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Friday, 11 September 2009

Usury laws and global economic development

Within consumption based economic models access to credit and lending is crucial to maintain steady economic growth. However the sentiment towards lending varies worldwide. In the Middle East there is little access to credit or lending due to Islamic usury laws.

Usury originally meant the charging of interest on loans. This included charging fees for the use of money. After countries legislated to limit the rate of interest on loans, usury came to mean the interest above the lawful rate. In common usage today, the word means the charging of unreasonable or relatively high interest rates.

The term is derived from Abrahamic religious principles within Christianity. Whereas most early religious systems in the ancient Near East did not forbid usury on inanimate matter, like plants, food, animals and people, usury was forbidden on money lending. The main moral argument was that usury creates excessive profit and gain without "labor" which is deemed "work" in the Biblical context. To make profit on loans was considered mere avarice, greed, trickery and manipulation. It was felt that usury created a divide between people due to obsession with monetary gain.

Thou shalt not lend upon interest to thy brother: interest of money, interest of victuals, interest of any thing that is lent upon interest. Unto a foreigner thou mayest lend upon interest; but unto thy brother thou shalt not lend upon interest; that the thy God may bless thee in all that thou puttest thy hand unto, in the land whither thou goest in to possess it. (Deuteronomy, 23:20-21)

The First Council of Nicaea forbade clergy from engaging in usury, which meant they could not charge interest of any kind. Keep in mind that the church was the wealthiest institution at the time. Lateran III decreed that persons who accepted interest on loans could receive neither sacraments nor Christian burial. Pope Clement V made the right to usury heresy in 1311 and abolished all secular legislation allowing it.

The Jews took a different view on the matter. Within Jewish tradition interpretations of usury vary, but one understanding is that Israelites were forbidden to charge interest on loans made to other Israelites. They were allowed to charge interest on transactions with non-Israelites. As the Jews were ostracized from most professions by local rulers, the church and the guilds, they were forced into marginalized occupations considered socially inferior: tax/rent collection and money lending. As a result they were viewed as greedy.

Often they were merely the ‘front’ man for the local lords. Peasants were forced to pay their taxes to Jews, which increased the animosity towards Jews, although it was the lords who were pocketing the funds. Tensions between creditors and debtors added to the social, political, religious and economic anti-semitism.

Attitudes towards usury did not prevent investment. What usury laws stipulated was that for the investor to share in the profit he must share the risk. To invest the money and expect it to be returned regardless of the success of the venture was to make money simply by having money and not by taking any risk or by doing any work or by any effort or sacrifice at all.

In a historical context, usury has been inextricably linked to economic abuse, typically of the poor. Within Muslim tradition ‘Riba’ is the corresponding term. Interest of any kind is forbidden in Islam. Specialized codes of banking have developed to cater to investors wishing to obey Qur’anic law.

And for practicing usury, which was forbidden, and for consuming the people's money illicitly. We have prepared for the disbelievers among them painful retribution. (Al-Nisa 4:161)

Islamic banking has the same purpose as conventional banking except that it operates in accordance with Shariah law. The basic principle of Islamic banking is the sharing of profit and loss and the prohibition of riba. In 1975, the Islamic Development Bank was setup with the mission to provide funding to projects in member countries. Initially the products offered were basic and founded on conventional banking products, but the industry has developed new products and services in recent years.

In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the property, a bank might buy the item from the seller and resell it to the buyer at a profit, while allowing the buyer to pay in installments. The fact that it is profit cannot be made explicit. Therefore there are no penalties for late payment. Instead banks ask for significant collateral to protect against default. Another innovative approach allows for a floating rate in the form of rental. The bank and borrower form a partnership, which rents the property to the borrower. The bank and the borrower share the proceeds from this rent based on the equity share of the partnership. Simultaneously the borrower buys the bank’s share on the property at agreed installments until full equity is transferred to the borrower. Furthermore Islamic banking is restricted to accepted deals, which excludes all business gambits involving alcohol, gambling, pork, etc.

Given the disparity in economic development in the West versus economic development in countries with ongoing anti-usury laws, usury seems necessary to insure that funds are made available to a larger cross-section of society. There is a direct correlation between usury and increased investment potential. With Islamic banking institutions invested in the risk, financial institutions are unlikely to extend capital to poor individuals with little collateral. Within that model, there would be no opportunity for investment capital to the impoverished entrepreneur, which leads to slower economic development, less innovation and a weak middle class. Cultural attitudes towards usury laws lend insight into the economic disparity between East and West.

(by Leslie Davis / Atlanta Mortgage Examiner)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant/Speaker/Motivator : www.ahmad-sanusi-husain.com 
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

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