Cooking the Books 1: The theology of interest

Sharia-compliant Islamic banking is apparently expanding with even non-Muslims switching to Islamic banks, reports the Times (12 March). According to the article’s author, Alex Wade, “under Sharia law, the charging or paying of interest is prohibited”. But, since banks do business by borrowing money at one rate of interest and re-lending it a higher rate, how can a bank which does not pay or charge interest exist?

This is to underestimate the subtlety of Islamic theologians, following in the footsteps of their end-of-Middle Ages Catholic and Protestant counterparts. In the Middle Ages the dogma of the Catholic Church banned usury, defined as charging money for a loan. Well, but not quite:

“No man, again, may charge money for a loan. He may, of course, take the profits of partnership, provided that he takes the partner’s risks. He may buy a rent-charge; for the fruits of the earth are produced by nature, not wrung from men. He may demand compensation – interesse – if he is not repaid the principal at the time stipulated. He may ask payments corresponding to any loss he incurs or forgoes. He may purchase an annuity, for the payment is contingent and speculative, not certain” (RH Tawney, Religion and the Rise of Capitalism, ch 1(ii)).

What was banned, then, was only the certainty of being paid a pre-fixed sum of money for the loan. As Tawney pointed out, the very word “interest” derives from one of the ways of getting round the ban on usury.

Islam, too, allows partnerships as well as a number of other arrangements which allow the payment of a pre-fixed sum of money for advancing money. Wade’s article mentions: salaam (“sale contract with deferred delivery”), arboum (“sale contract with a non-refundable deposit”) and murabaha (“deferred sale financing”).

So, while Islamic banks do not borrow money on the money market, they can still make what are in effect loans which bring in money for them. In any event, Islam is not opposed to profits and profit-making since these are regarded as non-certain rewards for advancing money.

In the end the Catholic church was obliged to face reality and, to try to keep the poor from being exploited by usurers, from the middle of the 15th century itself set up bodies to lend money to the poor. These were called monts-de-piété (literally “mounts of piety”), which is still the French word for pawnbroker, though on the Continent these are state-run bodies. They did not spread to England as Protestantism, which triumphed here in the 16th century, had no qualms about lending at interest. As a result pawnbroking has always been a private business here.

And these days in fact a profitable business which, along with cheapo shops like Aldi and Lidl, is doing well in the current depression. The leading pawnbroker firm in Britain is H&T, whose shares are quoted on the Stock Exchange. It has 105 stores and made £10 million profits in 2008 compared with £7.1 million in 2007. It charges 8 percent interest per month.

Wade doesn’t say if there are any Islamic pawnbrokers, but it shouldn’t be difficult to find some imam or mullah to justify this as a form of “deferred sale financing”.