Welby 'embarrassed' by Wonga link

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In a meeting with Wonga boss Errol Damelin, the Archbishop of Canterbury Justin Welby said that the Church of England is planning to expand credit unions as an alternative to the controversial payday loan providers.

This issue was recently also brought to the attention of football fans, when Newcastle United player Papiss Cisse refused to wear a top sporting a logo of his club's sponsor, Wonga, arguing that as a Muslim, he was not prepared to promote a money-lending company.

Bolton Wanderers Football Club also dropped plans to have payday lender QuickQuid as their sponsor after almost 4,500 fans signed a petition against the move, which they deemed unethical.

The morality of payday loan firms is under the spotlight. But what do faiths say about money lending and interest?

In general, usury defined as the lending of money at high interest rates, is frowned upon by religion. The three Abrahamic faiths - Judaism, Christianity and Islam - take a very firm stance against it.

Several passages in the Old Testament condemn usury, in particular when lending to the poor and destitute. This led to lending money at interest being forbidden in the Jewish community, explains Dr Alastair McIntosh from the Centre for Human Ecology: "In Jewish tradition charging interest was forbidden within the community, but it was permitted to outsiders."

This was how, says Dr McIntosh, Jewish people became known as money lenders, a situation that was exacerbated in medieval Europe, where Jews were persecuted because they were seen as having killed Jesus Christ and, as a consequence of that persecution, they had to be mobile. "It suited them to trade with a commodity like gold and therefore money lending, because if they came under persecution they could easily move," says Dr McIntosh.

"However, that of course added to the persecution, because of the control it gave them over local economies," he adds.

A shift in interpretation

The Christian tradition builds on the Old Testament's injunction against money lending, and a passage in the Gospels (Luke 6: 34-35) reports Jesus as saying that those who lend should not expect anything in return.

This, says Dr McIntosh, was taken by the medieval Roman Catholic Church to mean that usury should be forbidden among Christians. "Because Christianity extended the view of God's people to all of human kind, it meant not just not lending within your community, but also not lending full stop, at any rate of interest," he explains.

But in the 16th Century, with the Protestant Reformation, theologian and pastor John Calvin proposed a reinterpretation of the Old Testament injunction on money lending, specifying that there should be a distinction between usury, in which a high interest rate is charged, and lending money at low interest rates.

The latter, Calvin thought, should be permissible. "This is where you have the origin of the Swiss banking industry," says Dr McIntosh.

"The theology was created in Protestant circles that allowed what the Catholic Church had previously forbidden," he adds.

A firm stance: the Islamic model

Islam, on the other hand, does not differentiate between charging interest and usury, and takes a very firm stance against charging even the lowest of interest rates.

Habib Ahmed, Sharjah Chair in Islamic Law & Finance at Durham University, explains: "[In Islam] when it comes to money lending itself, even though it is allowed, it is not encouraged. It should be done under necessity only.

"This we get from Prophet Mohammed's traditions. For example, in one of his prayers he sought refuge from God from sin and being in debt. We also have instances where, when he was asked to lead the funeral prayers, he would ask if [the person] had any debt and, if so, the family would be asked to clear all debt before the prayers could start.

"So lending should be interest-free, but being in debt is not encouraged," he adds.

The strict prohibition of charging interest gave birth to Islamic banks, which are open to everybody and provide financial services which fulfil the principles of Sharia law.

"What this would mean at a very broad level," says Prof Ahmed, "is that Islamic banking is ethical banking, because scholars believe that Sharia law is inherently ethical - it's for the good of humans.

"What that means in terms of practical banking transactions is that they would not be based on interest, because that would not make them Sharia compliant," he says.

Islamic banks do business by using contracts that are permitted by Sharia law, such as sale contracts, leasing contracts, or partnership contracts. So, for example, if you wanted to buy a car, an Islamic bank would not lend you any money, but it would take the specifications of the car, buy it and sell it to the client at a mark-up, making a profit.

For example, if the price of the car is £10,000, the bank will buy it at that price and sell it to the client at, say, £12,000, which is payable, for instance, over five years. "The key difference, even if the economics of this transaction are similar, is that the sale contract is permissible," says Prof Ahmed.

"There are some other implications: the first important thing is that financing is linked to an asset. Whenever we talk about Islamic finance we talk about finance that's closely linked to an asset.

"The second thing is that, because it's a sale contract, there are some implications in that the seller is responsible. For example if the car is defective, the bank, being the seller, would be responsible for the car," he adds.

A different landscape?

Linking financing to real assets, as opposed to 'virtual' money, is what distinguishes Islamic banking from conventional finance. So what would the current financial landscape look like if the attitude towards money lending and interest shifted towards the Islamic model?

Prof Ahmed thinks that one of the key problems of the current financial system is that a lot of financial products have nothing to do with the real economy: "If you look at the financial crisis, there were instruments, in particular derivative instruments which were basically used to bet on price movement. I'm talking in particular about credit default swaps (CDS)."

He adds that the number of CDS which were issued was more than 10 times the value of the underlying assets. "In terms of specific instruments which were responsible for the financial crisis, I think the two main institutions were the mortgage backed securities and the credit default swaps. But under Islamic law neither of these is permissible," he says.

It is hard to predict what could have been, but according to Prof Ahmed the recent financial crisis highlighted that there were some ethical issues: "And this also applies to Islamic banks, not just conventional. I think there is a need to bring back ethics into banking."

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