What implications can be drawn from the Old Testament Torah teaching on lending and interest passages (Exod. 22:25, Lev. 25:35-36, and Deut 23:19-20)? The previous article in this series showed how access to loans without interest is an important component of generosity and compassion for the working poor in need of help with subsistence needs. Such interest-free loans can be supplied to our informal, personal network of family and friends.
But what about helping those workers rise up to a higher economic level? In addition to loans for subsistence needs, we can also consider productive loans. In Tight Fists or Open Hands?, Old Testament scholar David L. Baker remarks: “From ancient times there has been a distinction between productive loans, providing capital for trade or investment, and unproductive loans, which are made to supply immediate need” (p. 265). Productive loans affirm recipients’ dignity while they work their way out of poverty, and serve the common good at the same time through their business.
Often, entrepreneurs starting up a new business will rely on family and friends as a first source of funding. But for productive loans, according to Old Testament teaching, interest can be charged. When the loan need is about investing in a business or for other potentially profit-making purposes, then we are shifting categories to a productive or business loan. The Torah offers little teaching about such loans, but it acknowledges the legitimacy of interest-bearing loans beyond subsistence assistance: “If you lend money to any of my people who is needy, do not treat it like a business deal; charge no interest” (Exodus 22:25, NIV; emphasis added).
Why charge interest at all if the recipient has a low income? On this point, it is worth considering the case of the Montes Pietatis (“mounds of piety”), a charitable lending organization started by two Franciscan brothers in the 1400s.
Originally, donations from the wealthy funded loans and overhead costs. However, as the number of organizations being supported increased, the amount of resources available for lending diminished. The same amount of donations had to be spread to cover many more loans. This not only diminished the resources for loans, it affected the wages of employees handling day-to-day operations.
The leadership of the Montes Pietatis, and theologians advising the work, were challenged to address the montes’ economic sustainability. Eventually, they proposed that nominal interest must be charged on loans in order to cover employee and administrative costs. This innovation, an exception from the absolute ban on usury of that time, surprisingly won papal approval in 1515. The launching of these montes during the 15th century represents an innovative means for making credit and capital available to the working poor. (For further study, see Carol Bresnahan Menning, Charity and State in Late Renaissance Italy: The Monte Di Pietà of Florence.)
This important need is being addressed today by such efforts as microfinance institutions (MFIs). These offer small (as low as $50) short-term, interest-bearing business loans to low-income entrepreneurs around the globe. Most of the entrepreneurs seeking such loans are women seeking to climb out of poverty.
A basic economic principle for any business, including MFIs, is that outgoing operational costs (e.g., salaries, office rent, supplies) must be covered by incoming funds. For lending institutions, revenues include fees and interest on loans. Furthermore, since “financial systems are inherently very fragile,” they are more complex to sustain as an institutional lending service than loans from individuals (Brian Fikkert and Russell Mask, From Dependence to Dignity, p. 212). “Reaching over 204 million borrowers, MFIs are the premier vehicle for the ‘microcredit-for-microenterprises’ strategy” (p. 55).
MFIs have realized that to increase the number of people they serve and sustain their operational costs, they ought to charge a nominal interest rate. Peter Greer and Phil Smith, leaders at a leading MFI called Hope International, explain: “It is crucial for an MFI to charge interest rates that allow it to become self-sustaining in the long term so that it can continue to service its community [with]. . . enough interest income to pay for inflation, defaults, and operational overhead. . . . A financially solvent MFI means the community can count on having access to loans and other financial services” (The Poor Will Be Glad, p. 107-108).
Increased economic growth is evident as countries have opened the way for the development of markets, innovation and enterprise. Much of this involves the business activities of low-income entrepreneurs supported by MFIs. As a result, the number of those living in extreme poverty around the world is in significant decline.
From 1990 to 2013, according to the World Bank, the percentage of the world population representing those earning less than $1.90 a day has been reduced from 35% to 11%! Global economic growth has lifted more than two-thirds of the world population out of extreme poverty since 1820 (see Max Roser and Esteban Ortiz-Ospina, “Global Extreme Poverty,” 2013, revised 2017). Furthermore, these remarkable declines in global poverty have occurred as the population has grown rapidly. Closer to home, U.S. incomes among all strata have risen, including among the poorest quintile or one-fifth of the population. Robert Samuelson, a columnist for The Washington Post, recently provided the following comparison of 2000 and 2015 incomes across the five quintiles of U.S. income:
|Quintile||1. Poorest||2. 2nd Poorest||3. Middle||4. 2nd Richest||5. Richest|
|2000 Income||$ 25,300||$ 39,900||$ 56,400||$ 78,100||$186,300|
|2015 Income||$ 33,400||$ 46,800||$ 64,700||$ 90,600||$ 215,000|
Productive loans with affordable interest have greatly benefitted working poor around the world.
But how do you get access to borrowing and credit when you can’t get a credit card or open a bank account? Moreover, some forms of small-dollar loans typically used by low-income workers in the United States, so-called “payday lenders,” raise significant ethical questions. We explore that topic in the final article in this series.