Pope Sixtus V called it “contrary to Christian charity.” The third Lateran Council proclaimed it “a heresy” worthy of excommunication. Both Old and New Testaments denounced it, as did Plato, Aristotle, Moses, the Buddha, and Muhammad. The offensive practice? Usury, defined as the charging of interest on a loan.
By the 13th century, however, Christians began to distinguish between interest that was usurious and interest that wasn’t. Usury was gradually redefined as the charging of “excessive” interest. What was excessive? In the regulation of trade and banking, governments set up legal interest rates, and usury tended to mean rates above that standard.
Today interest is no longer thought of as usurious, unless it is excessive or exploitative. Even Catholic dioceses charge interest on loans to their parishes. A once heretical practice has become commonplace.
Muslims also have a longstanding religious prohibition on usury (meaning “interest”) to which they have strictly adhered. Recently, however, Islamic finance has developed a variety of “Shariah-compliant” investments, some of which resemble bonds. In 2009, Shariah-compliant global debt had already reached $1 trillion. Rather than allow lenders to charge interest, Shariah-compliant investments consider lenders and borrowers partners, in something of a profit-sharing arrangement.
Last year’s financial crisis in Dubai, however, exposed a problem with these new investments. Untested in the courts, the investments left lenders not knowing where they stood (in terms of priority of being repaid) in the event of a default. When Dubai World, a state-owned conglomerate that had expanded too quickly, sought to restructure a quarter of a billion dollars of debt, the lack of precedent became painfully clear. In that case, the government of Dubai eventually stepped in to back the debt.
But the larger issue—that is, rethinking the religious prohibition against usury—remains. The situation might eventually be resolved among Muslims through a redefinition of usury to mean only “excessive interest,” as happened in Christianity. Or it might lead Shariah-compliant investments to continue developing, possibly even becoming an alternative to the interest-based approach used elsewhere in the world. With the World Bank and the British government prepared to sell Shariah-compliant bonds, they seem to be betting on the latter alternative.