A Short Review of the Historical Critique of Usury
Wayne A.M. Visser and Alastair McIntosh
[SUP]Centre for Human Ecology[/SUP]
[SUP]First published in Accounting, Business & Financial History, 8:2, Routledge, London, July 1998, pp. 175-189.[/SUP]
[SUP]Abstract[/SUP]
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 criticisism 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 ratehttp://www.alastairmcintosh.com/articles/1998_usury.htm#_edn1. 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 [Refer PDF or Site]
Usury in Ancient Western Political Philosophy[Refer PDF or Site]
Usury in Judaism[Refer PDF or Site]
Usury in Christianity[Refer PDF or Site]
Usury in Modern Reformist Thinking[Refer PDF or Site]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[ii] 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.
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[Refer PDF or Site]
Usury as Double Billing[Refer PDF or Site]
Usury as Exploitation of the Needy[Refer PDF or Site]
Usury as a Mechanism of Inequitable Redistribution of Wealth[Refer PDF or Site]
Usury as an Agent of Economic Instability[Refer PDF or Site]
Usury as Discounting the Future[Refer PDF or Site]
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.
POSTSCRIPT ON THE CREDIT CRUNCH, 2009[Refer PDF or Site]
Alastair McIntosh & Wayne Visser
Added to the online version of this paper, January 2009
[SUP]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.[/SUP]
[SUP]Alastair McIntosh is a Fellow of Edinburgh’s Centre for Human Ecology.[/SUP]
Endnotes
http://www.alastairmcintosh.com/articles/1998_usury.htm#_ednref1 Hence, “usury” and “interest” have been used interchangeably in this paper, except where interpretative difference occured historically, in which instance the relevant distinction will be made explicit. Also, “interest” has been taken to refer to any real rate after inflation, bad-debt provision and administrative costs.
[ii] Most notable of these is Surah 2 verses 188, 274-280; Surah 3 verse 130; Surah 4 verses 29, 161; Surah 9 verses 34-35, 43; Surah 30 verse 39.
[iii] Exodus 22:24-25; Leviticus 25:35-37; Deuteronomy 23:19-21; Ezekiel 18: 20; Proverbs 28:8; Psalms 15:5; Nehemiah 5:7.
[iv] I Samuel 22:2; II Kings 4:1; Isiah 50:1.
[v] For more first-hand detailed insight into the theological debate on usury, especially during the 16th and 17th Centuries, some republished original texts from that period include: Blaxton (1974), Culpepper (1974), Fenton (1975), Smith (1975) and Wilson (1925).
[vi] Luke 6: 34.
[vii] Whilst opinions differ on the correctness of doing so differ, the authors have presumed God and Allah to represent the same divine principle though expressed differently in the understanding of respective faiths.
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Date: 03/12/10 |
