Australia’s first Islamic bank is projected to begin operations in 2025. Islam prohibits usury, so this bank advertises “profit-share” on deposit accounts, and “interest-free” loans in which the bank takes a sort of partnership role with borrowers, sharing in the borrower’s profits (and losses) rather than charging a set amount of interest. This may seem strange to the modern Australian, who is very well acquainted with interest. Interest on government debt is expected to exceed $43 billion in the 2024 financial year, and the average Aussie household was in $260,000 of interest-bearing debt in FY22. Government and personal debts are high and continue to grow in most Western countries – it’s unlikely that interest is going away anytime soon.
Generally speaking, interest is intended to compensate the lender for the opportunity cost of having lent the money. This can get complicated quickly, but the basic idea is that money has a “time value” due to inflationary forces decreasing the value of a unit of currency over time. The charging of interest, therefore, prevents erosion of the lent value and allows the lender to be restored to the same position he was in when the money was lent. One may then think that interest could be set at the rate of inflation. For reasons beyond the scope of this article, this is not the case, and interest rates in Australia are instead set by the Reserve Bank of Australia (RBA). Private banks then borrow money from the RBA at the set rate and lend out to the public at the highest rate they think they can get away with. This is a simplification, but it is sufficiently descriptive for the purpose of this article. All of this makes it very difficult to tie the modern conception of interest rates to anything real or tangible.
Interest is not a new concept – it is possible that it predates even the Sumerian civilisation. Overcharging of interest, or usury, is just as old. Usury is defined by the Oxford English Dictionary as “the action or practice of lending money at unreasonably high rates of interest”. This is the definition which most people today would use. The inherent problem with this definition is the further definition of “unreasonably high”. According to the Canadian government, “unreasonably high” is 60 per cent. In Australia, the limit varies based on loan size but generally is 48 per cent, although banks are exempt from caps. Given the mortgage stress currently being caused by rates under 10 per cent, it’s hard to see how 48 per cent could still be considered “reasonable”.
Until modern times, the reasonableness of an interest rate was not at issue – rather, usury was seen as the charging of any interest. Most religions ban or limit usury; Islam, Christianity, and Buddhism all condemn usury in their foundational texts, and Judaism prohibits usury in dealings with other Jews. Foundational philosophers such as Plato and Aristotle denounce usury in their writings, and usury has been flatly illegal in many countries throughout history. Interestingly, it appears that early forms of credit used in agricultural societies were predicated on the fact that lent resources, such as animals or seeds, could reproduce themselves and so a form of “interest” was justifiable. As money cannot reproduce itself, the argument goes, it is immoral to expect more than the lent amount in return. Thomas Aquinas suggested that charging interest was akin to selling the same product twice: “If a man wanted to sell wine separately from the use of the wine, he would be selling the same thing twice, or he would be selling what does not exist, wherefore he would evidently commit a sin of injustice.”
Over the centuries, there have been various attempts to offer usury-free banking, however none have survived into the modern age apart from the Islamic banking system. Although not always borne out in practice, Islamic banking is intended to operate on a profit-sharing model. Depositors are paid a “profit-share” rather than earning interest on their savings, and the bank effectively becomes a partner in any business it funds. Home purchases are funded on a “rent-to-own” basis, the homeowner paying off the loan along with a rental payment for use of the bank’s portion of the property.
A reasonable criticism to level at this system is that it merely renames interest and claims to be usury-free. The key difference is that interest is not tied to anything real or tangible. Interest is payment for use of money, regardless of the use to which that money is put. Conversely, the Islamic banking system ties the payment to the results of the finance, more akin to an investment. A home purchaser pays rent to the bank, which is a temporary joint owner of their home. A business pays to the bank some of the rewards reaped through use of the provided finance. In this way, both borrower and lender can more readily comprehend and explain the rationale behind their payments, rather than there being a somewhat arbitrary proportion of the balance owing that can change on the whims of national policy.
Islamic banking shows that the charging of interest is not the only way to handle moneylending. Although we should strenuously object to such institutions existing within our borders, it would be foolish not to consider the possibility presented by their operating model. We are a long way from implementing any changes at all to our national banking system, but we should always be willing to consider and incorporate ideas and methods that differ greatly from our own. Just as it is important in the life of an individual, so too in the life of a nation. The Islamic model of banking may not necessarily be the right choice for Australia, but it is a potential starting point from which to free our countrymen from the burden of interest.
T.J. Rolls
Governor – ANA Brisbane