronomy, the prohibition is extended to include all moneylending, excluding
only business dealings with foreigners.In the levitical text, the words tarbit or marbit are also used to refer to the recovery of interest by the
creditor.
In addition to
these biblical roots are various talmudic extensions of the prohibitions of
interest, known as avak ribbit,
literally "the dust of interest" which apply, for example, to certain
types of sales, rent and work contracts.This is distinguished from rubbit kezuzah, interest proper in an
amount or at a rate agreed upon between lender and borrower.The difference in
law is that the latter, if it has been paid by the borrower to the the lender,
is recoverable from the lender, while the former, once paid, is not
recoverable, although a contract tainted by the dust of interest will not be
enforced.(The Jewish Encyclopedia, 1912).
Despite the
prohibition on taking interest, there is considerable evidence to suggest that
this rule was not widely observed in biblical times.In addition to several
references in the Old Testament to creditors being exacting and implacable in
their extraction of interest[4][4], from the Elephantine papyri it appears
that among the Jews in Egypt in the fifth century B.C.E. it was a matter of
course that interest would be charged on loans (Encyclodpedia Judaica, 1971).This
charitable nature of the prohibition on interest suggests that its violation
was not regarded as a criminal offense with penal sanctions attatched, but
rather as a moral transgression.
The phenomenon of
evasion can also be partly explained by changing economic conditions, beginning
in the amoraic period in Bayolonia when interest prohibition was held to no
longer be compatible with the eocnomic needs of the community.In time, a
standard form of legalization of interest was established, known as hetter iskah, meaning the permission to
form a partnership, which has become so accepted that nowadays all interest
transactions are freely carried out in accordance with Jewish law, by simply
adding to the note or contract concerned the words al-pi hetter iskah. (Encyclodpedia Judaica, 1971).
Usury
in Christianity
Despite its Judaic
roots, the critique of usury was most ferverently taken up as a cause by the
institutions of the Christian Church where the debate prevailed with great
intensity for well over a thousand years[5][5].The Old Testament decrees were resurrected
and a New Testament reference to usury added to fuel the case[6][6]. Building on the authority of these texts,
the Roman Catholic Church had by the fourth century AD prohibited the taking of
interest by the clergy; a rule which they extended in the fifth century to the
laity.In the eighth century under Charlemagne, they pressed further and
declared usury to be a general criminal offence.This anti-usury movement
continued to gain momentum during the early Middle Ages and perhaps reached its
zenith in 1311 when Pope Clement V made the ban on usury absolute and declared
all secular legislation in its favour, null and void (Birnie, 1952).
Increasingly
thereafter, and despite numerous subsequent prohibitions by Popes and civil
legislators, loopholes in the law and contradictions in the Church's arguments
were found and along with the growing tide of commercialisation, the pro-usury
counter-movement began to grow.The rise of Protestantism and its pro-capitalism
influence is also associated with this change (McGrath, 1990), but it should be
noted that both Luther and Calvin expressed some reservations about the
practice of usury despite their belief that it could not be universally
condemned.Calvin, for instance, enumerated seven crucial instances in which
interest remained "sinful", but these have been generally ignored and
his stance taken as a wholesale sanctioning of interest(Birnie, 1952).As a
result of all these influences, sometime around 1620, according to theologian
Ruston, "usury passed from being an offence against public morality which
a Christian government was expected to suppress to being a matter of private
conscience [and] a new generation of Christian moralists redefined usury as excessive
interest" (1993: 173-4).
This position has
remained pervasive through to present-day thinking in the Church, as the
indicative views of the Church of Scotland (1988) suggest when it declares in
its study report on the ethics of investment and banking:"We accept that
the practice of charging interest for business and personal loans is not, in
itself, incompatible with Christian ethics.What is more difficult to determine
is whether the interest rate charged is fair or excessive."Similarly, it
is illustrative that, in contrast to the clear moral injunction against usury
still expressed by the Church in Pope Leo XIII's 1891 Rerum Novarum as "voracious usury ... an evil condemned
frequently by the Church but nevertheless still practised in deceptive ways by
avaricious men", Pope John Paul II's 1989 Sollicitude Rei Socialis lacks any explicit mention of usury except
the vaguest implication by way of acknowledging the Third World Debt crisis.
Usury
in Modern Reformist Thinking
Some may be
surprised to discover that Adam Smith, despite his image as the "Father of
the Free-market Capitalism" and his general advocacy of laissez-fair
economics, came out strongly in support of controlling usury (Jadlow, 1977;
Levy, 1987).While he opposed a complete prohibition of interest, he was in
favour of the imposition of an interest rate ceiling.This, he felt, would
ensure that low-risk borrowers who were likely to undertake socially beneficial
investments were not deprived of funds as a result of "the greater part of
the money which was to be lent [being] lent to prodigals and projectors
[investors in risky, speculative ventures], who alone would be willing to give
[an unregulated] high interest rate" (Smith, 1937: 339).
The great twentieth
century economist John Maynard Keynes held a similar position believingthat
"the disquisitions of the schoolmen [on usury] were directed towards
elucidation of a formula which should allow the schedule of the marginal
efficiency to be high, whilst using rule and custom and the moral law to keep
down the rate of interest, so that a wise Government is concerned to curb it by
statute and custom and even by invoking the sanctions of the Moral Law"
(1936: 351-3).
Another less well
known anti-usury economic reformist was Silvio Gesell (1904), yetKeynes wrote
that the world could learn more from him than from Marx.Gesell, as a successful
nineteenth century merchant in Germany and Argentina, condemned interest on the
basis that his sales were more often related to the 'price' of money (i.e.
interest) than people's needs or the quality of his products.His proposal of
making money a public service subject to a use fee led to widespread
experimentation in Austria, France, Germany, Spain Switzerland, and the United
States under the banner of the so-called "stamp script movement", but
these initiatives were all squashed when their success began to threaten the
national banking monopolies (Kennedy, 1995).Margrit Kennedy (1995), a German
professor at the University of Hannover, is one of the most vocal contemporary
critics of interest who builds on Gesell's ideas, believing that "interest
... acts like cancer in our social structure".She takes up the cause for
"interest and inflation-free money" by suggesting a modification of
banking practice to incorporate a circulation fee on money, acting somewhat
like a negative interest rate mechanism.
Finally, another
school of modern interest critics have their roots in the complementary work of
several socio-economic reformists of the early twentieth century, namely
Douglas (1924), Fisher (1935), Simons (1948) and Soddy (1926).Their chief
common premise was that it is completely wrong and unacceptable for commercial
banks to hold a monopoly on the money or credit creation process.For banks to
then charge interest (including to government) on money which they had in the
first place created out of nothing, having suffered no opportunity cost or
sacrifice, amounted to nothing less than immoral and fraudulent
practice.Various alternative systems are proposed by the original authors and
carried forward by their modern-day torch-bearers, for example, the Social
Credit Secretariat and the Committee on
Monetary and Economic Reform.
RATIONALE
FOR THE CRITIQUE OF USURY
Throughout the
history of the criticism of usury, various reasons and rationale have been
forwarded in support of this position.While some are unique to particular
traditions or individuals, many tread on common ground which this section will
briefly attempt to synthesise.
Usury
as Unearned Income
The Church's
simplest and perhaps earliest objection to usury was on the basis that it
constituted unearned income, an idea which stemmed from its general doctrine of
Just Price.The Lateran Council of 1515 clearly expressed such a view of the
Church:"This is the proper interpretation of usury when gain is sought to
be acquired from the use of a thing, not in itself fruitful (such as a flock or
a field) without labour, expense or risk on the part of the lender."Birnie
reinforces this point by noting that "to live without labour was denounced
as unnatural, and so Dante put usurers in the same circle of hell as the
inhabitants of Sodom and other practisers of unnatural vice" (1952: 4).
This is also the
rationale Ahmad uses to explain why in Islam God[7][7]"permits trade yet forbids
usury":"The difference is that profits are the result ofinitiative,
enterprise and efficiency.They result after a definite value-creating
process.Not so with interest";also "interest is fixed, profit
fluctuates.In the case of interest you know your return and can be sure of
it.In the case of profit you have to work to ensure it" (1958: 25).Perhaps
Aristotle had similar sentiments in mind when he argued that "a piece of
money cannot beget another".
There is an
important psycho-political dimension to this argument.Keynes' biographer,
Skidelsky, intriguingly comments that "Keynes's sense that, at some level
too deep to be captured by mathematics, 'love of money' as an end, not a means,
is at the root of the world's economic problem" (1992: 454).Hence, at a
fundamental level of analysis, the so-called evils of usury must be understood
as being connected with money being a social psychological construct
legitimised by the power dynamics of a given political economy which may or may
not be democratically and consciously legitimatised.An illustration of this
understanding can be seen in the Christian tradition where Jesus is asked
whether taxes should be paid to Caesar.Before uttering the famous words,
"Render unto Caesar what is Caesar's," he tellingly first asks to be
shown a coin and inquires, "Whose image and superscription hath it? (Luke
20:24)".In other words, "What power structure legitimises this
currency?"Jesus's response therefore said much more than merely "pay
your taxes."It invited questioning of the very psycho-spiritual power
dynamics that constitute the deep roots of human relationship in economy, and
which have always caused matters of political economy to be central to prophetic
witness.
Usury is what marks
the distinction between money being simply a socially contracted abstract
mechanism to lubricate between supply and demand, and money as an end in
itself.As an end in itself, as a social commodity legitimised through usury to tax
other economic activity, the honest process of living by the sweat of one's
brow is short-circuited.The true dignity and full reward of ordinary labour is
compromised.Money thus becomes self-perpetuating power in itself rather than
just a mediating agent of power.And it is the relentlessness of compound
interest in the face of adversity that sets the potential cruelty of usury
apart from equity-based return on investment. Resonant with Skidelsky's comment
about Keynes, one can see how it is the love of money as an end in itself, not
the use of money itself, that is said to be the root of all evil (1 Timothy
6).It was in recognition of the the need to have corrective feedback mechanisms
that Islam not only injuncts usury, but also imposes Zakat or wealth tax. And
more radical still, the Old Testament proposes a complete economic readjustment
through the "Jubilee" process every fifty years (Leviticus 25),
though there is no evidence that such wholescale redistribution of wealth in
all forms was ever actually carried out.Perhaps it is a prophetic vision whose
time has yet to come.
Usury
as Double Billing
A slightly more
obscure rationale was employed by the Church later in the Middle Ages in order
to strengthen its anti-usury doctrine.Drawing on some of the concepts of Civil
Law, it argued that money was a consumable good (fungible), for which the ownership passed from lender to borrower
in the course ofthe loan transaction (mutuum),
with the fair price of 'sale' therefore being the exact amount of the money
advanced.Hence to ask for more in the form of interest was illegal and immoral,
"like selling a loaf of bread and then charging in addition for the use of
it" (Birnie, 1952: 6).Or, as Aquinas intimated in his Summa Theologiae, it would be to sell the same thing twice (Ruston,
1993).
Usury
as Exploitation of the Needy
The condemnation of
usury in the form of charging for loans to the poor and destitute is a
recurring theme in several traditions.This is clearly the contextual meaning of
the Judaic biblical passages in Exodus and Leviticus (Encyclopedia Judaica,
1971) and Ruston suggests that "the original target of the medieval usury
laws was the medieval equivalent ofthe 'loan shark' [but that] the medieval
theory was unsatisfactory because it could not distinguish the helpfulloan from
the oppressive" (1993: 173).Sir Sayyed's school in Islam similarly
interprets riba as "the
primitive form of money-lending when money was advanced for consumptional
purposes" (Ahmed, 1958: 21).In the Indian tradition, this understanding of
usury can be also found, as is evident from this twentieth century
quote:"It is Usury - the rankest, most extortionate, most merciless Usury
- which eats the marrow out of the bones of the raiyat [cultivators] and condemns him to a life of penury and
slavery" (Jain, 1929: 110-111).
Ruston (1993)
claims usury as exploitation ofthe needy still exists in modern times.He cites
as an example the findings of a 1992 Policy Studies Institute report which
concludes that the poor pay more in absolute terms for their money, while
seeking credit only for absolute necessities rather than to finance the
acquisition of luxury goods which they cannot afford.This is borne out by a
recent study by the NationalConsumer Council (1995) on financial services and
low income consumers; as one respondent put it: "It's like being caught,
gotcha, and then they [the banks/lenders] start winding you in".Hence, the
poor have to sweat doubly so that the rich might live on interest.
A parallel modern
argument relates to the devastating social impact of the so-called "Third
World debt crisis", a situation which even Pope John Paul II (1989)
acknowledges in his Sollicitude Rei
Socialis when he states:"Capital needed by the debtor nations to
improve their standard of living now has to be used for interest payments on
their debts".This critical modern manifestation of usury is dealt with in
more depth and detail in the comprehensive works of Susan George,A Fate Worst Than Debt (1988) and The Debt Boomerang (1992), among
numerous others.For now, it is only worth pointing out to critics of the
Islamic interest-free banking system that if sovereign debt during the 1970's
had been advanced on an equity investment basis, debtor countries would not
have been caught on the rack of compounding interest at rates established by
non-domestic macroeconomic factors.Servicing costs could not have burgeoned
whilst at the same time most commodity prices paid to debtor nations
collapsed.Return on capital and perhaps capital repayment itself, being
commensurate with a nation's economic wellbeing, would have fluctuated in
accordance with ability to pay.The debtor nations would therefore have enjoyed
fiscal security akin to that of a low geared company. Of course, the fact that
much sovereign debt comprised recycled dollars from oil producing Moslem
countries is an irony, and a disgrace, that should escape notice no more than
eyes should be averted to the hypocricy of usury-promoting countries such as
Britain and the United States whose leaders often proclaim Christian values.Be
that as it may, by applying the Islamic approach, a lot of human misery could
have been avoided.Applying the same principle, this could be the case for the
countless individuals and enterprises caught in the trap of impoverishment
through non-sovereign debt.
Usury
as a Mechanism of Inequitable Redistribution of Wealth
The observation
that usury acts as a mechanism by which 'the rich get richer and the poor get
poorer' is common to several traditions.Islam rejects financial interest on the
basis that it contradicts the Principle of Distributive Equity which its
political economy strives to enshrine:"Interest in any amount acts in
transferring wealth from the assetless section of the population"
(Choudhury and Malik, 1992: 51).Coming from a totally different perspective as
a self declared 'individualist', Birnie reaches a similar
conclusion:"Interest, by making capital a quasi-monopoly, effectually
prevents the establishment of a true competitive system" (1958: 1).Kennedy
(1992) provides some excellent empirical evidence of this phenomenon which
relates to Germany in 1982.She shows that, while the poorest 2.5 million
households paid out (net) DM 1.8 billion in interest, the richest 2.5 million
households received (net) DM 34.2 billion.She even goes on to suggest that this
covert redistributive mechanism technically works against the constitutional
rights of the individual in most countries given that money is a government service
to which the public should have equal access.
The psychological
effect of this on the relatively poor can be seen to be magnified when merely
quantitative evaluation of transfers from poor to richis superceded by
consideration of the qualitative cost of such a wealth transfer.For the
relatively rich, the utility gain provided by usury is marginal to the already
substantial utility of the principal sum.The principle of the diminishing
marginal utility of wealth therefore applies to each incremental unit of wealth
procured by interest earnings.The poor, however, experience the converse of
this.For them, the loss in utility incurred by having to pay interest is
qualitatively much greater than the gain to the rich.Each unit of interest paid
incurs increasing marginal utility loss.Permitting usury to operate in an
economy therefore reduces overall utility in the economy.This must count as one
of the strongest arguments against usury.Any justification of it as an
efficient economic instrument would have to first demonstrate that it functions
to increase total utility.In the absence of such demonstration, it can
justifiably be condemned as a tool of tyranny.
Usury
as an Agent of Economic Instability
Gesell's (1904)
main objection to interest is that it is an endemic factor in the instability
of interest-based economies, i.e. the cycles of boom and bust, recession and
recovery.Similarly, Ahmad, arguing from an Islamic perspective, claims
"the greatest problem in the capitalist economy is that of the crises
[and] interest plays a peculiar part in bringing about the crises" (1958:
36).Even Keynes, the campaigner for interest-based monetary policy, admits the
fact that "the rate of interest is not self-adjusting at the level best
suited to the social advantage but constantly tends to rise too high"
(1936: 350).Kennedy (1995) is bolder, suggesting that the compounded growth of
interest may in fact cause inflation.She shows, for instance, how in Germany,
while government income, Gross National Product and the salaries and wages of
the average income earner rose by about 400% between 1968 and 1989, the
interest payments of the government rose by 1,360% which she claims implies an
inflationary effect.
Usury
as Discounting the Future
The last reason
cited for condemning usury relates to the concept and practice of discounting
future values.Because compound interest results in an appreciation in invested
monetary capital, it is presumed rational for people to prefer having a
specified amount of currency now than the same amount some time in the
future.This simple and rarely questioned logic has several disastrous
implications.For instance, Pearce and Turner (1990) note that discounting
affects the rate at which we use up natural resources - the higher the discount
rate (derived partly from the interest rate), the faster the resources are
likely to be depleted.Daly and Cobb (1990) take this observation to its logical
conclusion and show that discounting can lead to the "economically
rational" extinction of a species, simply if the prevailing interest rate
happens to be greater than the reproduction rate of the exploited
species.Another consequence of the discounting principle, argued by Kula, is
that "in evaluating long term investment projects, particularly those in
which the benefits and costs are separated from each other with a long time
interval, the net present value rules guide the decision maker to maximise the
utility of present generations at the expense of future ones" (1981: 899).
In this context it
is fitting to observe that a key feature that distinguishes financial economy
from nature's economy is that the one operates on a compound interest basis,
whereas the other is based on simple interest.Money deposited in the bank may
yield 10% plus interest on the compounded sum next year, but in nature, if you
leave this year's crop of apples on the tree, you are unlikely to pick a
compoundedly heavier crop next year!Accordingly, usury permits a disjunction between
financial and ecological economy.The result is either the progressive
destruction of nature, or in the absence of redistributive social justice, an
inbuilt necessity for periodic financial crashes throughout history.The point
is well made by the illustration that if Judas Iscariot had invested his thirty
pieces of silver at just a few percentage points compound, repayable in silver
as of today, the amount of silver required would be equivalent to the weight of
the Earth.
The implicit
ethics, or dearth thereof, of discounting can be used to illustrate clearly why
usury corrupts the natural world as well as social relations.For instance,
consider the impact of net present value discounted cash flow methodolgy in
appraising the trade-off between natural and human made capital which, over the
fullness of time, can usually be justified only if the utility of future
generations is discounted (McIntosh, 1996).This violates intergenerational
equity - a key principle of sustainable development recognised by both the 1987
Brundtland Commission and the 1992 Rio Earth Summit of the United Nations.It
also violates an age old percept of right livelihood which flies in the face of
the presumption of time value of money on which interest rates are based: that
is, it violates the presumption of many traditional land users that the land
should be handed on to the next generation in at least as good heart as it was
inherited from the forebears.Discounting, as the counterpoint of usury, can be
thus exposed as rueful device employed to justify theft of the children's
future.Exploration of the theoretical basis and practical illustrations of this
argument perhaps provides much scope for future micro and macroeconomic
research in ecological economics.
A
MODERN APPLICATION OF USURY PROHIBITION
Islamic
Banking
A previous section
on Islamic prohibition of usury made mention of the rejection by Islam of
financial interest or riba, largely
on the grounds of its negative distributive justice and equity effects (Khan,
1986).Out of this prohibition has developed perhaps the most sophisticated and
complete theoretical systems of interest-free political economy in the world
(Chouhury & Malik, 1992).
The specific
methods for implementing Islamic banking have centred around financial equity
based approaches, most notably Mudarabah
- a joint venture between the bank and a 'partner' with both contributing to
the capital of the project and sharing the profit or loss - and Musharakah - in which all the capital
for an investment is provided by the bank in return for a predetermined share
of the profit or loss of the business undertaking (Kahn & Mirakhor, 1986).
The first modern
Islamic bank was established in the 1960s in Egypt (The Banker, 1989) and in
the ensuing three decades, Islamic banking has grown into an industry with $80
billion in deposits and 100 banks and finance houses (Khalaf, 1995).Much of
this growth has been as a result of the comprehensive attempts by Iran,
Pakistan and Sudan over past 10 years to restructure their national banking
systems to bring them into accordance with Islamic law of the Shari'ah (Aftab, 1986; The Economist, 1992a).In addition,
increasing numbers of banks outside these countries, including in Western
countries, have begun to offer parallel Islamic banking services (O'Brien &
Palmer, 1993).As recently as 1996, the UK joined these latter ranks, with
Flemmings Merchant Bank (1996) offering the first Islamic banking service, the
Oasis Fund, to British customers.
The claimed
advantages of the Islamic banking approach to finance are that it results in:
more just and equitable distribution of resources; more responsible and
profitable lending due to the necessarily closer bank-client relationship; less
volatile business cycles; and more stable banking systems (Taylor & Evans,
1987); as well as "the relative efficiency of the interest-free money
system over the alternative interest-based system" (Darrat, 1988).On the
other hand, the Islamic banking industry has been criticised on a number of counts
too: for its lack of uniformity and standardisation of products, accounting
systems and endorsements by different sharia
boards (Khalaf op.cit); various
bad-debt complications (Shreeve, 1988); the information-gathering burden on
potential consumers and banks themselves to ensure the security and
profitability of their funds, as well the lack of an interest-rate mechanism to
use as a macro-economic tool (The
Economist, 1992b).However, these limitations must be viewed against the
backdrop of Islamic banking as a young and innovative growth market.
CONCLUSION
The preceding paper has attempted
to briefly describe the extensive history of the critique of usury, and to
crystallise and synthesise the main tenants of the arguments used in support of
this position.The fact that we live in a global economic system which is more
usurious/interest-based than ever before begs the question, therefore: Are any
of these criticisms of the past either serious and convincing enough or
currently relevant enough to merit a legitimate challenge to the status quo?In
the authors' opinon, every one of the reasons cited in the critique of usury,
perhaps with the exception of "double billing",seems more pressing
and relevant now than ever.In particular, it is the belief of the authors' that
individuals or organisations in the West with money to invest, especially those
which like to consider themselves as being ethical, might have rather more to
learn from Islam than is generally acknowledged.But first, society needs to be
re-conscientised to the relevance of the age-old usury debate in modern times.
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