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The Usurers: How Medieval Europe circumvented the Church’s ban on Usury

The Usurers: How Medieval Europe circumvented the Church’s ban on Usury

By Nizar Alshubaily | July 11, 2019

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.


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Adam F. Khan 10 months ago
CEO, IP Direct Group

I must say that best ever analises and historical expoloration of what and how it realy happened to Christian ban on Usuary and Interest was given by Jones in his book here: Barren Metal: A History of Capitalism as the Conflict between Labor and Usury Hardcover – 2014

Adam F. Khan 10 months ago
CEO, IP Direct Group

"Here's the message I took away from Barren Metal: 'Banking is magic that works' (p. 128). I think that's a fascinating insight, phrased in a sublime way. It really speaks to where we are today in the world, with central banks--including the Federal Reserve--exercising so much power over most of the globe. ... A competing phrase for summing up Barren Metal could be 'Capitalism is state-sponsored usury.' ... From the fall of Rome, th[e] Catholic ban on usury was enforced because the Church treated economics 'as if God mattered.' According to this doctrine, God gave men faith and reason to pursue success in this life, but as the Middle Ages gave way to succeeding eras, God began to matter less and less, and Jews moved in to fill the void. Jones' lengthy description of this epic transformation is fascinating, allowing Jones to once again show the incredible breadth of his knowledge. The flip side of this unhealthy usurious equation is one that abides by the moral law and puts labor above other economic systems, for 'there is only one use that will turn credit into wealth, and that is the application of labor.' Jones' views are militantly aracial, by which I mean he is insistent that race is not a factor in the struggle between Jewry and the rest of humanity. Rather, in his view, it is a religious story in which God plays the leading role and the Catholic Church is the agent of God's work on Earth." Edmund Connelly, Ph.D, Occidental Observer

Adam F. Khan 10 months ago
CEO, IP Direct Group

"Some may argue that without such innovations, we would not have the thriving banking industry of today, and the many beneficial services it provides." -benefits for few and missery and poverty for rest..not worthy at all to exercise such banking if we are increasing stress on nature and creating social unrest..instead the energy of sharia scholars should be directed into the achieving goals of sharia via banking activities. What is the point of making all this sharia standards if countries are issuing debt via bonds market and to repay them introducing new taxes. on people..again benefiting few and creating missery and tensions for the rest/ (edited)

Adam F. Khan 10 months ago
CEO, IP Direct Group

We need to address core of the usuary problem nowadays: money as debt unless this is done all efforts of sharia sholars and christian scholastic circles are doomed to fail. "individuals trying to circumvent the law for their own benefit by innovating financial structures" are there and always be however in money driven society and artificial scarcity of money the design of money system are creating such wicked drive. Sharia scholars need to re-design proper roots casues of creation of money in interest free way and then lets see how it will work

Safdar Alam 10 months ago
Owner , Siyam Capital

Salams brother. Even though gifts with loans may be prohibited in Shariah this is exactly what occured over many centuries with Muslim merchants and lenders. Also, even though a guarantee with Mudarabah is strictly not allowed, and you quote a fatwa that expressly forbids this in Mudarabah Sukuk - every single Mudarabah sukuk in existence has this guarantee. Finally, after analysing Bai al Inah, and then failing to see how commodity Murabaha is a direct and technical extension of this, extending from two to three (or four) parties to form the circular trading process, is hardly credible for one with experience of the industry as yoursef. Jzk for the article and analysis. (edited)

Banker, Writer

وعليكم السلام ورحمة الله وبركاته

Salaam brother Safdar.

Thank you for your comment.
I do understand the confusion between terms that lead you to make such a statement, as I have seen it many times before.
Rest assured, I didn't fail to see anything, it's only because I know too well the variations, disputes, differences, sometimes subtle, and nuances.
Bai Al-inah is a complex issue for anyone, which is why so much has been written about it, including the details given by Al-Shafi in Al-um, which many find a bit difficult to comprehend.
The Bai Al-Inah you're familiar with as most people probably, is actually one of 12 types of transactions called by the Maliki school Buyou Al-Aajaal (بيوع الآجال ). We can call them Delayed Sales to differentiate them from Deferred Payment Sales. Nine are permissible and three are forbidden. You can take a look at my recent post on LinkedIn on this issue:

The Bai Al-inah that the Malikis call Inah is actually a version of what is currently called today Murabaha to the Purchase Orderer which has a standard for it in AAOIFI as Standard NO. (8), which is different from other forms of Murabaha, for example with financial institutions, which can be called Tawarruq since financial institutions resell the goods in the market, which in turn is also different than the retail product known as Organized Tawarruq.
Each has its own issues and variations and reasons for being either forbidden or permissible., and specific clauses demanded.
For a full discussion on Bai Al-Inah, Maliki Delayed Sales, and Murabaha for the Purchase Orderer, I would highly recommend the 2004 book 'Fiqh Al-Riba' by Dr. Abu-Zaid. Hopefully it would clarify the issues.

As for Mudarabah Sukuk, it is quite different whether the guarantee is from the Mudarib, a third party, or in fact is woven into the fabric of the structure through a percentage in Murabaha which creates a capital protection. They all have different rulings.
For a full discussion of the Mudarabah/Murabaha Sukuk, I would recommend the papers presented to AAOIFI in 2018 in their 16th conference on Sukuk (Mudarabah/Murabaha) by Dr. Eissa, which I hope will clarify some issues.
Finally, thank you for pointing out a very important issue about the confusion of terminology, processes, and transactions. I really appreciate that and this actually prompts me to write an article explaining the differences between such concepts as Bai Al-Inah, Murabaha, Tawarruq, and Delayed Sales.
These are very important topics that people need to understand.

Owner , Siyam Capital

Salams dear brother. I agree there is much confusion about what these terms mean. However there can be little confusion when it comes to market practice. It seems market practice is made obscure by references to contracts and terms and theory that has no relevance to what Islamic banks actually contract and execute. This does not help Muslims understand what is going on. When those with little knowledge of practice focus on abstract theory then we are not serving Muslims positively. I am clear on market practice. And that tawarruq is in contravention if AAOIFI shariah standars. Also very clear that every non Ijara sukuk is in contravention of Shariah standards. That is one reason why none of these documents and contracts state they are actually in compliance. Because they are unable to. May we help Muslims to understand reality and not just increase them in confusion. Best regards brother. Safdar

Owner , Siyam Capital

By shariah standards i refer to AAOIFI Shariah standards which are clear and unambiguous in these matters.

Banker, Writer

Thank you for the reply brother Safdar.

But just to be clear, because terms can cause difficulties, and I don't wish to wrongly lead people astray. Tawarruq is actually approved by AAOIFI, but they don't accept the "Inah" part of it and they make that distinction in their Standard No. (30), as does the OIC International Islamic Fiqh Academy.
Organized Tawarruq is perhaps what you are referring to.

All the best brother.

Owner , Siyam Capital

Dear brother. Yes AAOIFI approves
tawarruq in Shariah standard 30. They have restrictions to ensure it is not organised. However market practice is organised in every single instance and in contravention of the Standard. Same applies for Non Ijara sukuk. It is not the guarantee but they buy back mechanism which is agreed to be the face value of the Sukuk. This is also prohibited in the Shariah standards. This is the clear and unwavering market practice - without exception for Tawarruq and Sukuk. That is why overly focussing on Shariah amd academic and theoretical aspects does not help Muslims to understand market practice. If anything it can serve to hide the reality of market praftice behind such discussion. Always my best regards, brother.

Banker, Writer

Well brother I guess after so many years in the industry, this has not been my experience.
I don’t feel cynical about the industry and I trust the scholars very much, many of whom I worked with closely and found them to be of the highest integrity.
In fact I have been positively amazed at the progress of the Islamic Banks.
I think a lack of knowledge and expertise may be causing many people to have suspicions.
I’m very sorry you are not fully satisfied with the industry, I wish I could actually say something that will convince you otherwise but alas I don’t know what to say.
All the best brother. (edited)

Investments, Fajr Capital

Salam Br Nizar- I think the transparency for all stakeholders will improve if there is greater disclosure on financial rewards received. If compensation for shariah structure approval was shown with each certificate, it would allow all stakeholders to judge themselves. Allah knows best.

Banker, Writer

Salaam brother Arsalan.

To be absolutely fair, why isn’t this transparency also demanded of Lawyers, Accountants, Auditors, Bankers, and Consultants?
Most of whom present a greater risk to clients’ money than Scholars. (edited)

Investments, Fajr Capital

Salam Br Nizar. Indeed there is disclosure for Bod, Audit fees and senior management compensation for most listed banks. If we agree disclosure is a good thing then it should indeed be demanded for all governance/advisory bodies.

Banker, Writer

Salaam Brother Arsalan.

I’m not sure which institutions you’re referring to but I’m actually looking at the annual report of one of the largest listed banks in the GCC.
Nothing given on Auditors, Lawyers, or Consultants.
Senior Management without names also.
Maybe it’s different in some markets.

Also, why would the fees for a Shariah Scholar be relevant?

Is the idea that if it’s a lot, then he might be approving the forbidden and if it’s low, then he’s giving the right pronouncement?

And how would people know the difference between what’s forbidden and permissible?

Is everyone now a Scholar?

The idea that today individuals without the level of learning of our scholars are making serious judgements is really worrying to me Brother.

As Ibn Qudamah says about Scholars:

“Their agreement is conclusive proof, and their dispute is expansive mercy.”

Owner , Siyam Capital

Jzk brother. I have never questions the integrity of scholars. However they are clearly manipulated. To blame ignorance for any criticism is a way of shutting down legitimate views that may oppose your own. I am happy for you to display to me how any if my views are a result of a lack if experience of knowledge. Where I have these deficiencies, I will accept them and learn from those better than me.
Jzk. Safdar

Banker, Writer

Brother, this is the second time you accuse me of something, please stop doing that, it’s impolite.
I mentioned nothing of your experience and knowledge, at all.
It was a commentary and a general view of the current market in which people question scholars without the necessary knowledge, which happens a lot.
However, let me point out that saying that you don’t question the integrity of scholars but yet they are manipulated isn’t exactly a show of trust in our scholars.
That’s of course your prerogative to think what you wish of them.
But please do not accuse me or insult me ever again, I’m not here for your pleasure.

Owner , Siyam Capital

For example it is my position that market practice breaks several AAOIFI shariah standards on Murabaha, Tawarruq, commodity sales and Sukuk. I am happy to present these to you and you can highlight why my position is wrong. Just let me know if that is ok with you. Jzk brother

Owner , Siyam Capital

Salams brother. I apologise if you felt I insulted you. That was never intended. Yet I do criticise practice. And you have said directly to me
In this thread that such criticism arises from lack of experience and knowledge and confusion. I accept I may ne guilty of these things and happy to wait for you to demonstrate my mistakes. I would not insult a fellow brother like you claim. Disagree - yes. But not insult. Waslams. Safdar

Arsalan Mustafa 10 months ago
Investments, Fajr Capital

Wonderful Article. Although i do believe the question of how and when simple sale and purchase contracts transformed to Islamic debt structures remains unanswered. Islamic debt instruments maybe different in form from contractum trinius, but substance seem very similar- avoiding interest/usury without any change in risk-return trade-off. (edited)