14 November 2007

Alternatives To A Pound Of Flesh?

Treasury minister Kitty Ussher today launches a three-month consultation into issuing Islamic "sukuk" bonds, which are compliant with the prohibition on interest found in Shari'a law. The government's goal is to introduce the bonds in next year's budget with the view to establishing the UK a key world centre in the development of Islamic finance, a market started just five years ago with the first $600 million bond issue by the Malaysian Government and now estimated to be worth $400 billion globally.

Coinciding, as it does, with the ongoing global impact of America's sub-prime lending crisis and warnings that repossessions in the UK will keep on rising over the coming months, perhaps it is time for Christians to revisit the Biblical injunction against interest† and consider whether this is a product that we should use. For, as Thomas Aquinas famously observed, "To take usury for money lent is unjust in itself, because this is to sell what does not exist, and this evidently leads to inequality which is contrary to justice."

When Jesus applied the Old Testament teaching against taking interest for his disciples in the Sermon on the Plain (Lk 6:34-36), his concern was that we might be kind and merciful. One of the issues, as Pope Gregory IX noted in the thirteenth century, is whether the lender shares in the risk associated with the loan or profits irrespective of what happens to the borrower. When you see the likes of Theo Paphitis, Duncan Bannatyne and Peter Jones investing their thousands in novel business ventures on Dragon's Den, you are witnessing the start of a relationship between lender and borrower as it is in the dragon's interests to ensure the entrepreneur makes the most of the borrowed funds. In contrast, when you or I visit the bank to negotiate a new mortgage, the bank is effectively able to ignore the needs of the borrower thereafter as they and their anonymous shareholders will profit whether or not we are able to make our monthly repayments.

The Islamic bonds, sukuks, are asset-based and tend to be used in conjunction with a structure where lease rental income provides a profit for the sukuk holders or where the profit share provides a return. In either case, the sukuk holder not only profits from the income generated from the underlying asset, but also holds a proportional ownership in it, so consequently assumes all rights and obligations for the maintenance of the asset. Here, at least there is shared risk, yet it still lacks the proximity of relationship seen in the Dragon's Den.

Once the Government has introduced the legislative framework to allow such bonds, promising to entrench London as "a global gateway to Islamic finance," perhaps Christian businessmen could devise a new set of financial institutions that would enable people to borrow and invest in a way that both shares any risk equitably and cultivates closer community relationships?

See Ex 22:25, Lev 25:35-37, Dt 23:20-21, Lk 6:34-36


The Stonemason said...

Was Aquinas correct? The lender who loans his money at interest is 'selling' the opportunity of using that money for something else for the duration of the loan, and the borrower has 'purchased' the use of that money for his own purposes. The investor's position is not risk free, the borrower may default on the loan and the lender not get his money back, let alone the interest. There needs to be proper regulation to ensure that borrowers are not charged punitively or lead by lenders into debt they have no chance of re-paying but I am far from convinced that we should turn back the clock to usury-less financing. Asset based loans will surely encourage the centralisation of assets into the hands of the already wealthy (witness the huge disparity of wealth in Muslim countries), whereas modern western financing has not only brought incredible wealth to the countries who developed and use it but also, in conjunction with political and legal reform, brought forth a much more equal and mertitocratic society.
However, I fully understand why the government is seeking to introduce these bonds, the City cannot afod to miss out on such a growth area in financing.