Usury laws, Islamic finance and the credit crunch

Citation

Shubber, K. (2009), "Usury laws, Islamic finance and the credit crunch", International Journal of Islamic and Middle Eastern Finance and Management, Vol. 2 No. 4. https://doi.org/10.1108/imefm.2009.35202daa.001

Usury laws, Islamic finance and the credit crunch

Article Type: Editorial From: International Journal of Islamic and Middle Eastern Finance and Management, Volume 2, Issue 4

It is a glaring irony that major shocks and disasters can often jolt human minds to think laterally, and thus come up with spectacular new ideas – the so-called “silver-lining of every cloud”.

When we look back at the Great Depression (1929-1932), we can identify more than one resultant silver lining, from Roosevelt's New Deal in the USA to Keynesian economic models and the birth of the Bretton-Woods set of multi-lateral institutions.

And, the latest credit crunch is likely to be no exception. One such aspect is the new thinking over exorbitant rates of interest charged by loan sharks and credit card companies. In the UK, we recently witnessed the start of a campaign organised by London Citizens to reinstate usury laws which impose ceilings on interest rates demanded by lending firms. Across the Atlantic pond, these voices were also targeting Wall Street banks and other financial organisations.

All these echoes the prohibition in Islam (and other main religions) of fixed interest on loans, along with the requirement for innovative channels for financing business investment – and personal financial needs. Whenever a business venture is contemplated, these (Islamically allowable) conduits involve some type of partnership and co-operative planning-cum-management from financiers and entrepreneurs/managers alike. In cases of personal financial need, some sort of benevolent assistance or community networking is called for.

Latterly, both American and the European campaigners have accused conventional financial institutions of propelling hundreds of thousands of people into unsustainable debt by charging excessive interest rates. In particular, these voices have been directed towards organisations that had recently been bailed out by the taxpayers, and in effect saved from almost virtual collapse.

In the words of Neil Jameson, Executive Director of London Citizens, there has been:

[…] enough huffing and puffing about greedy bankers. Our job as a civil society alliance is to call for a national debate on the issue of debt, which includes the reintroduction of anti-usury laws in the UK (Mathiason, 2009).

Jameson adds:

[…] we want sustainable alternatives like credit unions, because there will always be a need for money. We are not talking about turning the clock back. But there is clear evidence that the rates of interest charged to the poor and to small businesses has just gone too far (Mathiason, 2009).

It is noteworthy that British usury laws were abolished during the nineteenth century. In the USA, however, these continued until 1980, whereby one of the last acts of President Carter was to allow lenders unfettered liberty in charging borrowers.

On a related front, events leading to and associated with the latest credit crunch have raised question marks over society's “collective imagination”, a term coined in a special letter signed up by 33 first-rate UK-based experts (gathered by the British Academy) and addressed to the British Queen. Queen Elizabeth II posed a pertinent and delicate question to a group of academics during a royal visit to the London School of Economics.

In this context, the UK Queen asked: “why did no one see it (the crisis) coming?” (Turner, 2009). To tackle this seemingly simple query, a missive was prepared by the group and co-authored by Peter Hennessy and Tim Besley.

“Everyone seemed to be doing their job properly on its own merit” (Turner, 2009), says the diagnosis. And, according to “standard measures of success, they were often doing it well” (Turner, 2009). However, “the failure was to see how collectively this added up to a series of inter-connected imbalances over which no single authority had jurisdiction” (Turner, 2009).

The letter explains that as low interest rates had made borrowing cheap in the years preceding the onset of the crunch, the “feel-good factor” masked how out-of-kilter the world economy had become beneath the surface, with some countries, such as the USA, running up enormous debts by borrowing from others, including China and oil-rich Middle Eastern States, which were sitting on vast piles of cash (Stewart, 2009).

Despite these yawning imbalances, the experts stress, “financial wizards” managed to convince themselves and the world's politicians that they had found clever ways to spread risk throughout the financial markets – whereas “it is difficult to recall a greater example of wishful thinking combined with hubris” (Stewart, 2009).

The authors conclude:

[…] in summary, Your Majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off […] was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole (Turner, 2009).

These risks have been brought about by some widespread practices entrenched within the conventional Western-style financial system. Fixed interest rates are clearly one of these practices; another is the emphasis on augmenting rates of corporate earnings, as well as the nature of the executive payment-bonus system. As we have seen time and time again, excessive materialism can lead to overlooking genuine needs for moderation and benevolence when these actually arise.

It is hoped therefore that new lines of thinking will prevail, that are at once fairer, more practical, tolerant and comprehensive in outlook. If this does come about, then at least some of the losses caused by the latest painful recession might be recouped, while chances for stronger communal cohesion, as well as intra-country and cross-border understanding, will be enhanced.

Kadom Shubber