The Usurers: How Medieval Europe Circumvented the Church’s Ban on Usury
Some
observers may see resemblances between the Medieval European methods of
circumventing the Church’s ban on interest, and some financial structures
utilized today by Islamic Banks. To be fair, while a very small number may be
true, it’s certainly in my experience very limited and is not representative of
Islamic banking institutions. Any resemblances are superficial but may seem to
be the same for the observer with limited knowledge of Shariah rules. We must
not however underestimate the will of people to circumvent the law for their
personal profit. This is a common feature in humanity, regardless of the
geography or religion.
Christianity
had a ban on interest, very similar to Shariah. It also had its share of those
who played financial tricks to illegitimately profit from earning forbidden
interest. Some observers belittle the role the prohibition of interest had in
Europe, and may view it as a minor event. But this is not accurate, it had a
deep impact and lasted a long time and some would say it changed the face of
commerce. In fact it was looked at as a heinous crime and severe punishments
were levied and ordered. Author John H. Munro of the University of Toronto, in
his paper entitled: “The medieval origins of the ’Financial Revolution’ 0f 2003
states: “The friars found more ammunition in the Decretales that
Pope Gregory IX issued in 1234: after confirming the Third Lateran Council’s
decree of 1179 that had excommunicated usurers and refused the unrepentant
burial in consecrated ground, the Decretales required princes ‘to expel usurers
from their territories and never to readmit them.’” He further states: “The
campaign against usury culminated in 1311-1312 with the council of Vienne’s
decree of excommunication for all ‘magistrates, rulers, consuls, judges,
lawyers, and similar officials’ who ‘draw up statutes’ permitting usury or
‘knowingly decide that usury may be paid’. The council added that, ‘if anyone
falls into the error of believing and affirming that it is not a sin to
practise usury, we decree that he be punished as a heretic.’”
It
was serious, and as serious and discussed as it was in the Islamic world. There
were a number of methods used by European merchants and financiers to
circumvent the ban on interest. Among these was the simple method of
agreeing to a higher loan amount than actually borrowed. Sometimes foreign
currency was used to hide the interest. We have an interesting quote from the
January 2013 issue of BBC History Magazine:
“When
Matthew Paris, the 13th-century English chronicler, reported the death-bed
words of Robert Grosseteste, the reforming bishop of Lincoln (died 1253), he
included some financial advice:
For
example, I take up a one-year loan of a hundred marks [£66 13s 4d] for a
hundred pounds. I am obliged to make and seal a bond, in which I
acknowledge receipt of a loan of a hundred pounds, payable in one year. But if
you should wish to repay the money that you received to the pope’s usurer
within a month, or sooner, he will not receive anything other than the full
hundred pounds…”
Another
method to circumvent the ban on interest was the granting of gifts against
loans. We read in the same BBC article:
“From
1272 until c1342 the kings of England employed a succession of Italian merchant
societies as ‘bankers to the crown’. The granting of periodic gifts to the
Italians was the preferred means of paying interest. For example, in the three
years 1328–31, Edward III borrowed around £42,000 from the Bardi of Florence
and promised them gifts totaling £11,000.”
In
Shariah also there is a prohibition on gifts when a loan is given. A well-known
saying (Hadith) attributed to The Prophet (ﷺ) but considered to be weak, states: “Every Loan that brings a
benefit is Riba”. This is not construed as meaning only interest at
the end of the period, but also gifts that bring a benefit to the lender.
A
third method for circumventing the ban on interest was called the “Dry Exchange”.
This was perhaps the most famous method. This method involved Bills of Exchange
attesting to a loan that was to be repaid in another country in a foreign
currency. These bills were drawn and re-drawn many times. Manipulation of
foreign exchange rates was used to camouflage illegitimate interest on the
loans. The best I could discover as to why it was called “Dry Exchange”, is
that while on many occasions the loan was given as a way to stock and prepare a
vessel with goods to be sold by shipping to a foreign land, the ships never
left port with any intended cargo for trade and thus “Dry”. This method could
be quite complicated and involved several currencies, countries, and agents.
In
his research, entitled “The European Bill of Exchange” Markus A. Denzel
describes the “Dry Exchange”:
“A
special form of the bill transaction was the dry exchange (cambium siccum) “a
loan dressed up as an exchange transaction” with the transfer of money being
not the basis of the bill transaction, since no payment was made at the due
date of the bill. Instead of this, the drawee (often equal to the payee) issued
a bill of re-exchange (recambium) or the payee bought another bill of exchange
with the money he had received from the first bill transaction when the
original remitter was called the new payee.”
“There
are examples from the early 14th to the 17th century of interest rates up to
12–14%. The church and the theologians regarded this type of bills of exchange
as morally dubious, as there was in fact no difference in place but only a
“distancia temporis” and the bill transaction was used as a means of providing
funds which yielded ecclesiastically forbidden interest and of speculating for
the unpredictable changes in exchange rates.”
The
“Dry Exchange” was described in more detail in a very engaging book: “Medici
Money”, by Tim Parks published in 2005. The book explores several generations
of the Medici ruling family in Italy and the many techniques utilized by
merchants of that era to earn interest whilst appearing to obey the Church’s
ban on usury.
Meanwhile,
South of the Mediterranean Sea in the Islamic realm, however earlier during the
late 7th century, a transaction called “Suftaja” similar to bills of exchange
was being practiced. However, this was not a method of earning banned interest
like the European bills of exchange. Suftaja is where a loan is made to a
person in one city, and the borrower issues a certificate to pay the lender in
another city by someone else. Effectively a money transfer method used to protect
against the dangers of physical movement of money during a journey. One could
call it an old Islamic “Western Union”. Some call the Suftaja by another name,
“Hawala”, although to be precise, the Hawala is more related to transferring
debt onto another person versus simple money transfer.
The
fourth recorded method was the “Contractum Trinius” or Triple Contract. This
involved a set of three separate contracts: an investment, a sale of profit,
and an insurance contract. Each separate contract was permissible, however,
together they formed a forbidden interest bearing loan contract. A merchant
(lender) would invest funds in a venture of the partner (borrower), at the same
time the merchant would agree that any profit above a certain amount would be
for the partner for a fee paid by the partner. The final leg of the deal was an
insurance contract where the merchant would pay the partner to insure any loss
(guarantee). Effectively a guaranteed partnership leading to what is in essence
an interest on the loan.
In
“The Mediaeval Contractum Trinius And The Law Of Partnership” author J.J.
Henning quotes the French Jurist Pothier from his famous treatise on
partnership entitled “Traité du Contrat de Société” published in 1765:
“It
needs no great acuteness to perceive that such agreement is in truth nothing
else than a loan … which ought … to be declared usurious. It is very clear that
the three pretended contracts comprised in the agreement are only feigned in
order to disguise a loan at interest, and that, in truth I had no intention of
entering into a partnership with the merchant, but only of getting from him
interest on the sum, which I lent. And even if, by a misconception, I should
have persuaded myself that I really had the intention of entering into three successive
contracts with him, this would be an illusion produced by my cupidity, in order
to disguise for myself the vice of usury in the loan at interest to which the
whole of the agreement resolves itself.”
Some
commentators have made an analogy between the Contractum Trinius and certain
Islamic Financial structures such as Murabaha. In truth, Murabaha is in fact a
sale of commodities, the Contractum Trinius was closer to a partnership where
an investor was deemed to be sharing the risk of loss with the partner. In
which case it would be closer to getting a guarantee on a “Mudarabah”, an
argument is still being debated today on the validity of guarantees on
Mudarabah with most scholars forbidding it. In its meeting of 2012 held in
Algeria, The OIC Fiqh Academy issued the following resolution pertaining to
Mudarabah Sukuk (Islamic Bonds):
“No
mudarib, partner, or agent shall commit to carrying out any of the following:
Buying
Sukuk or Sukuk assets at their nominal value or with a predetermined value
leading to capital guarantee or to current cash for deferred cash, save in
cases pertaining to abuse and negligence, which require the guarantee of the
rights of Sukuk holders.”
The
fifth method at first seems to be absent from medieval European financial
trickery is what has been called in Islamic Finance “Bai Al-Inah”. This was a
method that was forbidden, as it was a trick to earn illegitimate interest
through selling merchandise. Such a transaction involved a buyer and seller and
one commodity. The buyer, in this case the borrower who wanted cash, would buy
from the seller (the lender) a commodity for immediate delivery but on a
deferred payment, say after 1 year. After this purchase, the borrower would
then sell back the commodity to the lender for immediate delivery and a spot
payment at a price lower than the deferred payment obligation. He then takes
the lesser money in cash but still owes the seller a higher amount to be paid
later. This was effectively, an interest-bearing loan.
But
in fact it was not missing, but not discussed as other methods, and so a bit
harder to research. This method was called the “Mohatra” contract. The word is
actually from the Arabic word “Mukhatara”, which means risk taking. Some say
this method was in fact borrowed from the Muslims in Spain, and is in fact the
same as the forbidden “Bai Al-Inah” I mentioned above. In 1679, this contract
was prohibited by The Vatican and deemed against the biblical prohibitions
against usury. French philosopher, mathematician, and theologian, Blaise Pascal
(1623-1662 A.D.) even mentions this method as an attack on Jesuits in letter
eight of his Lettres Provinciales: “The Mohatra bargain is effected
by the needy person purchasing some goods at a high price and on credit, in
order to sell them over again, at the same time and to the same merchant, for
ready money and at a cheap rate.' This is what we call the Mohatra, a sort of
bargain, you perceive, by which a person receives a certain sum of ready money
by becoming bound to pay more.”
Whilst
in Europe, this financial trickery used to circumvent the prohibition on usury
was well known, it wasn’t however as well documented by jurists and historians.
At least not to the level it was in the Islamic world. Muslim jurists wrote
extensively about these tricks and made certain that everyone understood they
were forbidden. Notable scholars such as Ibn Al-Qayyim (1292-1350 A.D.) in his
“A’Alam Al-Muwaqqi’in” wrote in detail about tens of such tricks.
In
time, Europe abandoned the ban on interest and usury became synonymous with
only “extortionate” rates of interest as opposed to any or all interest as it
was known for centuries.
In a
2017 article in Aeon magazine, entitled ‘Of Money and Morals” writer Alex
Mayyasi describes some aspects of how the prohibition became obsolete. The
article refers to the invented concept of Purgatory: “Meanwhile, the
Catholic Church played its own part in sowing the seeds of a change of
attitude. In the 13th century, it developed the concept of Purgatory – a place
that had little basis in scripture but did offer some reassurance to anyone
committing the sin of usury each day. ‘Purgatory was just one of the
complicitous winks that Christianity sent the usurer’s way,’ wrote the
historian Jacques Le Goff in Your Money or Your Life: Economy and Religion in
the Middle Ages (1990). ‘The hope of escaping Hell, thanks to Purgatory,
permitted the usurer to propel the economy and society of the 13th century
ahead towards capitalism.’”
Even
Martin Luther, the German monk who would become one of the most important
figures of the Protestant Reformation in the early 16th century weighed in on
the matter: “He who lends expecting to get back something more or
something better than he has loaned, is clearly a damned usurer,…” But
he certainly went further than what was acceptable in the Islamic World when he
was displeased with the sales of goods at a higher margin on deferred
payment: “First, There are some who have no conscientious
scruples against selling their goods on credit for a higher price than if they
were sold for cash: nay, there are some who wish to sell no goods for cash but
everything on credit, so that they may make large profits.”
Even
as late as in 1745, in his encyclical named “Vix Pervenit”, Pop Benedict XIV,
still condemned usury:
“One
cannot condone the sin of usury by arguing that the gain is not great or
excessive … neither can it be condoned by arguing that the borrower is rich…”
Christianity
and Islam both had a ban on interest in common, the former is no longer in
practice while it is still in the latter’s case, in some places. But they both
have something else in common: the inevitability of individuals trying to
circumvent the law for their own benefit by innovating financial structures.
Some may argue that without such innovations, we would not have the thriving
banking industry of today, and the many beneficial services it provides.
In a
research paper by Mark Koyama, entitled: “Evading The ‘Taint of Usury’ Complex
Contracts and Segmented Capital Markets”, the author concludes:
“the
usury prohibition should have, and did, stimulate financial innovation.
Innovation in contractual forms and in financial instruments not only enabled
merchants to better avoid detection as usurers, it also enabled them to trade
more easily and to spread risk more effectively. But since the benefits of a
new financial innovation quickly accrue to a wider set of the population than
the initial innovator or innovators, the social benefits of innovating
typically exceed the private benefits.”
Somehow
I think that ancestors on both sides would still call many aspects of
innovation just usury.
***************************************
Comments
Post a Comment