Public Square & Theology 101

What Does the Old Testament Say about Loans and Interest? Part 5

How Microfinance Loans for the Working Poor Help Reduce Global Poverty
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What if someone prefers a temporary productive loan as a means to work their way out of poverty—a loan that affirms their dignity while serving the common good through a business activity?

Consider this case from medieval times. Montes Pietatis (“mounds of piety”) were charitable lending organizations started by two Franciscan brothers in the 1400s. Originally, donations from the wealthy provided funds to loan. Yet over a period of decades, as the number of organizations increased, the amount of resources for lending effectively diminished. Donations were now spread around to cover many more loans, diminishing resources both for loans and also for the wages of employees handling the day-to-day operations. The economic sustainability of these montes was in jeopardy.

Eventually leadership and theologians proposed that a nominal interest must be charged on loans to cover employee and administrative costs. This innovation, an exception from the absolute ban on usury doctrine of that day, surprisingly won papal approval in 1515. These montes launched in the 15th century represent an innovative means for making credit and capital available to the working poor.

Productive Loans and the Working Poor

This same important need today is being addressed by microfinance institutions (MFIs), which offer small, short-term interest-bearing business loans (as low as $50) to low-income entrepreneurs around the globe—mostly women request these loans—to help them climb out of poverty.

A basic economic principle for any business, including MFIs, is that outgoing operational costs (e.g., salaries, office rent, supplies) must be covered by incoming funds. For lending institutions, revenues include fees and interest on loans.

Furthermore, since “financial systems are inherently very fragile,” there is a greater complexity to sustaining an institutional lending service than for loans from individuals, according to Brian Fikkert and Russell Mask. Over time, MFIs realized that to increase the number of people whom they could serve and to sustain operational costs, a nominal interest rate was needed.

Peter Greer and Phil Smith, leaders at Hope International, a leading Christian MFI, explain,

It is crucial for an MFI to charge interest rates that allow it to become self-sustaining in the long term so that it can continue to service its community [with]…enough interest income to pay for inflation, defaults, and operational overhead….A financially solvent MFI means the community can count on having access to loans and other financial services.

The Old Testament offers little guidance regarding funds offered by lending organizations with overhead expenses as opposed to loans from family and friends. Organizations that loan money to the working poor—whether in the 1400s or contemporary MFIs—have learned through trial and error that a nominal interest rate is necessary to continue serving clients, who primarily receive productive loans for small business purposes.  Fikkert and Mask explain, “Reaching over 204 million borrowers, MFIs are the premier vehicle for the ‘microcredit-for-microenterprises’ strategy.”

Significant Reduction of Those Living in Extreme Poverty

Increased economic growth is evident in those countries that have some degree of a free market and allow these MFI-supported business activities among their poor entrepreneurs. As a result, the number of those living in extreme poverty around the world is in significant decline, a fact not well known by the public. During a recent 23-year period, from 1990 to 2013, the percentage of the world population representing those earning less than $1.90 a day has been reduced from 35% to 11%—an amazing fact!

Comparing this reduction over a longer period of time, one historical estimate of global poverty suggests that, in 1820, 84% of the world population lived in extreme poverty (earning less than $1 per day). On that measure, global economic growth has lifted more than two-thirds of the world population out of extreme poverty over the past 200 years!

Furthermore, this remarkable decline in global poverty occurred despite the exponential growth in population over that same period of time. According to Max Roser and Esteban Ortiz-Ospina,

A 7-fold increase in the world population [that took place over these past 200 years] would be potentially enough to drive everyone into extreme poverty. Yet, the exact opposite happened. In a time of unprecedented population growth, we managed to lift more and more people out of poverty….Despite the clear evidence, many people are not aware of that fact that extreme poverty is declining across the world.

Productive loans with affordable interest have greatly benefited the working poor around the world.

Microfinance loans are just one application of Old Testament teaching on lending and interest. What else can we take away from our blog series on lending and interest (see previous article links below)?

Key Points about OT Teaching and Application on Lending and Interest

  1. The Old Testament identifies two categories of lending: a) interest-free lending for the working poor who need subsistence-living assistance, and b) productive loans that can charge interest. “If you lend money to any of my people who is needy, do not treat it like a business deal; charge no interest” (Exod 22:25, NIV).
  2. Interest-free subsistence lending is one component of economic social justice in the Old Testament for the working poor who have the potential to repay the loan. Requesting and receiving such a loan affirms their dignity and avoids the potential for long-term dependency.
  3. The most direct implication from the OT teaching fits the context of informal, personal interest-free loans, not from an organization, but from within one’s own network of family and friends. A borrower receiving such a loan would offer to the one making the loan an appropriate pledge as a promise of repayment. Apart from access to such an informal network, seeking some form of charity may offer the best means of temporary relief.
  4. Where humans are engaged in financial transactions there is potential for abuse. Yet, the abuses among some financial transactions does not negate the affirmation of interest-free lending as one form of generosity for the working poor and needy, and of productive loans as a means to climb out of poverty.

Editor’s note: Read the entire blog series: “What Does the Old Testament Say About Loans and Interest?” Part 1, Part 2, Part 3, Part 4

Dr. Issler’s full article on the topic, “Lending and Interest in the OT: Examining Three Interpretations to Explain the Deuteronomy 23:19-20 Distinction in Light of the Historical Usury Debate,” was published by the Journal of the Evangelical Theological Society.

Learn more ways to empower the poor to flourish in Love Your Neighbor: Restoring Dignity, Breaking the Cycle of Poverty.

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