A new understanding offinance as a discipline with an ethical or moral background partly adheres to experiences stemming from the many controversies they faced in previous centuries among different world religions. Generally speaking, it is acknowledged that a certain type of rivalry has existed over the past centuries.
This rivalry was between thepositive welfare effects of the use of moneyand the practice offinance and thenegative impacts on people’s welfare. Figure3.1gives an overview of the partly overlapping positions of the Jewry, Islam, and Christianity concerning some basic positions about interest taking.
An unequal distribution of wealth between individuals was often justified by money’s significant role in serving as an accelerator of envy, greed, or parsimony.
From the point of view of a numismatist, it is interesting to learn that in the past two different symbols were very frequently embossed on each side of a coin, which is
Jewry In principle people are
not allowed to to take interest.
But exceptions exist:
mainly interest can be taken from people that
are not Jewish.
forbidden to take interest from other Jews.
Islam There exists also a fundamental prohibition to take interest, but with exceptions: mostly if the granted loans are used for productive purposes,
called ‚Mudarâba‘ and
‚Muschâraka‘.
it is
practice interest taking is circumvented by charging a debt discount.
Christianity In principle the Jewish prohibition was also valid for the Christian Church.
A very intensive discussion went on in the
Middle Ages about the
‘moral interest’. For centuries the Pope’s Councils undermined the rigid restrictions and have legalized interest taking
in practice until today.
All monotheistic world religions permitted the borrowing and lending of loans if the money was invested in real productive purposes with a risky output.
Not allowed was taking interest for a loan granted to people who were in dire straits as they had no income to spend for consumption on goods.
Interest taking survived all its critics – in most cases due to the creativity of the critics itself.
Each of the three world religions have found their own way to circumvent inner skepticism.
For Jews In
Fig. 3.1 Interest taking from the point of view of the world religions
distinctly reminiscent ofAristotle’sdistinctionof the usage of money—oikonomia andchrematistics(see Sect.3.2.2)1:
– One side of the coin embodies thebright side of money. It reflects the capability of money to serve as means of exchange, unit of account, and store of value (see Sect.2.1). Such functions could reduce the purpose of the usage of money to the following economic transaction chain:goods!money!goods. The embossed head of the regentwho has issued the coin often expressed such a positive welfare economic function of money.
– The other side of the coin shows its dark side. Money is seen as a threat to individuals as it allows the conquest and subsequently the regulation of the minds, behaviors, and attitudes of people. In this case, the line of thought would be money ! goods ! money. To remind people of the dark side of money when using it in their daily lives, the reverse side of the coin was often embossed with a religious relic, mostly acrucifix, complemented by a citation. It represented awarning sign.
From a historic point of view, the relationship between money, resp.,finance and religion, was determined by the bigcontroversies about interesttaking. Figure3.1 gives an overview of the Jewish, Islamic, and Christian points of view concerning the legitimation of interest taking.
Some very fundamentalquestions about money and ethicswere topics repeatedly brought up over past centuries. One of them was the question as to whether humans are allowed to take interest, i.e., the idea that demanding a value for time is a violation of the privilege of God who has the monopoly about time. If the latter were true, theninteresttaking by men would be a severesin. Related to that question is the one that expresses doubts about thefairness of taking interestfrom a debtor. Is it fair to exploit someone’s troubled economic situation by burdening him with the obligation of paying interest? Is the burden to repay the debt not in itself a burden that a debtor has to carry? No wonder that interest taking was traditionally banned by theCatholic Church, if interest was demanded for loans that were not invested in risky ventures or if the interest rate lay above an unethically high hurdle rate (the so-calledusurious interestwith a hurdle rate of more thanfive percentannually).2In other words, no prohibition was necessary if theinterest ratewas acompensation for the takeover ofrisk, e.g., the capital lender bears a risk with an investment he had financed through the loan. Moreover, it was self-evident that an interest rate below five percent was in line with the Catholic Church’s position (see also Fig.3.2for a summary).
Despite theofficial ban, in practice,interest taking spreadover time. Partly due to practical problems in implementing an effective ban on interest taking, it was more
1Sedlacek(2011) in general has elaborated a very sophisticated and fundamental discussion of the different strands of religious sources and drivers of economics.
2The ban of usury interest taking for Christians was proclaimed on the Nicene Council in the year 325 (Ballestero et al. 2015, p. 8).
or less legalized in the twelfth century. The formal ban was substituted by canonic and theological points of views of a more informal character. For centuries the Catholic Church increasingly accepted that economic progress in Europe (at the latest with the Industrial Revolution), and added pressure to legalizing the practice of interest taking in banking with theCodex Iuris Canonic(CIC) number 1543 in the year 1918. Although in monotheistic religions differing reasoning for the ban of interest taking existed, there is one common denominator. In principle, they all accepted interest takingif it was acompensation for productive risky investments financed by loans. The justification of an interest rate as a compensation for risk bearing is obvious. It is worth noting that such a grounding of the interest rate cannot be found in the state-of-the-art interest rate theories like the time preference theory of Irving Fisher and Eugen Bửhm von Bawerk, the classical/neoclassical theories of interest, theKeynesianliquidity preference theory, or the theory of natural interest of Knut Wickselljust to mention a few prominent representatives of theories of interest.
The transition of the Catholic Church’s restrictive attitude towards interest taking and other religious motives have survived until today and have had a strong influence on how capital markets and finance should be judged from an ethical point of view. The emergence ofsocially responsible investments(SRI) would not be possible without the initiatives and the persistence of investors from Churches and religious faith communities. Figure 3.3 gives an idea of some of the most important benchmarks in SRI, indicated by investment products that have been launched in the past. Islam and Sharia Law has given another strong religious impetus to financial markets (Siddiq 1995). Today the so-called Islamic Finance movement is popular not only in Islamic countries but also beyond. In countries like the United Kingdom (UK), it has established a fast-growing industry with asset management andfinancing guidelines that to some degree differ from mainstream capital markets (Errico and Farahbaksh 1998, pp. 6–11).
For centuries interest taking wastraditionally banned by the Catholic Church. Despite the official ban, in practice interest taking disseminated over time. Due to the problem of banning interest taking effectively, it was legalized in the 12th century by Canonic and theological points of view with a more informal character that substituted the formal ban.
Ban of interest, if…
interest is taken for loans that are not invested for risky purposes.
interest rate is above a hurdle rate (usurious interest if above 5%).
No banning, if…
interest rate represents a risk premium, e.g. the capital lender bears a risk with his loan.
interest rate is equal or below 5 %.
Over centuries the Catholic Church increasingly accepted the fact that
economic growth, innovations and expanding economic activities in Europe
(latest with the Industrial Revolution) were agitating for the legalization of interest
taking in banking.
Fig. 3.2 Interest taking as a century-old controversy—the Catholic Church’s point of view