Saturday, 4 August 2007

The wrongs of loans

Is it right, or even reasonable, to argue that our debt-based economy is in any sense un-Christian, or to argue that lending money at interest, particularly for the purchase of something as basic as a house, is somehow wrong?

Before considering these questions, I’d like to quote something said by CS Lewis in the original radio talks that eventually became his classic Mere Christianity:

There is one bit of advice given to us by the ancient heathen Greeks, and by the Jews in the Old Testament, and by the great Christian teachers of the Middle Ages, which the modern economic system has completely disobeyed. All these people told us not to lend money at interest: and lending money at interest — what we call investment — is the basis of our whole system. Now it may not absolutely follow that we’re wrong. Some people say that when Moses and Aristotle and the Christians agreed in forbidding interest (or "usury" as they called it), they could not foresee the joint stock company, and were only thinking of the private money-lender, and that, therefore, we need not bother about what they said. That is a question I can’t decide on. I am not an economist and I simply don’t know whether the investment system is responsible for the state we are in or not. This is where we want the Christian economist. But I should not have been honest if I had not told you that three great civilisations had agreed (or so it seems at first sight) in condemning the very thing on which we have based our whole life.

Lewis avoided giving judgement. Can we, however, go a bit further?

Peter Kirk asks, for example, with respect to investing in a building society, “Is it wrong that I invest that money in a way which allows relatively poor people to buy homes to live in?”

There is, however, a difficulty with phrasing the question this way. Perhaps at one stage the aim and effect of building societies was, indeed, to allow the relatively poor to buy a home. The present situation, however, is very different, where almost no-one can afford even to get on the so-called ‘first rung’ of the housing market in the UK without mortgaging themselves to the hilt.

I would argue it is an example of the principle of ‘unintended effect’, with the initial provision of relatively small loans actually driving up the cost of house-buying, exacerbated further by the prevalence of two-income households. What has happened is a competition not for housing but for loans, with sellers able to ask more for their property because people are willing to borrow more to buy it.

The result is, increasingly, a nation of mortgage slaves under the delusion that they own an ‘investment’. But a house is only an investment if you can dispose of it without having to buy another at a similar or lower price. In other words, it is an investment for downsizing pensioners or for people who own more than one house — who do not therefore fit the category of those who need to buy ‘homes to live in’. In fact, as we know, another pressure driving up the price of housing is the ‘buy to let’ market. Yet this is only made possible by the ‘lend to buy’ mortgage market, which has arguably fuelled the problem, benefiting a few at a cost to the many.

This is why I would say it is a mistake to suggest that ‘playing the stock market’ is motivated by greed, whereas investing in a building society is free from ethical dilemmas. First, there is nothing necessarily ‘greedy’ about stock market investment. Secondly, the housing market has itself become the epitome of greed where some are raking in fortunes whilst others are struggling to hold on to their homes.

What, though, of other loans? Martin Luther would have had no problem with investments where the value of the investment could go down as well as up. That was just the nature of business. But in ethical terms, is the prohibition of interest just a matter of ‘risk good, no risk bad’?

The biblical injunction is based clearly on the principle of not exploiting the poor. It is unnecessary to explain why this is a bad thing! The problem for us is in recognizing that our debt economy is based almost entirely on the same form of exploitation, without us realizing it.

The Bible specifically forbids charging interest on a loan to a brother Israelite who borrows in order to buy what he needs. Such borrowing would fall into the category of a ‘consumptive loan’. However, any consumptive loan must be open to question either on the same grounds of need or on the grounds of greed.

If somebody needs something — really needs it, such as food or clothing or shelter — then charging them interest (in other words, further increasing the cost of what they cannot afford so that we can profit from the deal) is clearly immoral.

If, on the other hand, they want to buy something that they don’t need, then they should wait and work until they can afford it. To borrow money at interest in order to buy what you do not absolutely need only increases the cost of something you can’t afford already. For the buyer it is folly to get into debt, and for the lender it is collusion with their folly to take their money. On this basis, most of the credit industry stands condemned as operating on the principle of a sucker being born every minute!

That only leaves the charging of interest on ‘productive’ loans — loans which are taken out in order to develop a venture which will hopefully make money and provide economic benefit.

Luther’s own invective against charging interest was directed precisely at this kind of system. His arguments were that the lender sought to insulate himself from risk, leaving only the borrower exposed, which in his view was both unloving and contrary to the principle of accepting that life contains risks for all of us.

Of course, there is a certain simplicity in charging a fixed rate of interest on such loans. Moreover, if the venture goes particularly well, the borrower stands to gain more than otherwise might have been the case with a ‘shared profits, shared losses’ arrangement.

Nevertheless, we cannot necessarily say that is the end of the argument. The Islamic world operates on the principle that fixed interest is wrong, and yet there are major Muslim investors in the Western economy committed to abiding by that principle. If it can be done by them, why cannot it be done by us?

There is something clearly not quite right about an economic system which can take from the endeavours of others without a shared risk. Equally, it is clearly not impossible to operate on another basis. Given that we now have perfectly sober commentators appearing on the BBC saying, “We do not have a debt problem in this country, we have a debt crisis,” and given that the Bible is quite clear that this crisis is avoidable, do we not have, as Lewis observed, the responsibility at least to question the system and, where possible, to extricate ourselves and others from it?

Revd John P Richardson
4 August 2007

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  1. Michael Schluter has certainly written some interesting stuff on a non-interest-based Christian economic view.

  2. Schluter certainly has and his alternative to limited liability is really interesting.

    I think I agree with you John, you look at the situation and can see how it could have been avoided. But how could we undo it now?

    Obviously the buy to let system is distorting everything, yet many clergy do this as the only way to get on the 1st rung, as by the time they retire it may be impossible. We haven't yet done that but are thinking about it, but are not sure we can even afford that.

  3. I see the main problem as general consumer credit. Credit card rates are in excess of 10% above base rate and exch lender wants to sign you up for the maximum facility which would be viable if they were the only lender. They then make their profits on administration charges which bear no relationship to the costs involved.

    The purchase of a home or a car with a loan can be a reasonable decision providing the cost is proportionate to income.

    Similarly a young person may use a store card to prpare his wardrobe for his first job.

    Is buy to let a bad thing? Rented accomodation is attractive to students and others who are likely to move for employment reasons.

    The general rise in hose prices is a result of increasing wealth and population growth. This means that say people are prepared to spend 35% of income on housing rather than 25% a generation ago.

    The present crisis is the ironic result of low interest rates which have been good for house buers and business but have little effect on lenders due to the large margins taken by banks.

    More generally the problem is a result of the growing disparity of incomes in society.

    The problem of poverty is a result of government policy. The minimum wage is low to provide cheap labour. Benefits levels are set around half of this to provide suitable motivation. Any benefit given are rapidly withdrawn if income increases thus providing little motivation for overtime or part time jobs. Their motto seems to be "The system nver fais only people fail". The rich have their reward and the poor are unseen.

    David Hey
    West Yorkshire

  4. John you are only addressing one side of the equation. You suggest there is only one sensible alternative to borrowing and paying interest:

    "If, on the other hand, they want to buy something that they don’t need, then they should wait and work until they can afford it."

    But where should they keep these savings? If they do the apparently wise thing and put them in a savings account, surely they are also contributing to the problem. After all, the interest paid on the savings account comes through the savings institution lending funds to people who pay interest on those loans. That is the essence of the building society movement, which was founded originally for mutual benefit.

    So where should someone keep their savings? Are we to advocate a return to the piggy bank on the mantlepiece, or is a paper bag under the mattress more appropriate? There is another side to the equation!

    Tim Houghton,