"This is the generation of the great LEVIATHAN, or rather, to speak more reverently of that mortal god, to which we own under the immortal God, our peace and defense." -Thomas Hobbes: Leviathan
If you lend money to any of my people with you who is poor, you shall not be like a money-lender to him, and you shall not exact interest from him.
It is odd that a sin which has been universally and continuously condemned by all Christendom should today almost completely vanish from the minds of most Christians. Naturally it isn’t merely that the banking and financial sector has become a powerful force in itself, I think it is also the lack of an alternative to usurious banking which has caused Christians to not be too vocal on this point. How else can enterprise flourish and new businesses be formed if not by the capital lent at interest by banks? What incentive would banks have to lend if they did not earn an interest?
While I have no illusions that usurious banking would not be going out of practice anytime soon, I would however like to exercise our imaginations a little by sketching an alternative to usurious banking which could hopefully retain the releasing of venture energy with none of the crippling effects.
Usurious Lending: All the Profits with None of the Risks
The former Archbishop of Canterbury Rowan Williams in his lecture Ethics, Economics and Global Justice discusses a rather interesting point about early modern capitalism. This was a lecture which was just given right after the financial crisis of 2008 and it raises a few suggestive ideas about what an alternative to usurious banking might look like:
The venture capitalism of the early modern period expressed something of the sense of risk by limiting liability and sharing profit; it sought to give limited but real security in a situation of risk, and it assumed that sharing risk was a basis for sharing wealth. It acknowledged the lack of ultimate human control in a world of complex processes and unpredictable agents and attempted to ‘negotiate vulnerabilities’, in the terms I used a moment ago, by stressing the importance of maintaining trust and offering some protection against unlimited loss. By sharing risk between investor and venturer, it also shared power.
From here we can outline a sort of alternative to usurious banking. Currently the bank lends a sum to a new business at interest. Whether or not the business fails or succeeds the money will still be owed and the interest will still accumulate. If the venture succeeds, the bank will be able to collect on its loan, with interest, from the venture. If the venture fails, the bank will also still be able to collect on its loan with interest. In other words the bank shares the profits, but not the costs. This is hardly an equitable or fair arrangement. The banking industry is able to extort interest come what may for no other reason than it occupies a position of superior bargaining power, the monopoly of capital, of which the lender has no choice but to accept the terms thereof. To impose an interest due to the sheer fact of being the sole possessor of capital is qualitatively indistinguishable from a protection racket extorting money due to the sheer fact that the gangs are the sole possessor of coercive force.
What would like like therefore is for the bank to not simply profit from another’s misfortune. What we would like is for the bank to share the risks of the venture as well as the profits. How might such an arrangement work? Fortunately such an arrangement already exists in the practice of venture capitalism.
Risk and Profit Sharing Loan and Venture Capitalism
Instead of loaning money at a set sum with a set interest rate regardless of the outcome of the venture, the bank could employ inhouse experts to investigate the merits and claims of each venture proposal and come up with some arrangement for the loan. In venture capitalism the investment firm will normally fund a firm or company in its early stages, in exchange for an ownership stake in the firm in question. If the firm succeeds then the venture capital firm can profit when the successful firm, say, starts selling its shares to the public.
Of course the permutations of arrangements could be varied. The bank could simply ask for a cut of the profits of the firm for the next ten or twenty years for example.
How might we adapt this model to say personal loans such as for housing, education, etc? What would correspond to a “successful venture” in the field of personal finances? We can equate a “successful” venture in personal financing with the personal incomes of the person being loaned.
Let’s say that a couple wants to buy a house but needs to take out a loan. The bank could then lend them the money but take a percentage cut of the household income for the next few years of their working life. Thus the bank can make an estimated calculation of how many years and how many percent of the household income to take based on their present working and living situation. However once the percentage and number of years is agreed upon, it is locked. If the household income improves because the income contributors gets a promotion, a pay raise, a substantial bonus, or has some other sources of income, the bank profits because they have “invested” in the well being of the family by providing them with a roof over their heads. However if there is an unexpected economic downturn and the person is fired, gets a pay cut, disabled and unable to work or whatever, the bank will simply collect less for that is the “risk” of lending. A household where the bread winner has become fired or has suffered a pay cut would be analogous to a venture which has failed.
Analogous arrangements could be made for education loans as well. The bank can make an estimate on how much a graduate of a certain type of degree will make, and take certain a cut of the pay of the graduate for a number of years. The bank will profit if the graduate does well and the bank will share in their loss if the graduate does not.
It is fundamentally unjust that banks should be able to extort interest at virtually no to little risks to themselves by virtue of being in positions of financial power. What we would like to see is a much more equitable arrangement where the bank shares in both the profits of a successful venture as well as the risks and loss of the same.
At the root of this idea is the St Paul’s exhortation that we are to “Rejoice with those who rejoice, weep with those who weep.” (Romans 12:15), by making banks take on the risks of investment, it makes them literally invested in ensuring that their investment succeeds, whether it is in a personal loan or in a venture capital.