This is the final article in a five part series, "What does the Old Testament say about Loans and Interest?" You may want to review Part 1, Part 2, Part 3, and Part 4 before reading the content below.
We now complete a 5-part series on OT teaching on lending, in which I presented a case in the four previous blogs that the three Torah lending and usury passages (Exod. 22:25, Lev. 25:35-36, and Deut. 23:19-20) convey the same interest ban on loans to the poor, and that Deuteronomy 23:19-20 could be paraphrased as: “Do not charge interest on basic subsistence loans to the poor and needy, but you may charge interest on loans for other purposes, including for commerce.”
In this blog, I offer some implications for today, after clarifying the OT perspective about the importance of lending. In the OT, lending was one form of generosity for the poor and needy. Additional initiatives of kindness from farmers included permitting others to glean in one’s field (Deut. 24:19-22, e.g., Ruth 2:1-23) and storing up a separate tithe every three years, along with other local farmers, and then distributing produce to the landless: Levites, orphans, widows, and resident aliens (Deut. 14:28-19)--both of these activities were unique in comparison with laws of the Ancient Near East.
Lending addressed a pressing financial need for those who had the potential for repayment, i.e., the lower-income working poor. (For those in financial need who could not repay a loan, other forms of generosity better served that situation such as almsgiving.) Psalms 112:5 states, “Good will come to those who are generous and lend freely, who conduct their affairs with justice.” Why not make an outright gift rather arrange a loan? Because, for those who are able to work, lending affirms their dignity and avoids the potential for dependency. OT scholar John Goldingay’s comments on Psalms 112:5 are instructive, in which a virtue is affirmed in this verse that,
“ . . . finds expression in a willingness to lend. We might think it would express itself in a willingness to give, and the psalm will come to that, but this colon makes another point. Lending and borrowing is a common feature of life. In Western society it mostly means people with resources increasing those resources by lending to people with none. In the OT lending is a means of the rich helping the poor, not helping themselves, and not making them the recipients of charity but giving them means of reestablishing themselves, after which they would pay back the loan (see, e.g., Exod. 22:25-27). Its ideology was closer to that of credit unions and building societies. Here, goodness includes being willing to use one’s surplus wealth for the benefit of others. When they pay it back, it becomes available to help yet others.” 
1. Implications from Torah Teaching: informal personal loans from family and friends.
The most direct implication from the Torah 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 category of generosity that has existed since ancient times and continues today. I have been a recipient of such loans and have been a lender. For what kind of needs? We could begin with the four basic material needs of food, clothing, shelter, and basic transportation to get to work. Medical costs could fit here also. Discernment would be required on a case-by-case basis.
The paraphrase of Deuteronomy 32:19-20 above noted that there are loans for other purposes. Often, entrepreneurs starting up a new business will rely on this very same network of family and friends as a first source of funding, but for these kinds of loans, according to OT teaching, interest can be charged. When the loan need is about investing in a business or for other purposes, then we are shifting categories to a productive loan (not a matter of subsistence), for which the Torah teaching offers little information, aside from the acknowledgement in a few places of interest-bearing loans beyond subsistence assistance (e.g., Exod. 22:25, Deut. 15:3, 23:20).
But what if a low-income worker today does not have access to a network of family and friends who have the means to provide a loan? Here, charity may offer temporary relief. But what if someone does not want such a handout, but rather a hand-up? He or she would prefer a temporary productive loan as a means that affirms their dignity while they work their way out of poverty, serving the common good at the same time? NT scholar John Nolland captures the distinction well, “Loans would have as their goal getting people back on their feet; almsgiving assumed continuing dependency.”  And, consider from the giver’s perspective with surplus funds, that a gift of charity can be given once to benefit one person, and a gift of a loan can be given several times to benefit several people in sequence (unless a default occurs, which then changes the loan into charity). Charity and lending have differing purposes. Our focus in this series is on the matter of lending.
2. Loans from Organizations with interest for other purposes. As we shift, now, from the informal and personal, to the formal and organizational lending category, we may wonder: What about interest-bearing loans for the working poor? What about payday loans? These questions come to mind in light of the Torah’s emphasis to protect the poor and needy. I’m glad you asked. What follows in this final blog is not an apologetic for predatory lending companies, but an orientation to raise awareness regarding an economically-complex sector usually hidden from most of us. It is a sector of lending organizations that provide Small Dollar Loans (SDLs), of which some are also committed to helping low-income workers break out of the cycle of poverty and debt. Four issues are briefly considered:
Why is there a need for alternative financial services for SDLs?
Why charge any interest?
Why do SDLs cost more? and
What are the better lending alternatives?
a. Why is there a need for alternative financial services for SDLs?
Although low-income poor in the U.S. and around the world need access to SDLs for various reasons, securing funds through traditional banking is usually not an available option, due to the more stringent borrowing requirements (the risk factor), and to the higher cost for servicing short-term SDLs of $300 or more, in proportion to the loan amount (the processing cost factor, explained later). These non-standard banking centers, whether in the U.S. or overseas, provide a convenient and welcome access for varied financial services unavailable elsewhere to low-income poor who are “unbanked” (no bank accounts) and “under-banked” (have banks accounts but use these other services by choice). As John Caskey notes, “Despite their use by millions of Americans, pawnshops and check-cashing outlets [CCOs] are a largely hidden part of our financial system.”
b. Why charge any interest?
But why charge interest at all to low-income poor and needy? On this point, it is worth considering the case of the Montes Pietatis (“mounds of piety”), a charitable lending organization started by two Franciscan brothers in the 1400s. Originally, donations from the wealthy provided funds to loan and cover any overhead costs. Yet over a period of decades, as the number of organizations increased, the amount of resources for lending effectively diminished. The same amount of donations had to be spread to cover many, more loans, diminishing resources both for loans and also for the wages of employees handling the day-to-day operations. Thus, leadership and theologians were challenged to address the economic sustainability of these montes. Eventually they 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. The launching of these montes during the 15th century represents an innovative means for making credit and capital available to the working poor.
This same important need today is being addressed by microfinance institutions (MFIs), which offer small, short-term interest-bearing business loans 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. MFIs realized that to increase the number of people whom they could serve and to sustain the 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 OT Torah teaching mainly addressed informal, personal loans, with little information about other types of loans, and with little guidance when funds are offered by lending organizations with overhead expenses. Organizations that loaned money to the working poor---whether in the 1400s by the Monte Pietatis or contemporary MFIs---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.” MFIs have made an important contribution, along with the increased commercial opportunities around the world, in helping the working poor to move out of poverty.
On a larger scale, most are not aware that during a recent 23 year period, from 1990 to 2013, there has been a significant reduction of those living in extreme poverty around the world (those earning less than $1.90 a day), from 35% to 11% (World Bank Data), an amazing fact! One historical estimate of global poverty suggests that, in 1820, 84% lived in extreme poverty (earning less than $1 per day). In effect, global economic growth over the past 200 years has lifted up 73% out of extreme poverty--more than two-thirds of the world population! Furthermore, “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.”
c. Why do SDLs (small dollar loans) cost more?
How is it possible to justify annual percentage rates (APR) of 48% for pawnshops, the limit set by New York State? It turns out that an APR is not the best measure to compare normal, multi-year bank loans with short-term SDLs (e.g., 6 months), as Jay Richards explains with this analogy (using 2013 dollar values).“It is like comparing the price per mile on taxi service in Manhattan [NY] with the price per mile on a round-trip flight between New York and Los Angeles. The flight costs $70 per 1,000 miles. The taxi will run you over $2,000 for the same distance. . . . This way of measuring the consumer’s cost makes the cab ride look like a huge rip-off, when it could very well be your best way to get from Battery Park to Eighty-Fifth Street for a job interview.” For example, as Richards suggests, if CCO personnel offer a two-week $100 loan, their $15 fee hardly covers the processing time (20 minutes), without even adding in the cost of rent, utilities, insurance, etc. “The lender is setting a 15% charge to cover all those costs and risks. It sounds fairly reasonable when you look at it in that light. But when you extrapolate the rate over a full year, the APR is a whopping 391.07 percent.”
In a national 2012 survey of U.S. nonprofit organizations serving low-income poor, leaders voiced their unease about the extra operating expenses for both processing SDLs and the risk of default. Of the 44 that have either begun offering SDLs or are seriously considering doing this, 83% “are concerned that the interest rates they charge or plan to charge will not be enough to cover the cost of the loan product” and 80% noted that these rates “will not be enough to cover the risk of loan losses.” Smaller loans require the same time and cost of processing as standard bank loans, but the larger loans can cover these expenses within normally accepted percentages of the larger loan amount. The same math does not work for short-term SDLs; higher fees and interest rates are required.
d. What are the better lending alternatives?
When access to the standard forms of credit is not available (e.g., credit card, standard bank loan), some prefer to seek out the convenience and speed of processing from these alternate banking centers. In addition to loans and check-cashing, many CCOs and pawnshops provide wire services, paying utility bills, photocopies, and the purchase of money orders, pre-paid phone cards, and debit cards. Yet are payday lenders--with the potential for predatory lending--the only option for low-income poor? No, and a qualified yes. Depending on which borrowing requirements can be met, low income poor have access to SDLs from a range of organizations that seek to help borrowers to break out of the cycle of poverty and debt.
I name two specific organizations not necessarily to endorse them but to illustrate that such groups exist. Both organizations are certified as “Community Development Financial Institutions” by the U.S. Treasury Dept., and offer starter loans of $300 minimum. The mission of Good Capital Fund, Providence, Rhode Island, a nonprofit established in 2008, is “to provide equitable financial services that create pathways out of poverty.” It has served almost 2,800 clients to date and offers a year-long financial coaching program for an additional fee. The founder indicated that fees and interest only cover about 25% of their budget; grants and donations must be secured to meet remaining operating costs” although they are involved in a five-year campaign seeking more investors with the goal to become fully funded by interest payments. The mission of Oportun (formerly Progeso Financiero), a for-profit lender established in 2006, is “to provide affordable loans to help people with little or no credit history to establish credit and build better future,” and has served over one million clients to date. Borrowers can supply an ID either from the U.S. or from another country.
Yet there are many who cannot use such providers, because they do not have the appropriate legal documentation. The complicating factor is that most working poor throughout the majority world must live and work within the “extra-legal sector” in their respective countries, according to Peruvian economist Hernando de Soto. When villagers migrate to the cities, not only are the public services overwhelmed, but also the outmoded laws become too much red tape for these nationals either to gain business licenses or to buy land or rent housing. In 2000, de Soto noted, “As we have seen, the [low income working] poor in developing and former communist countries constitute two-thirds of the world population--and they have no alternative but to live outside the law.” In such cases, securing an SDL may only be through certain pawnshops and CCOs (aka payday lenders) that do not require legal documents nor credit history checks, but only sufficient collateral of a pawn or the next paycheck to make a loan. Too often payday loans can become an entrapment into a cycle of recurring loans, increasing and not diminishing the amount of debt.
A number of reputable MFIs have been established that offer SDLs for those in the majority world---with no ID-check, no credit check, and no collateral---employing a “social” pledge of accountability groups. “The microfinance movement has developed relatively low-cost ways of addressing the three C’s [character, capacity, and collateral], often using group-based incentives based on joint liability for loan repayment.” By making available SDLs, MFIs offer a means for poor entrepreneurs to move out of a level of poverty and, when the recipients are believers, these loans offer an indirect means to support local churches that will benefit from these new streams of giving from such entrepreneurs.
3. Two Action Points for Christian Leaders to Ponder:
In light of this very active but hidden sector of alternative financial services, Christian leaders both in the U.S and overseas, may consider two strategies for offering guidance for low-income workers trying to meet their own capital needs.
a. Locally: We could can band together in order to vet local alternative lending organizations located in our communities and cities whose mission is to help the low income working poor.  Churches and parachurch organizations could develop some kind of “seal of recommendation” list, and also train financial coaches. Then, for those needy workers attending our church or another church in the region who tend to rely on alternative financial services, they could become aware of these reputable lenders to address immediate financial problems with the goal of escaping the debt cycle and transitioning to a measure of financial stability. And, they could take advantage of any personal financial coaching available. A regional website could announce such a recommended list and the availability of coaches for those with mobile phone app access; yet word-of-mouth may be the most reliable way to get out this important information to needy workers.
b. Globally: We could consider how our churches or organization could participate in the economic outreach taking place throughout the world by collaborating with MFIs globally and locally. Fikkert and Mask propose a “Partnership Model” in which the MFI offers the financial services while the church/organization provides the non-financial components for these loan recipients: the Gospel message, discipleship, Bible study, counseling, technical services, and medical care. Individuals can invest their own funds to support these MFIs, yet MFIs (and recommended local alternate financial organizations) are the ones doing the actual lending, since they have the experience and efficient systems. Fikkert and Mask strongly warn churches not to take on that part, but to partner and provide non-financial services in which they have competency. “Churches and MFIs can pursue ministry together that is far more powerful than anything they could accomplish on their own.”
“Do not turn away from the one who wants to borrow from you.” (Matt. 5:42b)
“Good will come to those who are generous and lend freely, who conduct their affairs with justice.” (Ps. 112:5)
1. John Goldingay, Psalms, Baker Commentary on the Old Testament Wisdom and Psalms. vol. 3. Grand Rapids, MI: Baker, 2008, 311-12.
2. John Nolland, The Gospel of Matthew, NIGTC. Grand Rapids, MI: Eerdmans, 2005, 260, n. 247 (a comment related to Matt 5:42).
3. John Caskey, Fringe Banking: Check-Cashing Outlets, Pawnshop, and the Poor. NY: Russell Sage Foundation, 1994, 150. Caskey conducted a study for credit unions, “The Economics of Payday Lending,” (2002; available at filene.org/assets/pdf-reports/1752 81_Payday_Lending.pdf).
4. For further study of these montes, see Carol Bresnahan Menning, Charity and State in Late Renaissance Italy: The Monte Di Pietà of Florence. Ithaca, NY: Cornell University, 1993.
5. Brian Fikkert and Russell Mask, From Dependence to Dignity: How to Alleviate Poverty Through Church-Centered Microfinance. Grand Rapids, MI: Zondervan, 2015, 212.
6. Peter Greer and Phil Smith, The Poor Will Be Glad. Grand Rapids, MI: Zondervan, 2009, 107-108.
7. Fikkert and Mask, From Dignity, 55.
8. Max Roser and Esteban Ortiz-Ospina, “Global Extreme Poverty”2013, revised 2017 (available at ourworldindata.org/extreme-poverty; a 65-page document with many summary graphs and tables),4, and 14. The paper is produced by the Oxford Martin Programme on Global Development at the University of Oxford; Max Roser is an Oxford economist.
9. Jay Richards, Infiltrated. NY: McGraw Hill, 2013, 211.
10. Richards, Infiltrated, 211.
11. “Small Dollar Consumer Loans: Nonprofit Lenders Making a Difference,” Washington, D.C.: Credit Builders Alliance, 2012, 8.
12. Jim Hummel, Rhode Island Spotlight, “A Good Investment (5.14.15),” interview of Andy Posner, founder and CEO of Capital Good Fund (CGF).
13. Hernando de Soto, The Mystery of Capitalism. NY: Basic, 2000, 74.
14. Fikkert and Mask, From Dignity, 205.
15. More information and suggested guidelines for vetting are offered by the National Consumer Law Center, in a 63-page booklet: “Stopping the PayDay Loan Trap” (2010)
16. Fikkert and Mask, From Dignity, 232.
(For further details on the biblical study of this topic, see my article, “Lending and Interest in the OT: Examining Three Interpretations to Explain the Deuteronomy 23:19-20 Distinction in Light of the Historical Usury Debate,” Journal of the Evangelical Theological Society, vol. 59, 2016, 761-89.)