The Federal Trade Commission is cracking down on lenders who use misleading advertising to convince borrowers to put their cars down as collateral for loans. While the use of fraudulent marketing is bad enough, there’s also something unsettling about asking someone to risk losing their sole means of transportation in order to get some much-needed cash. These and other financial instruments, from subprime mortgages to high-interest payday loans, make many of us squeamish for a reason.
Interest-bearing loans are a building block of the American economy, but is there a moral line to draw around some kinds of lending? In a 2007 paper for the Journal of Business Ethics, Constant J. Mews and Ibrahim Abraham present this question in ethical debates around lending that go back to the beginnings of human history.
Mews and Abraham write that 5,000 years ago Sumer (the earliest known human civilization) had its own issues with excessive interest. Evidence suggests that wealthy landowners loaned out silver and barley at rates of 20 percent or more, with non-payment resulting in bondage. In response, the Babylonian monarch occasionally stepped in to free the debtors.
Christian theologians began developing ideas about usury in the late 12th and early 13th centuries—though it wasn’t always clear whether the term referred to all interest or just excessive rates. Mews and Abraham write that the rising concern about the issue in that era followed a “speculative credit boom” fueled by Christian expansion into Spain and the discovery of new silver mines.
Franciscan and Dominican preachers focused on the evils of avarice and concerns about the exploitation of the poor. Christian thinkers encouraged the wealthy to make investments at their own risk, like venture capitalists, rather than offer high-interest loans. But prohibitions on lending created a black market in which the poor might pay interest rates of 35 percent or more.
In the early modern era, thinkers from John Calvin to Adam Smith condemned excessive interest rates while accepting the need for loans with interest as part of Europe’s emerging capitalist economies. Governments began setting caps on interest rates. In England, the legal limit was 10 percent in 1571, and by 1651 the government had reduced it to 6 percent, though enforcement was lax.
Utilitarian philosopher Jeremy Bentham argued against the caps in terms that contemporary libertarians might rally around (“on the side of the individual … there is the most perfect and minute knowledge and information … on the side of the legislator, the most perfect ignorance”), and helped get them eliminated in 1854.
Mews and Abraham write that today, despite bans on excessive interest and various predatory lending practices, the issue of usury is very much relevant to poor borrowers. One of the few functioning models for applying a traditional moral framework to financial transactions is found in Islamic finance, which engages with the global markets while seeking to avoid benefiting from interest (or from various other profit centers, including movie makers and defense contractors).
The authors suggest that Christians interested in taking concerns about usury seriously could benefit from studying Islamic financial institutions.