PAYDAY LENDERS - A JUSTIFIABLE BUSINESS PRACTICE?

No-one should suffer the consequnces of abusive and excessive interest rates

Under Islam a charge for lending money to a third party is deemed to be usury. Usury being defined as an excessive and abusive charge for lending money onwards. Under the Quaran it is immoral to charge interest to people who you are helping from a charitable motive or who are in trouble and need assistance. Indeed it is often the case that this money will not be re-paid and the lender should not expect to get it back. This position was very similar under Christianity until Henry the 8th in 1545 ensured that an act of parliament was passed which allowed interest to be charged on sums lent. This revolutionised the use of rates of interest in the English speaking world.

 

In the early Christian Church, St.Thomas Aquinas argued that charging interest was like double charging a borrower. He is repaying you the sum he borrowed from you and you are charging the borrower a fee for using the money as well. If you buy a bottle of wine for a price you do not pay the supermarket an extra fee when you drink the wine. However, life is not as simple as that. There are crucial differences here between dealing with money and dealing with physical products namely, time and opportunity. 

 

By lending my money to you I am not going to have that money to use for my own purposes and I need to be compensated for that. I could have used that money on a project of my own or indeed I could have invested it in a bank to earn interest - so I want something for it. That is all well and good up to a point -- but you as a lender must make a decision as well. Are you lending to someone who is in a position to pay you back or are they not in a position to do so? If it is the latter then you are making a very poor business decision as well as a questionable moral decision. People who go for these loans are often but not always very desperate. Sometimes people need to get some temporary cash and can afford to be stung for a while and they get out of their crisis. For others, the payday loan is the start of a nightmare experience of stress, financial crisis and loan shark fuelled bullying. Interest rates shoot up and compound upwards many hundreds if not thousands of percent with little prospect of ever being repaid. Even if lenders do need to be compensated for lending to third parties there seems to be little justification for interest rates of this magnitude. The lenders come back with the argument that interest rates are so high because the transactions are so risky (Excuse me, doesn't that make my point?). We have legislation to curb monopolies and their excessive dominance of a market -- this needs to be extended to protect the vulnerable suffering from lender activities which do not bear any resemblance to the market structure of interest rates. Public authorities have challenged contractors when they have been overcharged and the same should apply here. The problem is multiplied because the people at the sharp end just do not properly understand the consequences of taking out these loans for themselves.

 

What can be done? The churches and mosques need to become more involved -- we need to extend credit unions and offer far more financial support and financial education to the vulnerable. The CAB has a crucial role to play here as has the Government's money advice service. These loans cannot take the place of properly constituted lending and other form of legal financial support to those in need.

 

The Muslim footballers at Newcastle took a brave stance in condemning their club for being sponsored by one of these lenders and Justin Welby the Archbishop of Canterbury is leading the way in this area. There is also a role for local and regional government to influence and drive this agenda in a positive way.

 

We need to convince people that the practise of charging these huge interest rates is not only morally wrong but is also bad from a business sense, especially if these loans are not or can never speedily be repaid. The consequences for society have not yet been assessed but there are better ways of addressing these issues.