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.