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Mishpatim

“When you lend money to my people, to the poor person who is with you, do not be to him as a creditor; do not lay interest upon him” Exodus 22:24

    It is almost impossible to imagine a modern financial system operating without interest and to the modern mind nothing seems to be wrong with charging and paying interest. 

    The Bible, however, strongly condemns interest and, when both parties are Jewish, the practice is halachically forbidden. Interest was also condemned by the Buddha and Hinduism; by the great Greek philosophers Plato and Aristotle and by both the Christian and Muslim religions. 

    At first glance, it would seem that the Torah prohibition of interest has to do with charity. The loans envisaged are loans to the poor and it would be uncharitable to exploit them for personal gain. Halachah, however, does not differentiate between loans to the poor and business loans and forbids both. Another reason, beyond exploitation of the poor, is therefore required. 

    One reason may be the one given by the medieval Church, that it is unearned income, meaning income from an item that in itself is not fruitful and therefore unjust. Another reason, given by Islamic and modern reformist thinkers, is that interest causes those who have capital to gain more capital, while those who don’t have capital to begin with end up having to pay more. In other words, interest “makes the rich richer and the poor poorer”.
     
    Economics is not a zero-sum game and when a business venture is successful, general wealth is increased so all can benefit, both lender and borrower. But what about all those times in which a business venture fails? 

    In those cases the borrower — who hadn’t capital to begin with — must bear the loss while the lender gets his money back in full with interest. In other words, there is a mismatch of risk where the lender bears less than his fair share of the risk, at the borrower’s expense. 

    Halachah has developed some legal vehicles to deal with the challenge of interest. In many cases, these are questionable at best and evasive in nature.

    Similar to halachah, Islamic sharia law prohibits interest-bearing loans. A system of Islamic banking was invented where risk sharing partnerships replace interest-bearing loans. Perhaps halachah can adopt some of the more systematic solutions developed by Islamic banking, instead of the current evasive halachic practices.
     

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