The financial crises of the past few months have resulted in some deep soul-searching as we struggle to understand why what seemed to be the bedrock of financial stability came crumbling down. First Wachovia, the nation’s No. 4 bank holding company, then Fannie Mae and Freddie Mac, followed by Merrill Lynch.
It did not stop there. The Feds bailed out American International Group, or AIG, for $85 billion and Washington Mutual became the largest bank failure in history. As the nation searches for a solution to the recession that started in December 2007, politicians debate bailout plans, CEOs line up for government handouts, and perhaps, just perhaps, as we beat around the proverbial bush, we are overlooking the root of the problem: interest or usury itself.
It is the age-old mechanism that has been used since the beginning of time to bind those who don’t have to those who do.
The appetite of our greed is nothing new and existed well before our time. It’s an appetite that was recognized from one end of the world to the other end — from ancient China to the Middle East — and surprisingly manifested in the prohibition of interest. A large number of ancient civilizations were against the practice of charging interest on loans.
Undoubtedly, capitalists will rise up and denounce this as a step back for the progress of humanity and of civilization. To which we must ask: are we really more civilized now than before when we exercised restraint in our appetite to consume and take advantage of others?
The Old Testament says: “If he has not exacted usury nor taken any increase, but has withdrawn his hand from iniquity … And executed true judgment between man and man; If he has walked in My statutes and kept My judgments faithfully — He is just; He shall surely live!” says the Lord GOD.” (Ezekiel 18:7-9)
“If he has exacted usury or taken increase — Shall he then live? He shall not live! If he has done any of these abominations, he shall surely die; his blood shall be upon him. (Ezekiel 18:13)
Although Jewish scholars differ as to the meaning of these injunctions, it is clear that the very nature of interest was considered reprehensible to the point that people who practiced it were cursed.
Even in early Christian history, we find the charging of interest was considered “detestable to God and man, damned by the sacred canons and contrary to Christian charity” by Pope Sixtus V.
Lateran III decreed that people who charged interests on loans would “receive neither the sacraments nor Christian burial.”
In Islam, the Quran is unequivocal on the evil of interest:
“Those who devour usury will not stand except as stand one whom the Evil one by his touch hath driven to madness. That is because they say: ‘Trade is like usury,’ but God hath permitted trade and forbidden usury. Those who after receiving direction from their Lord, desist, shall be pardoned for the past; their case is for God (to judge); but those who repeat (the offense) are companions of the Fire: They will abide therein (for ever). Allah will deprive usury of all blessing, but will give increase for deeds of charity: for He does not love ungrateful and wicked creatures.” (Chapter 2, 275-276. Al-Baqara or The Heifer)
This is a tenet to which many Muslims still adhere. During the early Islamic civilizations, a variety of banking principles were introduced that did not resort to interest. Many of these principles still are applied today and many Islamic banks largely were unaffected by the recent subprime [interest] woes.
As the recent financial meltdown indicated, an interest-based economy results in the economy being built on thin air. Banks counted on interest on loans from borrowers to meet their operational costs; however, with the recent spike in fuel prices and unemployment, borrowers were unable to meet their payments. Faced with decreased cash inflow, and falling home prices and rising foreclosures, banks became bankrupt. When the House of Representatives rejected the $700 billion bailout plan on Sept. 29, 2008, the ensuing panic caused the Dow Jones to fall almost 778 points, which is the largest single-day slide in history.
The reason why interest is so abhorrent is the preying of the lender on the borrower. The rich become richer and the poor become poorer. Who are the victims of the recent mortgage crises? Are they the Wall Street fat cats who sought millions in bonuses, even while the money for the bailout was being coughed up by the Feds, or the struggling taxpayers who must shoulder this burden?
For every dollar accepted by anyone from interest, it is inevitable there is someone who is struggling hand to mouth to pay that dollar in interest. Where does the bank get the money to pay depositors the returns on savings? People who are paying interest on their loans! A $100,000 loan at a fixed rate 15-year mortgage of 5.0 percent will accrue nearly $42,380 in interest — nearly half the amount of the loan itself.
Elimination of interest-based banking levels the playing field for the lender and the borrower alike. Islam is opposed to a guaranteed return for one of the parties at the expense of the other. One principle of Islamic banking entails that if a loss occurs, it is shared by the lender and the borrower through a partnership. This forces lenders to be more aware of their lending practices, decreasing the occurrence of the lax lending practices that were one reason for part of the financial failure.
For example, if a person wants to start a business, the bank finances the startup costs and becomes a partner, thereby sharing in the profits from that business rather than charging interest on the loan. The person who started the business pays the loan back in incremental payments.
Another practice Islam especially prohibits is speculative investments such as futures — expected profit before the commodity is even available.
The devastation of the financial markets today affects a larger number of people than such an event would have thousands of years ago. In today’s global economy, when the U.S. markets stumble, markets from Europe to Asia teeter in response. Interestingly, the prohibition of interest becomes more pertinent today than ever before.
In the face of the spiraling financial descent that we face in the near future, it is not possible that a loving and merciful God would not provide guidance on how to conduct an aspect of humanity as important as commerce. He has warned us throughout history to the evils of our greed and has given us the knowledge to control it by prohibiting the use of interest. If we fail to recognize it and utilize it, then we have only ourselves to blame.
This Voices column was written by Ali Shareef, a graduate student in the College of Engineering, University of Maine, Orono. Columns on Islam are published in cooperation with the Islamic Center of Maine in Orono.