Trish Morrow Islamic Economics

E9846 ASSIGNMENT 3

19/02/99 This assignment has been printed on 100% recycled paper 1

IS IT ETHICAL TO CHARGE/PAY INTEREST ON LOANS AND SAVINGS?

Islamic Economics, Usury & the Ethics of Sustainable Development

DOCUMENT INFORMATION

Student’s Name: Patricia Morrow Student Number: 110178-848 Course: Postgraduate Diploma in Environmental Management - Cleaner Production Technology Subject: Theoretical Foundations of Sustainable Development Lecturer: Professor Tor Hundloe Date: 19 February, 1999

Is it ethical to charge/pay interest on loans and savings? Patricia Morrow


Figure 1: Our economic system (based on interest) claims to be amoral, and this is usually only questioned by philosophers and religious zealots. (Source: Action for World Development 1993)

ABSTRACT

In this paper, the question of whether it is ethical to pay interest on savings and charge interest on loans is considered. While interest is generally taken for granted as an essential part of our modern economic system, until the seventeenth century usury was widely condemned by philosophers and Christian theologians, and it continues to be condemned today by the majority of Islamic theologians. In the light of today’s ecological crisis, partly fuelled by debt and poverty in the third world, the ethics of interest and usury needs to be reconsidered. The question of usury is examined here from a number of different philosophical frameworks, from the ancients such as Aristotle to the more modern philosophers such as Bill Mollison. Practical means of implementing interest-free banking and investment are discussed. It is concluded that usury is not ethical and never has been, and that our economic system urgently needs to be reformed. The reform of our economic system would make a significant contribution to intragenerational equity, an important component of sustainable development.



TABLE OF CONTENTS

Abstract Page 1.0 Introduction 1 2.0 Definition of Usury 1 3.0 Discussion of the ethics of usury from the viewpoint of different philosophical frameworks. 3 3.1 Islam 10 3.2 Christianity 13 4.0 A critique of usury froma modern philosophical framework 19 5.0 The practical implementation of usury-free financial systems 27 6.0 Conclusions and Recommendations 28 7.0 Bibliography 30 7.1 Internet References 30



1.0 INTRODUCTION The question of whether usury is ethical is not often considered in today’s western society, where the payment of interest on loans is accepted unquestioningly as a necessary part of our modern financial system. However, the practice of usury is not inevitable - a number of banks in Islamic states are functioning successfully without charging interest on loans. Indeed the payment of interest may not even be desirable. It is a contributing factor to increasing stratification of our western societies, and the enormous third world debt which causes unnecessary hardship, suffering and premature death for millions of people. Ecologically sustainable development implies not only conservation of diverse ecosystems, it also implies intragenerational equity. If sustainable development is to be achieved, it is necessary to re-examine our economic practices from an ethical viewpoint. Our economic systems are not “value-free” or amoral, they are based on assumptions about the behaviour of human beings in the marketplace, they are anthropocentric, and they promote the consumer’s freedom to choose as the highest human value. However, to most people, selfish consumerism is not the highest ideal which a human being can attain. Religious thinkers of all denominations tend to believe that God has made us for something more than shopping, and accumulating money and wealth, through usury. Are human beings “born to shop” and to accumulate paper banknotes by competing with each other, or have we been created for some higher purpose? Is the soulless consumer the ultimate goal of Darwinian evolution? If not, then it must be questioned whether interest and usury has any place in a civilised society. 2.0 DEFINITION OF USURY Fenton (1612) defines usury as any increase on a loan of money or goods, over and above the principal or original item loaned. While some would argue that interest is ethical provided that the amount is small, for the purposes of this paper usury will not refer to the payment of high interest only but to the payment of any interest at all. Fenton distinguishes between a loan and a gift, and also between a loan and letting or hiring a piece of equipment. In letting or hiring an asset, the use of the asset only is passed over, the asset itself is not loaned to the hirer, but remains always the property of the lessor. In a loan the asset itself is handed over as well as its use. A further point to be made is that in many cases the purpose of a loan is for the asset to be used up and consumed entirely, to be replaced with another of equal value. If a neighbour loans me a cup of flour when the shops are closed, it is not expected that I will return the exact same



cup of flour the next day. I will consume the flour entirely, and purchase an equivalent quantity of the same class of flour. An asset such as a car wears out or decreases in value the more it is used. It has a finite life, it’s life is shortened and it requires more maintenance the more it is used. Money, on the other hand, being only a medium of exchange and having no intrinsic value, does not become devalued in any way, or incur any maintenance costs, by being used. Thus it is important to make a distinction between a loan and letting an asset. Fenton makes a distinction between lending and selling, because selling is the perpetual loss of an asset, whereas lending is a temporary absence. The purpose of selling is to exchange an asset which is no longer needed, for something else. The purpose a loan is to allow another to make use of an asset while it is temporarily surplus to requirements, however ownership of the asset (or its equivalent) is retained by the lender. A distinction is made between exchange and a loan, as when an exchange is made it is different items which are transferred, whereas when a loan is made, an item of the same kind, class or type must be returned. Fenton also distinguishes between the loan of the use of an asset and the loan of an asset itself. If an asset such as a car is loaned (similar to the case of letting) then it is the use of the car which is loaned, the same car must be returned, not another Honda of a different colour. In this case the concept of usury does not apply. However, the case of usury applies to the loan of goods which are consumed and later replaced, such as money, food, petrol or other consumables. If a loan of money, food, or other consumables is made and the borrower, of his/her own free will and generosity, decides to reward the lender or thank him/her by returning the loan with something extra as a gift, then this is not usury. Usury arises when the borrower is forced or coerced into paying interest against his/her wishes, or feels obliged to do so by custom, or when the payment of interest is adopted by society as a whole, as a structural injustice. It is necessary to make a distinction between profits and interest. Profits are legitimately earned as a reward for one’s labour. If a shopkeeper makes a profit for selling foodstuffs this profit is a compensation for the shopkeeper’s efforts in setting up the store, working in the shop serving customers, keeping the accounts, travelling to purchase stocks etc. Loaning money involves no labour, skill or effort, and in this respect is fundamentally different from profitable business enterprises. Fenton’s definition of usury (1612), and the differences between loans (involving usury) and other types of transactions, still apply in today’s modern world and will be adopted for the purposes of this paper. 3.0 DISCUSSION OF THE ETHICS OF USURY FROM THE VIEWPOINT OF DIFFERENT PHILOSOPHICAL FRAMEWORKS



Vardy and Grosch (1994) describe several different types of ethical frameworks. These can be examined in turn to determine whether they shed any light on the issue of usury. In a constructivist relative framework, there can be no absolute prohibition of usury for all people at all times. Thus theologians of the sixteenth century who argued that usury was only wrong for brothers, not foreigners, and only in ancient times, are operating in a constructivist relative framework. Using this framework, the question about usury becomes whether it is ethical for our society right now. This is independent of whether it was ethical in the past, for the ancient Jewish community. To a moral realist, the prohibition of usury (or otherwise) would not necessarily have any exceptions. Moral realists may base their ethical views on a belief in God, or they will follow the Platonic tradition: that actions which are morally correct are correct regardless of whether God commands them. For a constructivist non-relativist, usury may be wrong only if this is coherent with other true moral statements. This implies that there is only one complete set of true moral statements. However, this complete set has not been identified yet. Thus it is extremely difficult to prohibit usury from a constructivist non-relativist framework, except perhaps to note that it is internally consistent with other moral statements such as • “It is wrong to steal” and • “The rich/strong should help the poor/weak” and • “Wealth should be amassed by hard work rather than idleness” (“He who

does not work does not eat”). Those who believe in the divine command theory of ethics will probably not practice usury if they are Christians, Muslims or Jews, as the God of the Christians, Muslims and Jews has prohibited usury, in the Bible, the Q’uran and the Torah respectively. (The only difficulty will arise if these believers do not see these writings as the literal word of God). People of other faiths who believe in the divine command theory of ethics will also refuse to practise usury , if they believe that it is specifically prohibited by their God or gods. Taking Protagoras’ approach that an individual human being is the measure of all things, (with morality determined by social custom), usury is not immoral in modern western society because our social customs include the charging of interest as a fundamental component of our economic system. One would expect Plato’s philosophy to give very little guidance on the topic of usury. To Plato, a just action arises from a person who is wise, courageous and self-controlled. He is more concerned with a person’s mental attitude than the results of their actions. However, Plato does specifically condemn usury. (Fenton, 1612) Aristotle concerned himself with distributional justice. He believed that the good of the individual was subordinate to the well-being of the community. It



is not surprising that Aristotle explicitly condemned usury in his Politics as unlawful and unnatural. (Fenton,1612). Of the other ancient philosophers, Cato, Pliny, Seneca and Plutarch also condemn usury. Fenton (1612) reports that Plato has forbidden usury in his Laws, and that Cato claims that usury is twice as bad as theft, and on a par with murder. Pliny comments that usury makes idleness itself fruitful ie. people no longer have to work to earn a living, they exploit the labours of others. Plutarch claims that usurers mock the philosophers by trying to make something of nothing. Aristotle has condemned usury in his Politics as unlawful and unnatural. Seneca agrees that it is unnatural, but finds a place for it in human affairs. They are both justified in noting that interest has no basis in the natural order - the bee does not charge the flowers for its pollination services, nor does the flower charge the bee for the loss of its nectar. There is no such thing as either profit or interest in the economy of nature - ecosystems tend towards a symbiotic relationship for the benefit of all their members. Many ancient governors of state tried to legislate against usury. Tiberius Casar was so opposed to usury that he relieved borrowers of interest by paying it from his own funds, in a vain attempt to stamp out the practice. The Egyptians were so plagued with usury that they tried to stamp out borrowing altogether by pronouncing a law that none shall borrow unless he pawns his father’s corpse. (Fenton, 1612) Twisden (1652) notes that the Romans, typified by Horace, believed that usury was justified, but that the interest should be no more than 1% of the principal per month (called the centesima), or 12% per year. Stoicism is a system of morality based on physics

1, which relies heavily on

the use of logic. It advocates an ascetic life lived in harmony with nature, and advises its followers to be equally indifferent to both wealth and poverty, as indeed to any other circumstances of life. Since poverty is not considered to be evil, and human beings are not believed to have any free will to make moral choices, it is not surprising that the Stoics did not concern themselves with questions such as the moral correctness of usury. Stoics believe that truth is based not on reason but on feeling, and that the world is deterministic. In this sense they have little to say in deciding how an individual should behave, believing that the individual has no free will or choice. While Stoicism does not comment on the moral value or otherwise of usury, it could be argued that the payment of interest solely for the transfer of money violates the physical law of conservation of mass-energy, and this would be anathema to the Stoics with their emphasis on nature and physics.

1 URL: http://www.utm.edu/research/iep/s/stoicism.htm The Internet Encyclopaedia of Philosophy: Stoicism



Thomas Aquinas takes the natural law approach to morality, following a tradition estabished by Cicero and built upon by Aristotle. To Aquinas, a life lived according to reason is a viruous life lived in accordance with God’s commandments. A good act has good ends but also involves good intentions. Aquinas does not consider good actions as merely means to an end: both the means and the end are inseparable. Aquinas considers that natural law can be deduced by examining human nature and the purposes of human existence (which he believes is to achieve communion with God). The equality of all men before God is a key feature of Aquinas’ philosophy. The need to preserve the human race figures in Aquinas’ thinking, and he concedes that some moral actions apply to the community as a whole rather than the individual. A system of usury whereby people in the third world starve to death while their government cuts back on social services following “structural adjustment” for loan repayments would be expected to be condemned by Aquinas. It certainly does not help the survival and well-being of the human race as a whole and it is inconsistent with his views on the equality of all men. However, Aquinas did not make absolute rigid rules on most issues. He believed in general principles, fixed by natural law, which were inflexible and unchanging. These give rise to a number of secondary, more specific rules which were not so rigid, admitted exceptions and could be interpreted depending on the situation. It is possible that Aquinas may have allowed usury given a certain set of circumstances (though this seems unlikely). The American sociologist Lester Ward was one of the earliest proponents of a planned human economy (Worster, 1994). He claimed that human society should not mimic the natural world with its competition and survival of the fittest. Society should be organised by experts as a welfare state, in which the weak are protected from the strong and all citizens receive equal benefit. Ward’s approach differs from that of the natural law proponents such as Aquinas and the Stoics. However, Aquinas would probably agree with him on the need for all citizens to receive equal benefit and the weak to be protected from the strong. Hence they would probably both agree that usury is wrong, albeit from vastly differing frameworks. Unlike Aquinas, Kant is concerned with following fundamental principles of morality, rather than with the survival and well-being of human beings. He is definitely concerned with means rather than ends. His philosophy stresses categorical imperatives, ie. actions which are enacted because it is one’s duty to do so, and any logical person would do the same. Kant is opposed to self-interest: it is one’s duty to be unselfish. Human beings are always ends, not to be treated as means to an end. Those who charge interest are acting purely from self-interest, thus Kant would not be expected to approve of this. Kant would see usury as not being in accordance with one’s duty, regardless of the results of usury for society or for the individuals involved. Kant believes that the highest aspiration of a human being is the development of a good will and that such a good will is developed by acting rationally. He



certainly does not believe that the highest aspiration of a human being is to become a selfish consumer in the marketplace, as our modern economists advocate. Utilitarian philosophy emphasises the greatest good for the greatest number. Whether an action is good or bad depends entirely on the ends or outcomes of this action. Bentham and Mill, the founders of utilitarianism propose that every action requires a hedonic calculus to determine whether it is a good action or a bad one. The hedonic calculus for pleasure and pain involves the consideration of

• intensity • duration • certainty • extent • remoteness • richness and • purity.

Given that the vast majority of the world’s population is poor and very few are rich, most of the world’s population is in the position of being borrowers rather than lenders. There are few who are experiencing the “pleasure” that derives from earning an income without having done any work, simply from having excess wealth to be loaned. Those who experience the pain of going without food or other goods so that they can pay back usurious loans are many in number, and perhaps the pain they experience is of greater intensity, duration and extent than the pleasure afforded to the rich moneylenders. Certainly those who die of hunger, or the bonded labourers who slave their whole lives to repay a debt that they did not incur, experience a greatly diminished ‘utility’. How then could a utilitarian sanction usury? Unlike Bentham , for whom all pleasures were equal, Mill made a disctinction between the higher pleasures, afforded to the mind, and the lower pleasures afforded to the body. Would this then make usury acceptable, if the rich moneylenders used their interest payments to finance visits to the opera, the purchase of great literary works and piano lessons, whereas the poor bonded labourers are primarily denied bodily pleasures such as having enough to eat, being free from cholera, and having a shelter from the rain? Sidgwick, a post-utilitarian philosopher, espouses the principle of prudence: that one should prefer a future good to a present lesser good. Many arguments in favour of interest claim that the lender should be compensated for the reduced utility of having to wait till later to spend their money. In a sense, interest is a reward for acting against the lender’s tendency towards impatience. However, Sidgwick espouses the virtue of patience. A usurious system rewards impatience, the antithesis of Sidgwick’s principle of prudence. Sidgewick’s principles of justice and benevolence would also appear to make it wrong to profit at someone else’s expense, by taking advantage of their poverty through usury.



Emotivists or logical positivists, claim that all morality is subjective. Thus they have nothing to say regarding the question of usury: some people will find it right and some people will believe it to be wrong. Perhaps this will depend on their religion, their culture and their economic circumstances. McIntyre calls for a return to the practice of the virtues. He advocates both retributive and distributive justice. A human being’s purpose in life is to become a good person by practising the virtues. McIntyre’s concern for distributive justice may lead him to condemn usury, as the abolition of usury would help to improve the distribution of wealth in society. What does Buddhism have to say about usury? Although Buddhism does not specifically condemn usury, it places an emphasis on “right livelihood” as one element of the noble eightfold path. The Islamic model of interest-free banking, where the banks are in partnership with investors and work in co-operation with them (rather than the traditional cut-throat adversarial relationship) could be seen as an example of “right relationship”, another important aspect of Buddhism. Buddhists see selfish desire as the source of suffering, and they aim to eradicate the ego and avoid the formation of attachments to anything in the material world. However, Buddhism does not specify specific acts which should be either practised or avoided. Thus while it is not in favour of greed or excessive selfish desire for personal wealth, it makes no specific comments on usury. Nevertheless, one of the five basic rules or precepts of Buddhism is to “refrain from taking what is not given”. (Vardy and Grosch, 1994). If interest on a loan is not given freely, as a gift, by someone who can afford to pay it, then taking interest (ie. usury) violates this basic precept of Buddhism. Buddhists consider that it is all right for a person to seek wealth provided that this is done legally without any greed. Situation ethics does not advocate following a rigid set or rules. Each situation is judged on its merits, considering the consequences of each action. Situation ethics relies on pragmatism (an ethical solution must work), relativism (one action is more ethical than another, there are no absolutes), positivism (religious faith cannot be derived by reason), and personalism (people come first, not laws). Thus situation ethicists will not advocated a rigid prohibition of usury for all people, for all time. Interest-free banking, as practiced by the Islamic banks, certainly works, and an interest-free system appears to be more ethical relative to other alternatives. The abolition of usury promotes people before profits. Hence some situational ethicists may argue in favour of prohibiting the payment of interest, depending on the circumstances of each case. A variation of situational ethics is proportionalism which is part-way between the natural law approach and true situational ethics. It holds that there are certain moral rules which should always be followed unless there is a proportionate reason to go against them. A system of ethics where usury was generally prohibited, except for the admission of a few exceptions under certain circumstances, would be an example of proportionalist ethics.



Feminist ethicists argue that traditional male-centred morality is based on rigid systems of rules, rights and duties.

2 They advocate a morality based on

spontaneous creative action, caring for others by responding to each situation depending on its circumstances. While feminist ethics may not specifically prohibit or allow usury, the flexible spontaneous feminist approach (a type of situational ethics) lends itself to the Islamic economic system of profit-sharing rather than interest. In the Islamic system, a rigid fixed interest rate is replaced by a more flexible arrangement involving business partnerships, risk and profit-sharing. The shares of the profit which each party obtains as a result of doing business together are negotiated between these parties rather than being rigidly fixed. There is scope for flexibility and caring in such an arrangement, as the wealth or poverty of the borrower can be considered, as well as just the profitability of the business undertaking. Each case can be considered on its merits, rather than complying with a fixed rate of interest. Rawls’ communitarian theory says that not only do we have a duty not to harm others, we must also actively seek to help those less fortunate than ourselves. If we should be helping those who are less fortunate than ourselves how then can we practise usury by charging them interest on loans? We would not expect Rawls to be in favour of usury. Nozick’s theory of justice states that a person is entitled to their wealth, provided that they have acquired it legally, and that we have no moral obligation to anyone except ourselves. Nozick is undoubtedly in favour of usury. Rawls’ theory of justice advocates an economic distribution pattern that favours the least well off. He argues that we have a moral obligation to help those less well off than ourselves, because one day we might find ourselves in need of assistance. Rawls’ theory is consistent with the abolition of usury, because usury tends to create wealth for some at the expense of others. What (if anything) does environmental ethics have to say about urury? The libertarian extension approach is that the interests of non-human life forms needs to be considered and responded to. Conservation ethics stresses the preservation of biodiversity because it is useful to humans. Neither of these approaches is really relevant to the question of usury. The ecologic extension approach, rather than affirming the individual human or the individual plant, stresses the fundamental interconnectedness of all things, and the importance of diversity in the ecological system. This approach does have something to say about usury. If all things, (living and non-living) in the ecosystem are interconnected then this implies that all human beings are interconnected. For one human being

2 URL: http://www.utm.edu/research/iep/f/femethic.htm The Internet Encyclopaedia of Philosophy: Feminist Ethics



to take advantage of another by charging interest on a loan and becoming rich at another’s expense is like cutting your nose off to spite your face. The hand does not seek to make a profit from the mouth by charging for its services of supplying it with food. Being interconnected, the two are mutually supportive. This is how our relationships with one another should be also: mutually supportive. Usury has no place in a system of mutual aid. In the United States the indigenous Iroquois Indians base their ethical framework on the effects of their actions on the seventh generation. They have a strong commitment to intergerational equity. In such a system is usury permissible? One would expect that their strong commitment to sharing and care for other people would not allow the charging of interest. The modern-day philosopher Bill Mollison (1988), founder of Permaculture, bases his ethics on the need to take reponsibility for our own existence and that of our children. He opposes economic growth and states that

to accumulate wealth, power or land beyond one’s needs in a limited world is to be truly immoral, be it as an individual, an institution, or a nation-state.

Mollison believes that we must base our economic systems on natural ecosystems, relying on collaboration rather than competition to make our society function. He cites Lewis Thomas (1974) who comments that even

the bacteria ... live by collaboration, accomodation, exchange and barter

Permaculture is based on care of the earth, care of people and setting limits to population and consumption (setting limits to growth, returning surpluses). Mollison’s philosophy is that, rather than asking “What can I get from this land, or person”, we should ask “What does this person, or land have to give if I co-operate with them?” Applying this second question to the issue of usury, seeking to gain interest at another’s expense is clearly wrong, whereas a business partnership based on co-operation, profit-sharing and risk-sharing (as practised by Islamic banks) is to be encouraged. If we are to base our own economic system on the natural system (exchange and barter) then there is no place for usury in an ideal economic system. In Mollison’s philosophical framework, the investment of idle assets for productive purposes is encouraged, not because of the thought of financial gain for the lender, but because of Mollison’s nature-based philosophy of returning all surpluses to the system for recycling. He states his viewpoint thus:

The accumulation of unused wealth, or wealth that does not lead to the proliferation of life, is a pollution of the same nature as any unused resource. Manure and money have much in common.



This is similar in some ways to the Islamic idea of the payment of a tax on unproductive assets, because surpluses should be invested, not in the hope of making a huge profit, but rather because it is one’s duty to do so. 3.1 ISLAM Trade and commerce are very important in Islam. The prophet Mohammad was a trader by profession. Islam promotes the values of tolerance, brotherhood and social justice. A muslim businessperson considers all resources as gifts from Allah, who has entrusted him/her to deploy these resources in the most efficient manner to fulfil Allah’s plan for prosperity, not just for him/herself, but for all others at the same time (Metwally, 1997). Most Islamic scholars (eg Mannan, 1988) are unanimous in believing that usury or interest is condemned by Islam. The Qur’an and the Sunnah (fundamental sources of Islamic law) prohibit interest. Some of these verses from The Holy Qur’an which prohibit usury are documented below:

Those who devour usury will not stand except as stands one whom The Evil One by his touch hath driven to madness. That is because they say: ‘Trade is like usury’. But Allah hath permitted trade and forbidden usury. (2:275) Allah will deprive usury of all blessing, but wil give increase for Deeds of Charity: For He loveth not creatures ungrateful and wicked. (2: 76) O ye who believe! Fear Allah and give up what remains of your demand for usury, if ye are indeed believers. If Ye do it not, take notice of war from Allah and his Apostle: But if Ye turn back , Ye shall have your capital sums: Deal not unjustly and Ye shall not be dealt with unjustly. (2: 278-279). (quoted in Metwally, 1997)

There has been some controversy among the ranks of Islamic scholars, with some claiming that the prohibition of Riba refers only to usury on non-productive loans which prevailed in pre-Islamic times when people were not familiar with productive loans and their influence on economic development. Mehmet(1990) comments that Islamic rationality is not pure self-interest: it is a balance of economic self interest and ethical responsibility. Islam obliges human beings to act with justice and moderation in social relationships and in the marketplace. Islam allows normal profits but does not permit monopoly or oligopoly profits, hoarding or speculation. Islam prohibits riba, literally translated as ‘increase’. While some Islamic scholars (Chapra, 1985) claim that riba refers to an extra value in excess of a reasonable opportunity cost for capital, it is usually understood to refer to any interest rate (opportunity cost of capital). In practice riba has been interpreted on a total ban on all interest: this is the policy adopted by the modern Islamic banks. Another Islamic obligation is to save for the future, and to pay zakat: to spend a portion of one’s wealth and income in a way that maximises total social welfare of the entire community.



Mannan believes that there are sound economic arguments to back up the Islamic viewpoint. He asserts that the rate of interest has nothing to do with the volume of saving. In this Mannan disagrees with the classical economist Alfred Marshall, however he draws on arguments put forward by Keynes to back him up. Keynes believes that the volume of savings depends on the volume of investment, and that a properly-run community ought to bring the marginal efficiency of capital to zero. Keynes sees this as a means of getting rid of the many unpleasant aspects of capitalism (which Muslims also seek to get rid of). Crowther (1958) also comments that

a gradual and imperceptible fall in the value of money is necessary to enable the world to slip out of its self-imposed claims of usury.

Mehmet (1990) claims that the Islamic economic system approximates the capitalist ideal of perfect competition and is supposed to reconcile efficiency and equity conditions. Islamic economics contains two important mechanisms for promoting equity, which other economic systems are lacking: zakat (almsgiving or wealth tax) and riba (the prohibition of usury). Mehmet argues that the existing Islamic economic framework cannot work in practice in today’s society, without additional economic intervention. He states that it is based on a theory of perfect competition whereas today’s world is marked by imperfect competition and it is this which necessitates appropriate government intervention in the economy. The problem of what rate of interest is an exorbitant rate of interest is neatly solved in Islam by banning all interest altogether. Even if there was some basis for establishing what is a “reasonable” rate of interest today, this may be different tomorrow, or in another town or country. Some skeptics would argue that if no interest is paid on deposits, then the rich may be tempted to hoard their wealth as unproductive assets. However, the payment of Zakat conveniently avoids this problem for the devout Muslim. Unproductive assets are taxed in the Islamic system, thus encouraging investment. (Profits from productive assets are also taxed in Islam, through Zakat, but at a different rate). (Metwally, 1997) In Islam, a debtor has to clear all debts before his/her death, otherwise he/she is a sinner. Sometimes a lender may take pity on a borrower and give him/her a special loan, Quard-i-Hasanah, which it is not imperative to repay. The borrower repays if he/she can. If he/she dies before he/she has repaid the loan, he/she has not technically committed any sin. In Islam money does not in itself produce interest or profit and is not viewed as a commodity. It is solely a medium of exchange. The relationship of the Islamic bank to its clients is that of a partner, rather than a creditor or debtor. Riba, or interest, is not allowed in Islam, however, Mudarabah, or profit-sharing joint ventures, is permissible.



In a typical Mudarabah contract, a financier provides funds and a Mudareb (labour partner) provides knowledge and skill, and the profits from the undertaking is shared between the partners in an agreed proportion. This system does not apply to consumption loans, which are more or less unproductive in nature (though their influence on the productivity of the community has indirect bearing in so far as it stimulates production and supply.) Consumption loans are financed by other means such as hire-purchase arrangements or rent-to-buy schemes (with an Islamic bank being allowed to cover its administration costs but not make a profit). Some opponents of usury say that the solution to the problem of unequal economic distribution is to abolish money altogether and return to a barter system. Muslims would not, however, agree with this. In an Islamic society the role of money is to provide the best measure for channelling purchasing power in the form of transfer payments to the poor. (Mannan, 1986) Thus in an Islamic society it is not desirable to dispense with money altogether and reinvent a cashless barter system. Moslems have a compulsory obligation to pay Zakat (alms) to the poor. The use of money facilitates the calculation of the exact amount of this Zakat. Mannan believes that money performs another important social function in containing or resisting the open exploitation which can result from any system where haggling is employed. Without money, Mannan notes that we would have to show all the relative values of goods and services available. For example if we had only 100 commodities available for purchase in the supermarket, this would necessitate the publishing of 4950 rates of exchange (how many eggs for a 10kg bag of rice, how many for a spade etc.) In today’s supermarkets there are far more than 100 commodities, thus it would be extremely difficult for modern supermarkets to function without money of some description. 3.2 CHRISTIANITY Many Christian theologians, such as St. Ambrose, St Basil and St Augustine, have condemned the practice of usury over the ages. Writing in 1612, a devout Christian, Roger Fenton, cites Bible verses from Ezekial, the Psalms, Luke and Exodus to back up his arguments that usury is incompatible with Christianity.

Thou shalt not take usurie of him, no more then thou guest. (Ezekial 18:8) 3

The just is merciful and lendeth (Psalm 37)

Lend looking for nothing again (Luke 6:34) If thou lend money to my people, to the poore with thee, thou shalt not be as a Usurer unto him, thou shalt not oppresse with usurie. (Exodus 22: 25)

3 The texts have been reproduced here exactly as written by Fenton, in “Olde English” although more modern

translations may have slightly different wording.



If thy brother be impoverished or fallen into decay with thee, thou shalt release him, and as a stranger or a sojourner, so shall he live with thee; thou shalt take no usurie of him nor vantage, or more than thou gavest. Thou shalt not give him thy money for usurie, nor lend him thy victuals for increase. (Leviticus 25:35) Thou shalt not give to usurie to thy brother, as usurie of money, usurie of meate, usurie of any thing that is given to usurie. Unto a stranger thou maist lend upon usurie, but thou shalt not lend upon usurie to thy brother, that the Lord thy God may blesse thee. (Deuteronomy 23:29)

This last quote is particularly interesting, and may shed some light on why the early Christian theologians considered usury to be wrong, while in some cases Jewish theologians do not. The Jews interpret this passage to mean that it is quite acceptable to loan to a gentile or non-Jew, who is a “stranger” rather than a “brother”. However Christians believe that Christ came to abolish these distinctions between Jew and Greek, slave and free, man and woman, consequently there is no one in the human family who is not a “brother” (or a sister) of the Christian. Hence in the early days of the Christian church, usury was considered to be always wrong, under any and all circumstances. Some proponents of the ethical neutrality of usury propose that if the borrower is wealthy enough to repay the money with interest, then the payment of interest is not wrong because it does not cause poverty for the borrower. Fenton strongly refutes this argument by saying that not only the welfare of the borrower must be considered, but also the welfare of society as a whole. He claims that if the borrower achieves a high enough return from his investment to repay the loan with interest, then the prices he is charging are too high, unjustly so. The borrower is committing a sin against society by setting his prices so high and making so much of a profit. Fenton claims that if someone is sufficiently rich that repaying the principal and interest cause no financial hardship, then such a person has no right to be seeking a loan. The rich should reserve the funds or goods for those who truly need them. The rich man has been given his wealth as a steward of God, to be used responsibly to benefit the whole community, not for narrow personal gain. Fenton also claims that we must not harm or take advantage of anyone (by usury) regardless of whether that person is rich or poor. It is Fenton’s claim that the primitive life was most natural when people lived upon the increase which God gave by the yield of the earth and living creatures. This increase was a gift from God, with human labour a contributing factor, and was not gained by exploiting other human beings. As money is solely a medium of exchange, and has no real or intrinsic value, it cannot provide an increase in the same way that a block of land provides an increase when human labour is applied to it for agriculture. In the words of St Ambrose

Be it meate or apparell, or any overplus above the principall, what ever you call it, it is Usurie.



and in Fenton’s own words

The Spirit of God in Scripture hath branded all increase and overplus, whatsoever above the principall, by the name of a biter or a gnawer.

Fenton also quotes the commandment “thou shalt not steal” as further condemnation of usury. St Basil claimed that usury was among the greatest abominations, on a par with bloodshed and murder, idolatry, bribery and oppression of the poor. St Chrysostome lamented the fact that usury was prevalent in his day, although the usurers justified their actions by claiming that they had given the interest as alms to the poor. Chrysostome believes that it would be better not to cause poverty in the first place, by not charging interest. The famous theologian St Augustine cautions that it is odious and detestable to give money upon usury. Augustine refutes the arguments of those who claim that they have no means of supporting themselves and earning an income other than from the interest they charge. He notes that robbers claim that they need to steal in order to make a living, and those involved in prostitution claim economic necessity, but this does not make either robbery or prostitution morally justified. Fenton (1612) also argues that often when people claim that they need the interest to live on, they are in fact quite rich (if they are rich enough to have surplus funds available for loan) and that they should be content with what they have. Apart from individual theologians, the church councils of Nice, Carthage and Vienna condemned usury. The Elibertin council even went so far as to threaten excommunication from the church for all who practised usury. In about 787, Edward the Confessor attempted to banish all usurers from his kingdom. The prime objection to usury in the early days of the church was that an equitable bargain is one from which both parties gain equal advantage. Luther published a long sermon on usury in 1520, and another tract on trade and usury in 1524 (Wilson, 1925) Bucer, denouncing usury, wrote that

neither the church of Christ, nor a Christian commonwealth, ought to tolerate such as prefer private gain to the public weal or seek it to the hurt of their neighbours.

In spite of the many examples of theologians opposed to usury, there were a few dissenting voices also. Calvin believed that under some circumstances usury could be justified, stating that a general Biblically-mandated rule of equity should be followed, rather than the more specific prohibitions mentioned in Deuteronomy and Leviticus. He still insisted that usury must not be charged to the poor, and that in all cases the return earned by the borrower from the productive use of the loan must be greater than the interest that was being charged.



Zanchie claimed that usury was permissible, provided that if the borrower gained little or nothing, then the interest was to be little or nothing, and that if the borrower could not return the principal, then the lender was to accept the loss as much as he would accept any gain. Fenton claims that this arrangement is not in fact usury at all, that it is a business partnership, provided that the risks are shared equally be both parties. (Zanchie’s system is similar to that used by Islamic banks, where profit-sharing is permissible but interest is not). Twisden (1652) notes that at the time of the council of Nice, usury was particularly rife among the clergy, who used it to amass enormous wealth. Twisden concludes from the historical evidence that usury was not evil in itself, but only because it violated the church’s decrees. Twisden claims that the earlier councils only prohibited usury among the clergy, and that it was not until after 800 that usury was prohibited among the lay also. Twisden’s analysis leads him to conclude that he can find nothing, either by literal wording or necessary inference from scripture, or the practice of the primitive church, to lead him to conclude that usury was inherently sinful, nor could he claim that it was absolutely lawful. Twisden believes that whether usury is sinful or not depends on the circumstances. There was great controversy among theologians of goodwill in Twisden’s day. While Cardinal Cajetan was of the opinion that paying money for loan to banks called “Mountains of Piety” was unlawfully usurious, Cardinal Tollet saw no problem with them. Writing in 1653, Filmer claims that nowhere in scripture is usury forbidden to Christians, but it is as lawful as any other contract or bargain, unless the laws of the land state otherwise. He claims that the Biblical proclamations against usury were a secular law for the Jews only, and that is why they were allowed to charge interest to strangers but not to fellow Jews. Filmer draws an analogy with the situation where the ruler of England may decide to prohibit usury among men in London, where there is the greatest poverty, but allow Londoners to charge interest to men from Middlesex. Fenton’s opinion is that in the days when Moses prohibited usury, the items borrowed were small in value, and where a garment was left as security, this indicated that the loan was to be quickly repaid, as clothing is almost as necessary as food. For such insignificant loans he claims that usury cannot be justified. He claims that the Mosaic prohibition of usury no longer applies in a society where loans are much larger in value and are borrowed for greatly extended periods of time. Twisden (1652) claims that the old testament prohibitions on usury may be only applicable to the Jewish society, in the same way as the Jubilee (Leviticus 15:8) the cities of refuge (Numbers 35:11) and the release to be made every seventh year. (Deuteronomy 15: 1,2). Twisden notes that although usury was condemned by early Christian theologians, it was widely



practiced among them, and was sanctioned by civil laws if not by religious mores. He also notes that not one writer has condemned usury if the interest or increase is freely given by the borrower or is offered to the lender as a gift. Filmer (1653) quotes three texts from the law of Moses relating to usury, as quoted by Fenton, and comments that these texts relate specifically to the poor (only) and thus do not prohibit usury against anyone who is not so poor. According to Filmer, all contracts for gain are not prohibited as usurious as Luke 19:23 mentions a bank of usury in the Jewish commonwealth, out of which, a man, by depositing his money, might at length receive his own money returned with usury added. It is unlikely that Jesus would tolerate such a bank if it were not moral, claims Filmer. It is Fenton’s claim that there are no New Testament quotes which specifically prohibit usury, though he cites Matthew 5:42

Give to him that asketh, and to him that would borrow of thee turn not away.

and he also cites Luke 6: 35

Lend, looking for nothing thence.

Fenton claims that as these verses are not taken literally but each case is judged on its merits, neither should the prohibitions on usury be taken literally, it depends on the circumstances. The decision whether to loan depends to some extent on the borrower’s necessity, his/her honesty and capacity to repay the loan, and on the lender’s capacity to make the loan without suffering unduly from the loss of the principal. Jesus also forbade his disciples to carry gold, or silver or any manner of coin in their purses. Which of us today would follow the letter of this law? These examples show that while the practice of usury was widely condemned by many, there were a significant number of dissenting voices. The teaching that all usury was reprehensible continued to be the official teaching of the Church of England right up until well into the seventeenth century. (Wilson, 1925). After that time, it started to cave in under vigorous attacks from the world of business. A “compromise” was reached whereby interest was permitted provided it was modest in amount and did not exceed a ceiling set by the state. Wilson comments that due to the changing economic circumstances, any minister of a city church who was indiscreet enough to criticise what had become the chief occupation of his wealthy parishioners found himself obliged to find another parish. Calvin’s opinion was that interest was lawful

provided that it did not exceed an official maximum, that even when a maximum was fixed, loans must be made gratis to the poor, that the borrower must reap as much



advantage as the lender, that excessive security must not be exacted, that what is venial as an occasional expedient is reprehensible when carried on as a regular occupation, that no man may snatch economic gain for himself to the injury of his neighbour (Wilson, 1925)

The basis of Calvin’s arguments, which were widely adopted, was that the Mosaic law on usury applied only to the special circumstances of the Jews of Moses’ time. He also refused to make a distinction between land and capital, saying that in practice they were interchangeable investments. Unfortunately Calvin’s beliefs on usury were widely quoted out of context, without any of his qualifications, and came to be used to justify usury under any and all circumstances, when this was hardly Calvin’s intention. A significant reason for the uptake of Calvin’s ideas was that the prohibition on usury had been framed in an age when the borrower was poor, and the lender rich, and this no longer applied. While the usury debate in the Catholic church has died down, there are still some present-day Christians who advocate the prohibition of usury. A present-day theologian, Fonseca (1988), considers the question of whether high interest rates are ethical, from a modern Christian viewpoint. He considers the views of the Catholic church and also those of John Maynard Keynes. Fonseca cites the Pontifical Commission “Justitia et Pax” (1986) who discuss the issue of international debt, calling for lower interest rates and fewer erratic fluctuations in the exchange rates. Their opinion is that if loans are granted at excessively high interest rates then the creditors forfeit their right to reimbursement. However, they are not opposed to the idea of interest per se. They comment that “creditors have rights, acknowledged by debtors, relative to interest rates, the conditions and schedule of reimbursement”. The Pontifical Commission appears to acknowledge that the current system encourages greed. They call on the commercial banks to finance projects on the basis of their impact on growth in preference to safer projects with more immediate returns of investment and of questionable value to society (such as armaments manufacture). Human solidarity and care for the poorer members of society are the values underlying the Commission’s stance. However, in more materialistic terms they also state their concern for avoiding the collapse of the international financial system. No indication is given of the numerical value of the interest rate which the Pontifical Commission considers to be “usurious”. Consideration of the weight of evidence regarding the Christian position on usury leads to the conclusion that the official Church has moved from its original position of a complete prohibition of usury to approving of interest provided that the rate is not too high. Whether the individual Christian agrees with usury is largely determined by his/her conscience, however few modern Christians would dispute the official church’s position that interest is now acceptable.



Related to the issue of usury is the question of whether those with surplus funds can be persuaded to invest their surplus if there is no economic incentive (in the form of interest) to do so. Lending is seen as a work of mercy to the poor. Fenton quotes several Bible verses which emphasise the Christian’s duty to lend surplus funds to those in need.

Thou shalt not shut up thy compassion, but shalt lend. (Deuteronomy 23:8) A good man is merciful and lendeth (Psalm 112:5) Do good and lend (Luke 6:35)

Many Christians believe that it is morally reprehensible not to invest surpluses. The Parable of the Talents (St. Matthew, 25:14-29) illustrates this point. The person who buried their talent in the ground rather than investing it in the community for productive purposes is reprimanded and punished by having this talent removed. With regard to this issue of productive investment, there appears to be no controversy or dissent within the church community. 4.0 A CRITIQUE OF USURY FROM A MODERN PHILOSOPHICAL FRAMEWORK The condemnation of usury may have been appropriate in the days of the ancient Greek philosophers, before Adam Smith invented the invisible hand and Malthus started to fret about the increasing human population. However, is usury still wrong in today’s culture of electronic banking, globalisation, Wall Street, the proposed Multilateral Agreement on Investment and golden arches scattered around the globe? When the abolition of usury was recommended in 1612, Fenton claimed that a loan to the poor is an act of kindness, similar to doing someone a favour, and that no interest should be charged on loans in the same way that no price is charged for other acts of kindness. Does this still apply in today’s society where it is necessary to have a bank account whether you want one or not, for your salary or social ecurity payments to be paid into? Loaning the money in your savings account to the bank, to be used for housing and consumption loans, and productive loans, can hardly be considered an act of kindness when you have no choice in the matter. This is just one of the relevant features of our modern economic and financial system, which must be considered. Firstly, the changes which took place in the economic system in the sixteenth century need to be discussed, because some of these changes have persisted to the present day. What exactly was it that all of a sudden made usury appear to be an attractive proposition? Tawney (1925) comments that in the early sixteenth century when usury was considered unlawful, the capital required to set up a business was usually not



entirely out of the reach of the ordinary merchant. This is no longer the case in today’s society. Later in the sixteenth century, with increasing expansion in industries such as the extractive and woollen industries, the need for loans increased. These loans were usually granted in the form of credit for goods, and interest was not necessarily charged. The industrial revolution brought about the need for ever increasing sums of money, and usury became commonplace. The industrialists and business owners saw control of their businesses transferred to the industrialists who provided finance. The merchant or craftsman became more like an employee than a self-employed businessman. This caused some of the opponents of usury to redouble their efforts. However Tawney claims that

the movement which provoked their denunciations itself made it impossible that they should have any practical effect.

While previously the opponents of usury had sought to protect the peasant or the craftsman from the unscrupulous pawnbroker, following the industrial revolution those who paid interest were the clothiers, mine owners and ironworkers, who most believed weren’t so poor and could defend themselves. If the rich should not borrow because they already have enough, how then can we finance the large-scale production of goods which have become a necessary part of modern life? Firstly, the large-scale production of goods is not always entirely necessary. Increased self-sufficiency and small-scale decentralised local production of goods will help us to ensure sustainable development. Secondly, it is possible for the state to finance necessary large-scale items such as national telecommunications and transport infrastructure, through taxes, without necessarily borrowing at interest. Thirdly, worker co-operatives, such as the Mondragon co-operatives which have become prolific in the Basque country in Spain, provide an alternative means of financing large projects without interest and without all the wealth and benefits of the project accumulating in the hands of one person only. So while usury proliferated following the industrial revolution, it does not have to still be practised today, provided that the issue of providing sufficient capital for large developments is addressed. The abolition of usury would be much harder to practise in today’s society, as not only has the economy changed since the 1600’s, but society’s values have substantially changed also. For all our technical sophistication, in modern times we have come to worship money as if it had intrinsic value, losing sight of the fact that it is solely a medium of exchange. The modern economy tends to be regarded as a morally neutral sphere in which money is made or lost through the action of market forces. Ethics is largely excluded from consideration in our current economic system. The system is based on “rational” individuals or firms operating purely out of self-interest. Reilly and Kyj (1990) comment that in a typical firm, welfare of the employees, health of the community and loyalty to suppliers, customers and the nation itself are taken into consideration only as a means for maximising



the corporation’s wealth. The core values of American business are wealth maximisation and individual self-interest.

The corporation contributes to society only to the extent that it maximises its own efficiency and wealth. ... Modern apologists...believe the only social responsibility of business is to use its resources efficiently and engage in activities that increase profits while staying within the explicit rules of the law. Their article of faith is that open and free markets without deception or fraud will best bring this about.

Reilly and Kyj argue that the ethical context of classical economics may have been appropriate in the past in an environment characterised by large undeveloped land masses, small businesses, low population density and an early stage of technological development, it is not relevant in today’s society with its advanced technology and complexity, as society no longer has the ability to easily absorb “externalities” and these become a significant source of inefficiency. The question of whether it is ethical to charge and pay interest is one which is not even considered in today’s society, as the economic system is based on the moral philosophies of Smith and Ricardo. Most businessmen would agree with the philosophy of Milton Friedman: that business has no responsibility to anyone or anything beyond itself. For the most part, corporate ethics is confined to the principles of business, defined by Reilly and Kyj (1990) as follows: 1. Internal efficiency of the resources used must be maximised. 2. Internal profitability must be maximised 3. Corporate decision-makers are agents of the owners Considerations of equity, social responsibility, environmental preservation etc. are not part of the basic corporate ethics. Corporate ethics deals exclusively with the concepts of value, and has no place for the concepts of rights, truth, justice etc. There is no place for altruism in the standard corporate ethics. According to the principles of modern business ethics, it is perfectly acceptable to earn a living by killing people (through the sale of tobacco products, inadequate worker health and safety, selling Nestle infant formula in the third world, manufacturing carcinogenic pesticides), provided you make the highest possible return for the shareholders. The “invisible hand” of the market is expected to somehow compensate for this loss of life. With its emphasis on individualism to the detriment of all other ethical considerations, there is no place for questioning usury in our modern system of ethics. However, in recent years, some dissenting voices have been heard, especially in the light of the ecological crisis which calls into question our relationships to each other and to the earth. One example of a dissenting voice is Korten’s (1996). He questions the ethics of extractive investment, such as buying a corporation, stripping it of its assets and closing it down. While the individual investor profits from such



actions, society as a whole is impoverished. To Korten, when an investment simply creates money or buying power, such as through the inflation of land or stock values, without creating anything of value, this is another form of extractive investment. The investor has created nothing, however their share of society’s buying power is increased. This situation of “extractive investment” seems little different to loaning money for interest, and increasing one’s buying power without having created anything of value to society. Therefore in Korten’s framework, usury must also be considered to be wrong. Hardin (1991) is an example of an environmentalist who disagrees with utilitarianism. He states,

“The greatest good of the greatest number” is nonsense. The theory of partial differential equations tells us that we cannot maximise for more than one variable at a time. Since the time-honored utilitarian ideal is mathematical nonsense it must be practical nonsense also. We need to find other approaches to the problem of the optimum. We must, in a word, decide whether we want to maximise the number of human beings on Earth, or to maximise their average - not their total - well-being.

Individualism is under attack from a number of different quarters. Page (1991) comments that the concept of an individual human being is being challenged not only but philosophy but by evolutionary biology also. The notion of utility relies on the concept of the individual. Concepts such as rights, duty, obligation, autonomy and justice also rely on the concept of separate individuals. How does the interest rate affect the natural environment? How does it affect the distribution of wealth in our society? The current interest rate may have implications not only for the distribution of wealth in the present generation, but also for the distribution of wealth between present and future generations, “intergenerational equity”. There is not universal agreement between economists, however, that the interest rate and wealth distribution are interrelated. Norgarrd and Howarth (1991) consider the question of whether altering the interest rate can promote intergenerational equity or increased well-being of future generations. Their conclusions however, do not in fact shed much light on the issue of usury. They conclude that to ensure intergenerational equity wealth should be transferred, rather than making inappropriate investments. They claim that alterations of the interest rate in the hope of benefitting future generations are simply variations of the “trickle down” theory which has failed to alleviate poverty in the present generation. Norgarrd and Howarth give examples of wealth transfer such as setting aside natural resources and protecting environments, educating the young and developing technologies for the sustainable management of renewable resources. Daly (1991) also discusses whether high or low discount rates are beneficial for the environment. He notes that a high discount rate is worse for the environment because it speeds the rate of depletion of nonrenewable resources and shortens the turnover and fallow periods in the exploitation of



renewables. However, a low discount rate will permit more projects to be undertaken even though resource use for each project is less intensive. It would appear that further investigation is required to determine the effects on the environment of interests rates, and thus determine whether usury is ethical from a viewpoint of environmental ethics. However, it is extremely encouraging that economists are beginning to consider such questions, which, before the ecological crisis, were not on the agenda. As stated previously, there are a few examples of dissenting voices who seek to change the prevailing concept of business ethics, to consider a wider range of issues than just honesty in accounting and compliance with the Trade Practices Act. Nevertheless, issues such as the question of usury in the context of our modern economic system, need to be examined in much more detail. The question of whether usury is ethical can be examined, using utilitarianism as the theoretical starting point, (as the lesser of many evils).

4 While

utilitarianism is not a perfect system of ethics, (as discussed earlier in this paper) it can be used by both religious thinkers and atheists alike, and can be adopted to some extent within different cultures. (However it does conflict with western society’s dominant ethic of individualism). Utilitarianism considers not only the interests of the individual, but society as a whole. Utilitarianism is a form of consequentialism. It considers ends or goals and then considers the actions necessary to achieve those goals. In a utilitarian framework, the ends justifies the means. This contrasts with the more dogmatic approach which exists in some religious ethics where moral rules are formulated which must never be broken. Within a utilitarian framework, self-interested actions can only be justified insofar as they promote the well-being of society as a whole or at the very least cause no harm to society as a whole. Rather than considering whether an action causes ‘pain’ or ‘pleasure’ to another, utilitarianism will be used here to discuss whether an action is in the “interests” of another. Some actions considered from a utilitarian framework will be right or wrong depending on the circumstances, while others will be universally applicable under all conditions. In Bentham’s traditional utilitarian framework, the interests of the community are considered as being the sum total of the interests of the individuals who make up that community. The interests of the individual cannot be considered in isolation, but in relation to others. Some take the point of view that an individual should be free to do as they please with what is their own. However this is essentially a selfish point of view, and will not be considered here.

4 A similar approach is used by Cathy Challinor URL: http://www.pcug.org.au/~gchallin/gundaroo/ethics1.htm How

can different values and conflicting ideas be managed in terms of deciding future directions for a community?



The essence of the utilitarian argument is this: if a lender who is already rich loans a sum of money which they do not need, their utility is increased by the interest they charge on the loan. The borrower, who may in some cases be already poor, has to pay back not only the principal but also a sum of interest, If the borrower is poor and has to go without basic necessities to pay back their loan, then their utility is greatly decreased. Does the borrower’s loss of utility outweigh the lender’s gain in utility? In our society there poor greatly outnumber the rich. The world’s 358 billionaires have a combined wealth which exceeds that of the world’w poorest 2.5 billion people. (Ellwood, 1996). Thus it is logical to assume that borrowers greatly outnumber lenders. So the interests of the borrowers assume a greater priority than those of the lenders, due to the sheer weight of numbers. What about the situation where someone who is not poor takes out a loan? Most middle class people in western countries take out a loan to purchase a house, not because they are destitute, malnourished, and struggling to make ends meet, but simply because houses are so expensive, in comparison with a middle class person’s salary. These consumers are not so greatly inconvenienced by having to pay interest on their housing loan. (Some of them are, but not the majority). Should interest be payable on these loans, seeing as the borrower can afford it? This then begs the question: if usury can theoretically be justified in some cases and not others, why not abolish interest altogether (for the protection of the poor) and introduce the Islamic alternative of profit-sharing. In the Islamic system of profit-sharing, the borrower and the lender enter into a partnership where they undergo some business undertaking together and divide up the profits between them. This allows a wealthy lender to take into account a poorer borrower’s economic status and not take an undue propoportion of the profits. The Islamic system allows a more equitable distribution of “utility” between borrower and lender ie. it safeguards the interests of both parties, to a greater extent than our current system of usury. It could be argued that the Islamic economic system does not pay enough attention to the lender’s utility, because it does not adequately compensate them for the risk involved in loaning funds. However, rather than charging a fixed interest rate to cover the risk incurred by the lender, an item could be offered as security in the case of non-payment of the loan. Or an alternative system could be used, such as the system used by the Grameen Bank, loaning only to individuals who are organised into groups, thus ensuring repayment because other members of the group also want a loan. Indeed this method is a way of spreading the financial risk over a large number of individuals, thus it is in a sense egalitarian or equitable, because the alleviation of poverty is a community responsibility, not just a burden placed on the individual. Fenton comments on the connection that is often made between greater risk and greater returns. This argument is often used to justify usury as compensation to the lender for the risk of losing their principal. However, Fenton argues that when usury becomes regarded as legitimate, the gain



always goes to the usurer, who always makes a gain from then onwards, no matter what the cost to the borrower, who may have failed to make any profit at all. Wherein then is the risk, if the usurer is virtually assured of getting his money back with interest. The practice of usury has led to such outrageous situations as the bonded labours in India, where generations are bound to labour for their entire lives to pay back a debt they did not even incur. The risk should not be borne entirely by the borrower and their descendents. No, the risk should be shared between the borrower, the lender, and maybe even the wider society. In fact, the best option is to avoid risky business ventures in the first place. How can the argument against usury respond to the economists’ contention that interest is simply the price of money? Firstly, money cannot have a price because it is solely a medium of exchange or a unit of measure. Putting a price on money is like putting a price on litres and millimetres. It is an absurd and meaningless concept. Changing the definition of interest to the “price for the use of money” is equally illogical. How much is the price for the use of units of length or time? Secondly, when we allow money to have a price, this price steadily increases until it becomes, as Shakespeare so aptly put it, “a pound of flesh”. The practice of charging a pound of flesh unfortunately did not end in the days of Shakespeare, we are seeing it continue, mainly in the developing countries. How many peasant farmers have died of starvation because their governments have cut back social services, as a result of “structural adjustment “ following usurious loans? If even one person dies as a result of usurious loans, then the price of money is too high! No sum of money can buy back the life of someone who has departed from this earth. None of the foregoing arguments appear to be altered in any way by the context of our modern financial system. If anything, the gap between the rich and the poor has greatly widened since the seventeenth century. Thus the utilitarian argument is far more relevant now than it was then. Admittedly, the sums of money required now to finance modern day infrastructure projects such as wastewater treatment plants and electrification projects and road bridges run into the millions, whereas in the days of Aristotle loans were of the order of a bag of flour to be repaid after the wheat harvest. However, this does not, of itself, justify usury. It merely necessitates the acquisition of large amounts of capital. Funds can be raised from those who have excess capital without paying a fixed rate of interest, using the Islamic model of business partnerships and profit-sharing. Alternatively, funds can be raised,as stated previously, using government funds or through worker-funded co-operatives. In the Islamic system investment in such large infrastructure projects (or any other projects) is encouraged by zakat, a tax payable on unproductive assets. Rather than giving people an economic incentive to invest, in Islamic economics they are given an economic disincentive not to invest. This could be regarded as the “stick” approach rather than the “carrot” approach. It is usually argued that human beings are more motivated by positive means than by negative means. The prospect of reward is greater than the fear of



punishment. However, how can this apply when a person is already rich, and already has more than enough of everything they need? What incentive can possibly be offered to such a person to persuade them to loan their excess to someone in need? Only the thought of even greater wealth? This cannot work in practice, because it only serves to create more poverty. We live in a finite world, and with our current population we cannot increase the wealth of the rich without transferring resources from those who are already poor. Hence a better incentive to offer the rich is the spiritual satisfaction to be gained from a simpler lifestyle, sharing with others and making a positive contribution to humanity. Those in favour of usury claim that it cannot be abolished because our modern economic system is heavily dependent on interest to function. However, this argument does not hold water. Formerly, our economy depended on the cheap labour of human slaves from Africa, but nowadays no-one of sound mental health would call for the reinstatement of slavery to sustain our economy! Thus just because usury has become common, and part of the system, doesn’t make it right. Slavery was once part of the system too. What about the argument that the lender should receive compensation for the temporary loss of their money, while it is being loaned out? They believe that they have worked hard to earn that money. It’s true that wealth is the result of hard work, but it’s not always true that wealth is the result of the hard work of the wealthy themselves. More commonly, wealth is the result of the exploitation of the hard work of others. The managing director of a large company who commands a huge salary does so, not as a result of his/her own seventy hours of work alone, but as a result of the hundreds of labourers on the assembly line churning out widgets to be sold at a profit. Without the efforts of the shop floor staff, the company would become bankrupt and the managing director would not earn any money at all no matter how hard he or she him/herself worked. Even assuming that the lender genuinely has worked their fingers to the bone to acquire surplus wealth in excess of their immediate needs, they have already been paid for their hours of toil, and seeking to earn interest on the money again, is like being paid for the same job twice, ie. it is double dipping. What does the modern day argument for the abolition of usury have to say about the enviornmental crisis, and how does our increased knowledge and awareness of ecology impact on the issue of usury? Costanza (1991)claims that

Ecological systems are currently our best models of sustainable systems.

To build an ecologically sustainable financial system, we should model our system on the economy of nature. In the natural environment if one component malfunctions the entire system becomes unbalanced. These



systems are interdependent. Does poverty exist in nature? If one species of tree was to consume and leach all of the nutrients out of the soil the tree itself would die out prematurely, along with the entire ecosystem which would be forced to evolve into something new and different. The epiphyte does not pay rent to the tree on which it lives. The bird does not accumulate more insects than it needs for survival and health, leaving them to rot in its nest. The mother bird does not demand that her babies repay her with interest when they are grown to maturity, as payment for the opportunity cost of not consuming the extra insects she has collected for them. Each component which is part of the economy of nature is subordinate to the health of the entire ecosystem in which it is found. In a certain sense then, in a healthy stable ecosystem nature has its own just distribution of wealth. If we wish to create an ecologically sustainable society, with a just distribution of wealth, we should model our economic system on the economy of nature in which usury is non-existent. 5.0 THE PRACTICAL IMPLEMENTATION OF USURY-FREE FINANCIAL SYSTEMS The abolition of interest sounds like a brilliant idea, but can it be achieved in practice? While traditional sources of finance such as borrowing from relatives, friends or informal moneylenders may be adequate for small businesses or individuals, modern banks are necessary for the financing of large scale projects. In modern western society there are very few banks which are usury-free. However, in the Islamic world there are a number of banks which work on the principle of profit-sharing rather than interest. The first interest-free Islamic bank was the Dubai Islamic Bank, which was established in the United Arab Emirates in 1973 with a start-up capital of US$14 million. In 1975, the Islamic Development Bank opened in Jeddah, Saudi Arabia. From these humble beginnings, there are now more than 100 interest-free banks in 45 countries. What options exist outside the Islamic world for people who want to make the radical change to an interest-free financial system? Don’t all banks, credit unions and even ethical investment funds pay interest? There are a few alternatives. For example, Community Aid Abroad has an Ethical Investment Fund where depositors can elect to earn 0% return on their investment. Investors in the Fair Trade fund are also helping to further the work of Community Aid Abroad in creating employment for third world artisans. Here in Brisbane the Catholic Church’s Archdiocesan Development Fund allows the operation of an at-call savings bank account where, if the depositor so chooses, no interest is paid. The depositor’s funds are used for the construction of schools, churches and homes for the aged.



The LETS system and the Ithaca Alternative Trading System are examples of advanced barter systems where interest is strictly prohibited. There are a number of LETS groups operating in South-East Queensland. Usury is an issue not only for individuals but also for governments. Patricia Knox comments that while conventional governments delegate the task of money creation to a central bank, in the Channel Islands the government itself controls this function.

5 Whereas money is loaned to the British

government at interest by the Central Bank, the Channel Islands issues its own money at no interest. In Britain increasing amounts of tax revenue are being used to service the debt which accumulated over the last 300 years, and social services must be cut back to repay the Bank of England. However, the Channel Islands have no debt, and thus income tax there is only 20%. There is no inheritance tax, capital gains tax or VAT in the Channel Islands. Knox recommends that other governments reclaim their power to create interest-free money, and that extortionist debts should be classed as unenforceable. 6.0 CONCLUSIONS AND RECOMMENDATIONS Seeing as usury has so little to recommend it, why do we persist with it in a supposedly civilised society? Perhaps it is because economics has assumed profound importance in our society, at the expense of ethics. Modern economics is viewed as being amoral and divorced from ethics, when in fact the two are fundamentally interrelated. The widespread practice of usury is just one symptom of an economic system that promotes the freedom of the individual in the marketplace to the detriment of all other freedoms, rights and duties. In the days of Plato and Aristotle, when usury was widely condemned, Plato advocated that only philosophers, of the highest standards of virtue, were fit to govern. These were people (actually they were men) who had achieved some form of enlightenment, and could thus contribute to the moral advancement of the republic. Today’s politicians tend to be economists rather than philosophers. They aim to promote the economic advancement (ie. growth in the GDP) of a country rather than its growth as a culture, or its growth towards a more advanced civilization. Even when today’s politicians discuss economic advancement, they tend to be preoccupied with “baking a bigger cake” rather than worrying about how this cake is divided up between the rich and the poor. Imagine the public ridicule that would be ensue in Australia if a group of bearded academics from the Universities’ Philosophy Departments, announced the formation of the New Acropolis political party, running on a platform of the abolition of usury, the end of racism, a guaranteed minimum

5 URL: http://www.globalideasbank.org/BOV/BV-101.html Channel Islands model of debt free money



wage for everyone, giving a sum of 10% of GDP to our neighbouring Asian countries as compensation for ripping them off, reinstating land rights (ie. right to negotiate) and buying large areas of land to return to its indigenous owners, increasing taxes to fund public services, ie. generally advocating the moral advancement of society. They may also advocate abolishing the Department of Defence, to be replaced by a Department of Nonviolent Resistance, with the military being redeployed for civilian projects such as the construction of schools. Just the mere suggestion of an increase in taxes would guarantee that the philosophers would not be taken seriously. Who would be crazy enough to vote for a politician who dared to suggest that there is more to life than making money? What a sad indictment of our society than individual selfishness is considered an economic virtue, and that rampant individualism is the only ethic permitted for the leaders of our nation! If usury is to be abolished, it is not enough for isolated individuals to withdraw their funds from commercial banks and invest them in interest-free alternative financial institutions. It is also necessary for us to elect representatives in government who will promote more human values, and more humane economic policies, as alternatives to the obsessive individualism which rules today’s society. In conclusion, while members of the church and the state may have bowed to public pressure from the newly emerging merchant classes in the seventeenth century, and pronounced usury legally and morally acceptable, it is not ethical and never has been. The primary problem with usury is that it can cause hardship to those who have to pay it (who are often already poor), while increasing the wealth of the already wealthy who have spare capital available to be loaned. Thus in most ethical frameworks, from Aristotelian and Platonic ethics to utilitarianism to feminist ethics to Islam, the abolition of usury can be defended. It is recommended, therefore, that usury be abolished, and that this change is brought about by a grass roots movement of concerned citizens investing in interest-free banks and participating in financial alternatives such as LETS and the Ithaca Alternative Trading System. It is also necessary to lobby governments, not only for the abolition of usury, but to help create a saner society that is not dominated by rampant individualism. 7.0 BIBLIOGRAPHY

Daly, Herman E. (1991) Elements of Environmental Macroeconomics, Ecological Economics. The Science and Management of Sustainability, Columbia University Press, New York. Ellwood, Wayne (1996) Building a Green Economy, New Internationalist, April 1996. Fenton, Roger (1612) A Treatise of Usurie, Divided into Three Bookes, London, reprinted in Silk, 1972. [Filmer, Robert] (1653) Quaestio Quodlibetica: or a Discourse, whether it may be lawfull to take Use for Money , reprinted in Silk, 1972.



Fonseca, Aloysius (1988) Are High Interest Rates Justifiable? Gregorianum 69, 2 ,pp 225-259. Mannan, Muhammad Abdul (1986) Islamic Economics: Theory and Practice, Hodder and Stoughton, Cambridge. Mehmet, Ozay (1990), Islamic Identity and Development. Studies of the Islamic Periphery, Routledge, London. Metwally, M.M. (1997) Economic Consequences of Applying Islamic Principles in Muslim Societies, International Journal of Social Economics, Vol 24, No. 7/8/9, 1997. Mollison, Bill (1988) Permaculture A Designers Manual, Tagari, Tyalgum. Norgaard, Richard B. and Howarth, Richard B. (1991) Sustainability and Discounting the Future, Ecological Economics. The Science and Management of Sustainability, Columbia University Press, New York. Pontifical Commission “Justitia et Pax” (1986) At the Service of the Human Community: An Ethical Approach to the International Debt Question, Citta del Vaticano, p.19.

Reilly, B.J. and Kyj, M.J. (1990) Economics and Ethics, Journal of Business Ethics, 9: 691-698, 1990, Kluwer Academic Publishers, Netherlands. Silk, Leonard (ed) (1972) The Usury Debate in the Seventeenth Century: Three Arguments, The Evolution of Capitalism series, Arno Press, New York. Sparkes, Russell (1995), The Ethical Investor, Harper Collins, London. Tawney, R.H. (1925) Introduction to reprinted version of Wilson, Thomas (1572) A Discourse Upon Usury, G.Bell and Sons, London. Thomas, Lewis (1974) The Lives of a Cell, The Viking Press Inc. Trainer, Ted (1998) Can Permaculture Save the World?, Permaculture International Journal, Issue 68, Sep-Nov 1998. Twisden, Roger (1652) Introduction to Quaestio Quodlibetica: or a Discourse, whether it may be lawfull to take Use for Money , reprinted in Silk, 1972. Unknown author (1625) Usurie Araigned and Condemned, or, A discoverie of the infinite Injuries this kingdome endureth by the unlawfull trade of usury, London, reprinted in Silk, 1972. Vardy, Peter and Grosch, Paul (1994) The Puzzle of Ethics, HarperCollins, Glasgow. Worster, Donald (1994), Nature’s Economy, Cambridge University Press, Cambridge. Wilson, Thomas (1572) A Discourse Upon Usury, reprinted in Tawney, 1925.

7.1 INTERNET REFERENCES URL: http://www.utm.edu/research/iep/f/femethic.htm The Internet Encyclopaedia of Philosophy: Feminist Ethics

URL: http://www.utm.edu/research/iep/s/stoicism.htm The Internet Encyclopaedia of Philosophy: Stoicism

URL: http://www.pcug.org.au/~gchallin/gundaroo/ethics1.htm How can different values and conflicting ideas be managed in terms of deciding future directions for a community? URL: http://www.globalideasbank.org/BOV/BV-101.html Channel Islands model of debt free money

Trish Morrow Islamic Economics

Documents

Transcript of Trish Morrow Islamic Economics