Lending and Borrowing: A Christian Perspective

Are financial institutions evil? The media sure makes them seem that way. I’ve asked myself this before but now that I am about to begin a career in finance, I real­ized that this is the time to find an answer to that question. As I began to explore the issue, I started realizing that there is a seeming paradox between the way our world works and the laws laid out in the Bible. The paradox is essentially that the Bible tells us lending is lawful only if repayment is not expected but in today’s society that is simply not possible. Additionally, if lending, especially lending with the expectation of both repay­ment of interest and principal, is wrong, then would it be wrong to go work for a company that facilitates that exchange? Or to that end, is it wrong to put money in a savings account knowing full well that the bank will then take that money, lend it out to somebody else, and charge them interest on it? This paper will delve further into what the Bible has to say about lending and borrowing, how its interpretation has changed over time, and how it can work in today’s society.

Before attempting to address the paradox mentioned above, it is important to understand how lending and borrowing works in our economy. In our economy, we are able to efficiently match borrowers with lenders and potential investors with appropriate investment opportunities by using large institutions to facili­tate the flow of capital. Large banks take money from lenders that have put money in their savings accounts hoping to make a moderate rate of interest, then they lend that money out to bor­rowers that need money to make large purchases such as that of a house or a car. This is important for a number of reasons. One of these is that it allows for personal consumption smoothing. For instance, if you want to buy a house, you can take out a mortgage and make small payments monthly instead of waiting until you have enough saved in the bank to purchase the house all at once. Additionally, by pooling a lot of savers together and lending to a large number of borrowers, banks are able to spread risk out through the economy so that the failure of one borrow­er does not significantly impact any one lender. These are two of a plethora of benefits and should give an idea of the importance of borrowing and lending in our current financial system.

Let’s begin with the practice of borrowing. According to the Bible, it was not considered wrong to borrow money. How­ever it did condemn certain types of borrowing. Borrowing is touched on in the book of Psalms, which is an Old Testament collection of hymns and poetry that was written by a few dif­ferent authors. In this book it is written, “The wicked borrow and do not repay, but the righteous give generously.”[1] This tells us that it is not inherently wrong to borrow, but it is wrong to borrow and not be able to repay your debt. Along the same lines, the book of Proverbs also makes reference to borrowing. For some background, the book of Proverbs is a book of lessons that was passed down from the wisest elders. Most of these were from King Solomon, a king renowned for his wisdom. The book lays out a master/slave relationship that a person takes on when they borrow in Chapter 22: “The rich rule over the poor, and the borrower is slave to the lender.”[2] The first half of this verse outlines the idea that the rich are typically the ones who provide work for the poor and, in doing so, they are the boss that rules over them. The second half tells us a condition of the rich and the poor. When you owe somebody money, you are subject to their wishes until you pay them. Every cent that you make is used to pay them rather than to cover your own needs until they are paid back in full. In modern society, if you do not meet your interest payments and pay back what you borrow, you can have your assets seized and you will, at the minimum, have a very low credit rating. This means that you will have to borrow at extremely high interest rates if anybody is willing to lend to you at all. In that sense, the borrower becomes the lender’s servant where the fruit of all of their work is given to the lender. Ad­ditionally, the lender historically would put conditions on the loan telling the borrower what they can and cannot do, which emphasizes this master/servant relationship.

These passages seem to outline the biblical perspective on taking on debt. Though it may not be a sin to borrow money from another person, it clearly facilitates a relationship where one person serves the other. Additionally, borrowing with an inability to pay back the lender is considered sinful. Though this may seem to be a bit extreme, it’s clear how this philosophy on borrowing could benefit our society if it were civic law instead of just a moral code. One benefit is that it would eliminate those that borrow and cannot make payments. Because of this, lend­ers would not be worried about a borrower’s ability to pay and would not need to charge as high of interest rates, which would greatly benefit lower-income earners that are forced to borrow at high interest rates. I mention lower interest rates because rates are a function of the risk taken on by the lender. A large amount of the lender’s risk is the borrower’s ability to pay them back, so if there is certainty in this aspect then the lender’s risk will decrease and the interest rate that they charge the borrower will decrease as well.

Let’s now turn to the practice of lending. The Bible makes many references to the practice of lending money. In the Old Testament, most of the laws from God came through Moses and were laid out as a moral code for God’s chosen people to live by. They emphasize the idea of helping the worst off mem­bers of society. The issue was addressed directly in the book of Deuteronomy. Deuteronomy was written by Moses in approxi­mately 1407 B.C. to remind the Israelites what God expects of them. In the middle of the book, there is a list of principles and instructions for living a Godly life as God’s chosen nation. In Chapter 23, it is stated, “Do not charge a fellow Israelite interest, whether on money or food or anything else that may earn inter­est. You may charge a foreigner interest, not a fellow Israelite.”[3] This is interesting because it was stating that it was legal under Old Testament scripture to charge foreigners interest but not to charge a fellow Jew interest. In the latter case it was expected that they would lend without expectations of repayment. To clarify, this does not mean that they could not be repaid when lend­ing to a fellow Jew, just that if that person was unable to repay their debts, those debts were to be forgiven. Lending was addressed again in Exodus where, under Mosaic Law, it was stated “If you lend money to one of my people among you who is needy, do not be like a moneylender; charge him no in­terest.”[4] This law was likely implemented because interest-bearing lending would only make the poor worse off than they already were. This passage makes clear once again that, according to the Old Testament, living a godly life meant not charging interest to those who could not pay their debts. However, lending was not discouraged amongst wealthier Jews, nor was it discouraged be­tween nations. In fact, at one point business was set up such that Jews lent to Christians and vice versa so as to facilitate commerce without breaking the Old Testament scripture. Also, interest­ingly enough, some passages do not con­demn lending as a practice and in some examples, they even seem to extol it. For instance, Psalm 112 says “Good will come to those who are generous and lend freely, who conduct their affairs with justice.” The laws laid out by Moses are meant to cre­ate a moral code for God’s chosen people. Part of this means helping, not harming, the worst off members of society. The pas­sages on lending seem to emphasize that principle.

The picture then gets slightly muddled as we move from the Old Testament to the New Testament. The reason is that the Old Testament states that a Jew can lend at interest to non-Jews but the New Testa­ment says that we must treat everybody as though they are our brother and, in doing so, forgive the debts of all who cannot re­pay. In one of Jesus’ sermons, he proclaims the following:

And if you lend to those whom you ex­pect repayment, what credit is that to you? Even sinners lend to sinners, expecting to be repaid in full. But love your enemies, do good to them, and lend to them with­out expecting to get anything back. Then your reward will be great and you will be children of the Most High, because he is kind to the ungrateful and wicked.[5]

As mentioned earlier, this sends a slightly dif­ferent message than the Old Testament view on lending. Whereas the Old Testa­ment made it clear that lending, especially lending at interest, was forbidden among the poor and among fellow Jews, the New Testament states that lending to anybody with the expectation of repayment is dis­couraged. However, this passage is in the middle of Jesus’ sermon about loving your enemy and giving freely to those who need it. In context, the emphasis on forgiveness and love seems to be more in line with Mo­ses’ teaching of loving one’s neighbor, even if that neighbor is a sinner or an enemy. Additionally, the book of Matthew adds the following verse: “Give to the one who asks you, and do not turn away from the one who wants to borrow from you.”[6] Neither of these passages condemns lending. They actually encourage lending to all who need to borrow. They teach us to not discriminate in our lending and to be forgiving of oth­ers. Also, they do not say that it is wrong to be repaid; they simply state that if the bor­rower is unable to repay their debts, forgive those debts.

Christianity has attempted to recon­cile the Old and New Testament views on lending throughout history. To understand where Christianity has stood on the issue, it is interesting to look at the Church’s po­sition over time. To do this, we must look into the history of the word usury. Usury is used instead of the word interest in the King James Version of the Bible. The mean­ing of this word has changed over the years though. A long time ago, the word was sim­ply defined to mean interest, based on the Latin word usura. However, the interpre­tation of the word today is defined as the practice of charging excessive rates of inter­est on a loan. The Catholic Church has long struggled with the question of whether it is ever moral for someone who loaned you money to charge you a fee. Many philoso­phers, including St. Thomas Aquinas, have addressed the issue and have noted that it is unjust to exact interest but acknowledge that there are some biblical passages that condone it. Because of the passage from Deuteronomy that seems to condone lend­ing to those of different faiths, Jews began lending to Christians and vice versa so that borrowing and lending could occur for business practices without breaking the law. As time went by, interest rates began to rise to excessive levels (at times they reached up to 80%!) until the Church decided to step in and decide what rates of interest were morally acceptable. Gradually, the defi­nition of usury came to be known as the practice of charging excessive interest rates. This definition seems to bring together the biblical perspective of borrowing and lend­ing. If lending is allowed as long as interest rates are not exorbitant, then lenders will only lend to those that have a reasonable chance of repaying their debts. There is also the requirement that those who bor­row must have the ability to repay their debts. The reason for this is the risk/return tradeoff that was mentioned before. If a borrower has a low ability to pay the bank back, the bank will need to be compensated for that risk through a higher interest rate. If they are not allowed to charge high in­terest rates, then higher-risk borrowers will have no opportunity to get a loan.

Though this perspective seems to make sense, there also seems to be a few problems when trying to implement it into a system that facilitates capital flow smoothly. Using the modern definition of usury, it is wrong to charge excessively high rates of inter­est. One problem with this is that we do not define what a “high rate of interest” is. Additionally, though society can seem­ingly function under this definition of in­terest, there is a second problem that has not been identified. The problem lies in the financial theory about valuing a debt obli­gation. When a bank makes a loan, it relies on several identifiers to assess an interest rate. These identifiers are used as an at­tempt to understand the borrower’s ability and willingness to pay the loan back. Some identifiers that they use are credit score, loan amount, loan duration, and income. If a borrower has a low credit score because he has not been able to pay bills in the past, then he will have to pay higher interest rates going forward. This makes sense fi­nancially if you think about the risk/return tradeoff. If a bank makes a loan that has a lower chance of being paid back, then they take on a greater amount of risk in making the loan. In order to encourage them to do so, they must be compensated for taking on that risk. This is known as a risk premium and is essentially a higher interest rate for the borrower. This means that the lower a person’s income and the lower their credit score, the higher their interest rate. While this makes complete sense from a financial point of view, it stands in direct opposition to what the Bible teaches us. This problem is important to highlight but, unfortu­nately, is not one that I can solve. The Bible teaches us that the poorer somebody is, the lower the interest rates you should charge them and the more willing you should be to forgive their debts. This seems to be the most important solution but one that is not necessarily viable in today’s society.

In conclusion, the conversation on bor­rowing and lending is not cut and dried. Clearly, there are passages that seem to both encourage and discourage lending. Because of that, philosophers have debated on both sides of the issue and the Church has been changing its position over time. Today, the practice of charging interest for money lent is considered wrong when the interest rates are excessive. Additionally, if someone cannot repay their debts, the Bible says that it is right to forgive them of their debts. This perspective ap­pears to fit into our modern day financial system. Borrowing and lending play an important role in smoothing individuals’ consump­tion, facilitating the development of infrastructure and other major projects, and providing the Fed­eral Government extra sources of capital for domestic spending. A problem may arise if banks charge interest rates that are too high to compensate themselves for additional risk. But as long as the in­terest rates are not excessively high and we help those that are less fortunate and un­able to pay, today’s system can function in accordance with scripture.

 

Endnotes
1. Psalms 37:21 (NIV)
2. Proverbs 22:7
3. Deuteronomy 23:19-20
4. Exodus 22:25
5. Luke 6:34-35
6. Matthew 5:42

Roy Walker ’16 is an Economics major and Statistics minor. He believes that matter can be created and destroyed. That’s why he studies econ.

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