I remember reading somewhere in Leviticus that it’s wrong to charge someone interest for a loan and I remembered this point as I started a debate with a number of fellow Christians around the dinner table. I offered the proposition that it is totally outdated and not applicable nowadays because of the advancement of the economic and financial system over the years. With all the years of actuarial education on my side, I began to recall the role interest plays in society. To this date I’m able to remember 3 reasons justifying the concept of interest (let’s assume that person A is lending $1 to person B):
1. Liquidity preference – It is obviously better A to have cash now to do whatever he likes with it, rather than forego that right by lending money to B. The loss of that right must be paid for from B to A, in the form of interest.
2. Time value of money – A dollar now is worth more than a dollar tomorrow. Person A can take his $1 and invest it to get a profit in a year’s time. If person B borrows $1 from person A and just repays A the same amount, then person A stands to lose the potential profit gained from investing that $1. Also, if person B borrows $1 from person A and invests it for a year himself, what will happen at the end of the year is that B will give $1 back, and B can pocket the profit made. This is not fair against person A, so A must charge interest to bring borrowing back at equilibrium (if B can borrow $1 and invest at 0 interest, what’s stopping him from getting $2? $3? there is no equilibrium here).
3. Credit risk – For any loan, there is a probability that person B cannot (or will not) pay person A back, and A stands to lose the borrowed amount if B defaults on the loan and runs away. Person A must charge interest as a risk premium (similar to insurance).
And so with these weapons in hand, I was potentially able to declare Biblical Law as obselete.
That’s until I actually found the passage in Leviticus where it talks about interest… (to be continued)
