The financial crisis of the past few years has resulted in some deep soul-searching as we struggled to understand why what seemed to be the bedrock of financial stability came crumbling down. First Wachovia, the nation’s number four bank holding company, then Fannie Mae and Freddie Mac, followed by Merrill Lynch. It did not stop there; the Feds bailed out American International Group (AIG) for $85 billion and Washington Mutual became the largest bank failure in history. As the nation searched for a solution to the recession which started in December 2007, politicians debated bailout plans, CEOs lined up for government handouts, and perhaps, just perhaps, as we beat around the proverbial bush, we overlooked the root of the problem: interest or usury itself.
Given the prevalence of interest-based transactions today, it may be bewildering to indict interest itself as a problem. It seems logical, at face value, that a lender should gain some benefit for his risk in providing a loan. However, history has demonstrated that even if this practice of interest was initiated with the best of human intentions, it degraded into the worst of unabashed exploitation of the poor. It became the age-old mechanism that was used since the beginning of time to bind those who don’t have to those who have.
This appetite for profit even at the expense of those most impoverished is nothing new and has existed well before our time. An appetite that was recognized from one end of the world to the other—from ancient China to the Middle East—and manifested itself in the prohibition of interest. A surprisingly large number of ancient civilizations were against the practice of charging interest on loans.
Undoubtedly, capitalists will rise up and denounce this as a step back for the progress of humanity and civilization. However, we must ask: are we really more civilized now than when we exercised restraint in our appetite to consume and take advantage of others?
The Old Testament says: “’If he has not exacted usury nor taken any increase, but has withdrawn his hand from iniquity … And executed true judgment between man and man; If he has walked in My statutes and kept My judgments faithfully — He is just; He shall surely live!’ says the Lord GOD.” (Ezekiel 18:7-9)
“If he has exacted usury or taken increase — Shall he then live? He shall not live! If he has done any of these abominations, he shall surely die; his blood shall be upon him.” (Ezekiel 18:13)
Although Jewish scholars differ as to the meaning of these injunctions, it is clear that the very nature of interest was considered reprehensible—to the point that people who practiced it were cursed.
Even in early Christian history, we find that charging interest was considered “detestable to God and man, damned by the sacred canons and contrary to Christian charity” by Pope Sixtus V.
Lateran III decreed that people who charged interests on loans would “receive neither the sacraments nor Christian burial.”
In Islam, the Qur’an is unequivocal about the evil of interest:
“Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, ‘Trade is [just] like interest.’ But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns to [dealing in interest or usury]—those are the companions of the Fire; they will abide eternally therein. Allah destroys interest and gives increase for charities. And Allah does not like every sinning disbeliever.” (Qur’an 2:275-276)
This is a tenant that many Muslims still adhere to. During the early Islamic civilizations, a variety of banking principles were introduced that did not resort to interest. Many of these principles are still applied today and many Islamic banks were largely unaffected by the recent subprime woes.
As the recent financial meltdown indicated, an interest-based economy results in the economy being built on thin air. Banks counted on interest on loans from borrowers to meet their operational costs. However, with the spike in fuel prices and unemployment, borrowers were unable to meet their payments. Faced with decreased cash inflow, falling home prices, and rising foreclosures, banks became bankrupt. When the House of Representatives rejected the $700 billion bailout plan on September 29th 2008, the ensuing panic caused the Dow Jones to fall almost 778 point—the most ever for a single day since the Great Depression in 1929.
The reason why interest is so abhorrent is the preying of the lender on the borrower. The rich become richer and the poor become poorer. Who are the victims of the recent mortgage crises? Is it the Wall Street fat cats who sought millions in bonus even while the money for the bail-out was being coughed up by the Feds, or the struggling tax payers who must shoulder this burden?
For every dollar accepted by anyone in interest, inevitably there is someone who is struggling hand to mouth to pay that dollar in interest. Where does the bank get the money to pay depositors the returns on savings? People who are paying interest on their loans! A $100,000 loan at a fixed rate 15-year mortgage of 5.0 percent will accrue nearly $42,380 in interest—nearly half the loan itself!
Elimination of interest-based banking levels the playing field for the lender and the borrower alike. Islam is opposed to a guaranteed return for one of the parties at the expense of the other. One principle of Islamic banking entails that if a loss occurs, it is shared by both the lender and the borrower through a partnership. For example, if a person wants to start a business, the bank finances the startup costs and becomes a partner, thereby sharing in the profits from that business rather than charging interest on the loan. The person who started the business pays the original principal amount back in incremental payments. This lack of a guaranteed return forces lenders to be more aware of their lending practices, and decreases the lax lending practices that were one of the reasons for the financial failure. Another practice Islam especially prohibits is speculative investments such as futures—expected profit before the commodity is even available—which was another reason for the financial collapse.
The devastation of the financial markets today affects a larger number of people today than it did thousands of years ago. In today’s global economy, when the U.S. markets stumble, markets from Europe to Asia teeter in response. Interestingly, the prohibition of interest becomes more pertinent today than ever before.
In the face of the spiraling financial descent that we faced, and from which we have not yet fully recovered, it is not possible that a loving and merciful God would not provide guidance on how to conduct an aspect of humanity as important as commerce. He has warned us throughout history of the evils of our greed and has given us the knowledge to control it by prohibiting the use of interest. If we fail to recognize it and utilize it, then we have only ourselves to blame.