A few weeks ago I read a rather stimulating piece on Project Syndicate entitled The Challenge of Islamic Finance.

It was stimulating not because it introduced Islamic finance, which I’ve long kept a weather eye on, but because it put the model into perspective against the larger changes going on in the worldwide economy.

In addition, as always with the best bits of writing, the comments are just as interesting as the original piece.

So I thoroughly recommend going off and reading it.  However, rather than rake over its coals here my purpose I want to address business’ attitude towards usury.

A brief history of usury

The term “usury” comes from the old English for “using” money or materials owned by another person (i.e. borrowing).

When the Christian church was established it embraced the outright prohibition on interest bearing loans which exists in the Hebrew Torah.  However as Christianity grew up within the Roman Empire, where usury was allowed, it had to struggle for a thousand years before Pope Clement V declared all interest to be sinful and all legislation allowing it null and void.

Within a few centuries this outright ban started to unravel.  One of little known effects of the establishment of the protestant Church of England is that is allowed Henry VIII to permit interest rates of up to 10 percent, a move which is recognised as the foundation of modern interest rates.  This rate was later reduced to 6 percent, a maximum which remained in place in the UK until the 1850s.

So we arrive at today’s meaning of usury: the charging of excessive interest rates, with most countries having a nominal rate above which it is illegal to charge.

It’s worth noting that interest bearing loans are still outlawed in both Judaism and Islam (although Jews are allowed to charge interest to non Jews) and that other ancient cultures around the world also frown upon charging interest.

In other words, usury is not a cultural problem but one which has troubled philosophers and economists since history began.

What’s the problem with usury?

Key to people’s problems with usury is the idea of what is a fair and equitable transaction.

The ancient Greeks frowned upon usury because money did not of and by itself increase.  For them interest could be charged on something which does naturally increase.  For example, if one person was to lend another a herd of animals he would be entitled to a share of the increase in that herd through procreation when it’s returned.  £100 does not naturally procreate, so therefore only £100 should be returned.

Similarly many believe Jesus’ objection to moneychangers in the Temple of Jerusalem is because of the usurious nature of their business.  Hebrews needed a half shekel to enter the temple but the Roman money they were exchanging was worth more than that half shekel.  It was not, therefore, a fair and equal transaction because the moneychangers were making a profit out of nothing.

The same thoughts are echoed in Islam where parties entering into a transaction must be assured a fair exchange of items of the same value either at the point of transaction or at an agreed date later on .  This is why interest bearing loans are forbidden under Sharia law, because the debtor has no assurance of gaining anything of equal value to the interest charged.

Usury and CSR

What’s all this got to do with CSR?  Well it leads to an interesting set of thoughts about commerce and trade and how they can become more responsible.

It’s widely recognised that over exposure to debt and overvaluation of assets were key components to the financial meltdown of 2007-8.  These are precisely the circumstances prohibitions against usury are trying to protect us against, and key to that protection is the fair exchange of goods between those engaged in trade.

At no point do traditional anti-usury notions become anti-trade, anti-profit or anti-capitalist.  Nearly all have at their heart a concern for ensuring trade is conducted to the benefit of all involved and most, like the ancient Greek example, are explicitly pro-investment: encouraging those with excess capital (as represented by the livestock) to directly invest in the livelihoods of others of lesser means for a share of the profits.

Today the idea of gaining the highest price for the lowest value goods or service is termed “excessive profit margins”.  There’s very little difference between this and usury because both have at their heart the distasteful notion of earning money for doing absolutely nothing.  Excessive profits and usury reek of exploitation, neither has anything in their fiber about an equitable transaction.

CSR often describes itself as a movement which enforces standards which are higher than those required by law.  In the aftermath of a catastrophic worldwide economic meltdown which had its origins in excessive risk perhaps the CSR community should  take a long hard look at how the businesses world has become almost completely usurious in nature?

After all, surely there are better ways to trade with one another than to belittle, humiliate and exploit your client?

Picture Credit: Sunrise by Diganta Talukdar under CC Attribution License.

Tagged as: christianity, csr, islam, islamic finance, judaism, philosophy, sharia, usury