Making Lending Decisions
How does our finance theology inform whether to make a loan to a particular customer and at what interest rate? Several of the foundations of biblical finance come to the fore here. First bankers are not omniscient, so they need to work diligently to understand potential borrowers’ situations and needs. They have an important role in helping borrowers evaluate whether a loan is truly beneficial to them, and how to use the proceeds productively.
Second, neither party knows the future, so both parties should be prudent and conservative in thinking about future scenarios. Both are well-advised to discuss what could potentially go wrong over the course of the loan and how to recover from potential difficulties.
Third, bankers can guide lenders towards loans that best show justice and love to the borrower. A loan that the borrower can repay without hardship is a just and loving loan. A loan that does not tease the borrower with a low interest rate that increases later is more likely to be a just and loving loan. Conversely a loan—in many cases a credit card—that is likely to lead to more accrued debt in the future is not a good way to show justice and love.
Interests rates vary with the riskiness of a loan as is necessary for the borrower to share in the risk-adjusted return on the loan. But, an interest rate so high that it prevents the borrower from flourishing is contrary to the biblical purpose of finance. Biblical principles suggest several courses of action when the market rate for a borrower’s credit standing is too high for the borrower to afford. First, make the loan at a subsidized interest rate. Second, help the borrower find a way to use the proceeds gainfully even if the rate is high. Third, help the buyer find resources through government or charity rather than borrowing. Fourth, help the borrower discover how to live without the loan. Perhaps the most biblical solution for loans to the poor are zero interest rate loans extended by a nonprofit organization coupled with financial and livelihood counseling. Some of these solutions fall outside of finance as we have defined it, but those working in the financial institutions may be the only contact a poor person has to help them navigate the financial maze. This may present an opportunity to show justice and love beyond the requirements—and paid hours—of a financial job. Lending to the poor is very challenging, which is almost certainly why the Bible teaches specifically on the topic.
McIlroy, “Christian Finance?”, refers to this as the “virtue of generosity” and calls for interest free loans and other support for the poor.
Microfinance is an example of loans at high interest rates to the poor extended in a loving supportive community. Although this model seems to work in certain cultures, it is hard to argue that charging a high interest rate to the poor is a Biblical model.