Financial Institutions

Article / Produced by TOW Project

To complete our theological analysis of finance, we need to demonstrate exactly how people can develop financial institutions that bring glory, stewardship, and justice and love from God’s created foundations. By institutions we mean those structures and mechanisms which society uses to organize its activities. The four primary finance institutions are currency, intermediaries, instruments and prices. In this section we explore each of these four institutions, show how they are built on God’s foundations and are a way in which we obediently respond to God through stewardship, justice, and love. Along the way we address several questions which arise.

Van Duzer argues that institutions may be among the powers and principalities referred to in the Bible and that as such were created by God for good.[1] He infers that Colossians 1:16-17 may be referring to institutions such as business or markets.[2] He quotes Yoder who argues that God created institutions to provide “regularity, system, order” to his creation.[3] Consistent with this we take an optimistic view of finance; a “what was intended by God” view of finance. Later we look at how God’s intentions for finance are impacted by a fallen humanity, and recognize that finance institutions can be, and are, used for great harm in society; exhibiting bad stewardship and lack of justice and love for fellow humans.

Van Duzer, Why Business Matters to God: (and what still needs to be fixed), 144-146.

“For in him all things were created: things in heaven and on earth, visible and invisible, whether thrones or powers or rulers or authorities; all things have been created through him and for him. He is before all things, and in him all things hold together”, Colossians 1: 16-17.

Van Duzer, Why Business Matters to God: (and what still needs to be fixed), 145, quoting John Howard Yoder, The Politics of Jesus (Eerdmans, Grand Rapids, 1994), 141.

Currency

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God enabled humans to represent material value in media that are durable, storable and transportable. In his original creation design God made some physical elements, such as gold, to be attractive, small, and relatively scarce. He also created in humans an ability to understand and impute value to such articles. Later, God allowed humans to establish governments which would use non-scarce resources, such as paper, to represent scarce resources, such as gold, which in turn could be exchanged for a wide variety of resources.[1] We have money which is in modern times very easy to transport (and is almost costless to transport electronically) and which provides access to real resources such as food, housing, education and capital goods. Being able to easily allocate resources via currencies is an important part of fulfilling the creation stewardship mandate.

The Bible contains much teaching about money. Several famous teachings are that “the love of money is a root of all kinds of evil” (1 Timothy 6:10) and, “You cannot serve both God and money” (Matthew 6:24). These teachings are not about money as a medium of exchange, but rather about human attitudes towards money and the power it represents to us.  However, money as a medium of exchange is not the root of evil. Money as a medium of exchange is a blessing enabled by God.[2]

Some have argued that paper money which is not backed by gold is morally wrong. Exploring those arguments is beyond the scope of this article and would not inform the main points of this article.

Jacques Ellul, Money and Power (Inter-varsity Press, Downers Grove, 1984), argues that society’s way of thinking about money, wealth and resources is contrary to Biblical teaching. Although Ellul highlights the evil arising out of money, he is writing about wealth and material possessions, and not about currency as a medium of exchange.

Intermediaries

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Intermediaries are institutions that “remanufacture” lenders’ resources into a form that is useful to borrowers. A simple example is when a bank intermediates between several depositors and one business loan borrower. Intermediaries include all the various types of banks, but there are several other important types of intermediaries such as pension funds, life insurance companies, mutual funds, private equity funds, hedge funds and securitization vehicles. Even “disintermediated” financial transactions—when companies borrow money by issuing bonds to lenders, rather than borrowing from a bank, for example—typically go through some kind of intermediary, such as an investment bank. Any financial vehicle which aggregates on savers' money and invests it in borrower obligations is performing the function of financial intermediation. Intermediaries function because God created humans to be social and heterogeneous, to act as agents, to make promises, and to be prudent risk takers.

Intermediaries allow humans to fulfill God’s stewardship mandate in two key ways. First, intermediaries develop networks of borrowers and lenders, investing their own resources to identify and build trust between parties. You would probably never lend money to a stranger to buy a house, but you would deposit money at a bank that lends to the stranger. You trust the bank because you know the bank has a process to makes sure it lends soundly to appropriate borrowers. Second, intermediaries make resources scalable by enabling many savers’ resources to be aggregated. You can’t lend enough money for someone to buy a house, but a bank with thousands or millions of depositors can pool their funds to make large loans possible.

One way intermediaries enable justice is by allowing non-elite households and small businesses to gain access to resources. Without intermediaries a household’s access to resources would be limited to the social relationships of that household. Poor households would likely stay poor. With intermediaries a poor household can borrow the resources to buy a house, car, college education or start a small business. Likewise with small businesses that do not have the size or reputation to issue bonds directly to investors. This allows for a more just society.

Intermediaries allow borrowers and savers to care for each other, which as we have seen is an act of love. The intermediary enables the borrower to obtain the needed funds more easily and more cheaply than if the borrower relies only on family and friends. Intermediaries also enable savers to save for the future in lower risk and higher return ways compared to hiding money under mattresses or lending only to acquaintances. Although the saver and borrower never meet, they are caring for each other by sharing resources in this way. 

Can We Really Love Someone Through Intermediaries?

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Faith & Co.: Banking on Hope

How does the gospel change a bank’s view of people and how they should be treated, especially those of modest means? Inspired by faith that sees the infinite worth of each person, Guardian Bank takes a different, more humane and hopeful view that also provides hope for everyday households and commercial customers.

If finance is a means of care and love, doing finance through intermediaries raises a question. Can we love someone we do not even know?

We can indeed show love for people whom we do not know. Most of us are familiar with institutions in society that enable humans to show love to each other across distance and time. For example, employees and donors of NGOs such as Oxfam, World Vision and Red Cross, to name a few, are acting out of love for needy people around the world, even though they do not actually know the persons they are loving. Indeed even the work of developing those organizations is an act of love for our fellow humans.[1] Similarly, although we do not usually think of this, savers who make bank deposits which allow borrowers to use those resources for a period of time can be acting out of love for the borrowers even if their exact identity is unknown to the savers.

This suggests a possible tension between stewardship and love, however. It seems that larger intermediaries should allow for better stewardship because they have opportunities to borrow and lend in many markets around the world. But smaller local intermediaries with more local relationships  might be better at enabling love because they may know their customers more intimately. A big national bank might allow for more optimal stewardship and a small local bank might allow more intimate love. Our theology would urge banks and customers to consider this potential tradeoff when making decisions regarding the scale of their banks. If a bank chooses to be large, it should be with an explicit goal of excellent geographical and scale stewardship. If a bank chooses to remain small it should do so with an explicit mission to be excellent at love.[2] Depositors should consider the same tradeoffs when deciding where to do their banking.

This is consistent with Catholic doctrine as outlined in Compendium of the Social Doctrine of the Church, (Pontifical Council for Peace and Justice Justice and Peace, Libreria Editrice Vaticana, 2004, Reprint April 2005), Paragraph 208.

David McIlroy, “Christian Finance?”, Ethics in Brief, Vol. 16, No. 6, (Spring 2011), urges us to structure intermediaries in ways, perhaps smaller, which allow a stronger connection or “fellowship” between borrowers and savers as a way to better serve both parties.

Instruments

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Financial instruments are promises between two or more parties with differing resource needs which are tailored to allow both parties to be prudent risk takers when the future is unknown. As argued above, God created humans to be a promise keeping people. That element of creation along with the fact that God created humans social, heterogeneous, time bound, and to be prudent risk takers in a world of uncertainty, gives rise to financial instruments. Financial instruments are the products “manufactured” by intermediaries to meet the needs of savers and borrowers and allow humans to obey God’s creation mandate and to show justice and love in significant ways.

Financial instruments enable good stewardship because they can be tailored to fit the risk, return, and time profile of the particular stewardship opportunity. Thus, if a borrower company has a particular project whose outcome is quite contingent on an uncertain future (i.e., it is risky), then a financial instrument can be crafted which anticipates this risk and thus helps the saver and borrower mutually agree on how exactly to share the requisite resources, very likely with an equity-type instrument.

Financial instruments also allow for a more just society. Instruments can be tailored for the needs of those members of society whose needs are the greatest. Small business loans are instruments that have provided countless opportunities for entrepreneurs to serve society. Student loans are an instrument which has provided great opportunity for young people whose families have not been able to save enough for education. The special tailored instruments used in micro-lending also enable justice. Specialized housing loans with smaller down payments and government insurance have enabled countless low income families to gain the benefits of home ownership. Financial instruments allow those members of society with ample resources one way to show justice to poorer members of society.[1]

A mortgage loan is an example of love enabled by financial instruments. The saver helps the borrower obtain a physical place in which she and her family can flourish. In turn, the borrower helps the saver prepare for later in life when he is old and no longer productive enough to support himself. Through God’s creation design he anticipated that we would develop financial instruments which would enable humans to love each other in such meaningful and useful ways. Of course, the borrower and saver do not specifically know each other but they do know of the other's existence and can thus love each other in this way.

We consider the topics of charging interest to the poor and of charity to the poor later in this article.

Prices

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Prices in financial markets are expressed as expected rates of return on financial instruments, which in debt instrument are quoted as interest rates.[1] Why exactly would the borrower and saver agree to pay or receive a rate of return or interest? Is that part of God’s creation design? We argue yes, as follows.

First consider this from the borrower’s perspective. Ideally, the borrower will be willing and able to pay interest because he or she can use the borrowed resources to produce greater resources in future. These productive opportunities have been created by God and include things like shelter so the borrower can stay healthy, planting seeds to grow a crop, gaining skills through education, building a road or factory, or buying a machine that can make something useful. Time periods and productive opportunities are both parts of God’s created order. This is one-half of the important foundation of interest rates.

For the second half of the foundation, consider this from the lender’s perspective. The lender is willing to give up access to some resources until some future period for two reasons. At present he or she has more resources than needed. But later, there is likely to be a future period during which he or she will need additional resources, in retirement for example. It makes sense to let the borrower use the resources for a period of time and return them later. To give up control of the resources for a while the lender will want compensation at least equal to the next-best use for the resources. The lender’s diminishing appetite for current consumption and knowledge of likely future time periods in life are direct results of God’s creation of humans as finite and time-bound.

Thus, the productive opportunities and human consumption needs created by God, along with the above eight foundation of finance, form the basis for interest rates. Interest rates are not some aberrant human idea; rather interest rates are an institution which flow directly from God’s creation design. Furthermore, a well-priced interest rate can benefit both the borrower and lender, and will be the result of a voluntary mutually beneficial exchange.

Interest rates are a key part of stewardship. This price mechanism allows for clarity in resource allocation decision making. If you are paying interest, you have an incentive to borrow only if it helps increase your future productivity. Interest discourages you from borrowing simply to live above your means because you have to pay back more tomorrow than you consume today. The interest rate mechanism encourages good stewardship of financial resources over time. However, we caution against assuming that this mechanism will automatically lead to the “care” part of God’s creation mandate. Not every project with a positive financial return will lead to creation care. It will take thoughtful finance participants to work within the context of interest rates to care for God’s creation.

Interest rates facilitate and stimulate a just re-allocation of resources. Interest rates provide a way for those members of society without resources to gain access to resources simply by agreeing to fairly compensate the lenders for the temporary use of the resources. Interest rates allow sharing of resources to be voluntarily agreed and mutually beneficial. Interest rates allow a financial transaction to be good for both parties. Without interest rates (i.e. a zero interest rate) financial activity would be a gift from lenders to borrowers. Without interest rates borrowers would be attempting to gain free access to lenders’ resources. This would look a lot like begging, which is perhaps not the best way for justice to work. However, God in his creative genius arranged that one way justice can occur is via sustainable voluntary mutually beneficial activities among humans, one of which is what we call interest rates.

For brevity, we will use the term “interest rate” in this article to denote the more general concept that two parties to a financial instrument anticipate a rate of return for sharing resources over time.

Can a Market Exchange Really Be Love?

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The question of prices raised two questions about finance as a form of love. First, can love be expressed in a market value-exchange relationship? Put another way, if both borrower and lender expect to gain from the relationship, is either one really doing it out of love? Second, since most financial transactions are at arm’s length, can one love another human even if there is no personal relationship?

Can one person love another through selling something at a price? Recall that our idea of love is seeking to bring about the flourishing of another human as an end in itself, and with due respect for that person as a human. The answer is yes. People bring about others’ human flourishing all the time through providing goods and services at a price. When farmers provide wholesome food, they help consumers to flourish, even though consumers pay for the food. We don’t regard good teachers as mere mercenaries simply because they get paid. The majority of work in modern economies is paid, and the goods and services produced by work are sold at a price. If charging a price negates the possibility of love, then virtually no work could show love.

Why is it that market-rate finance somehow seems less capable of showing love? Perhaps it is because money—unlike teaching or farm produce—seems like an undifferentiated product. A farmer shows love by selling good produce. Can a lender show love by lending good money? The answer, surprisingly, is yes. The money itself is not better or worse than any other money, of course. But the circumstances, conditions, and terms of lending are all opportunities for borrowers and lenders to care for one another. The duration of the loan, its payback provisions, collateral requirements, default penalties, insurance, inflation protections, and countless other terms can make a loan better suited to enable the borrower and the lender to flourish. Income verification, property assessment, due diligence, understandability of loan documents, availability of unbiased information, and other factors related to initiating the loan can also show care and respect. The location and convenience of bank locations, loan officers, rate comparisons, community engagement, advertising, and other factors can help reach underserved communities. Credit counseling, respectful dialogue about the use of proceeds—whether for consumption or investment in productivity, product education, and other factors can show love by helping people avoid borrowing if it is likely to harm them. For equity transactions, the openness of markets, the accuracy of financial statements, the integrity of people with inside information also care for and respect investors. Even though the money itself is the same from one lender to another, the love—that is, the care and respect—can vary widely.

For example, a mortgage lender may help a low-income family buy a house instead of renting. If the house, the interest rate, the loan period, the income verification, and all the other factors are handled properly, this can be a tremendous benefit for the family as they begin to build equity. It also benefits all those who lend the money involved, typically bank depositors or pension funds. Similarly, an investment bank that helps an entrepreneur issue an initial public offering to raise capital to grow the business brings a kind of love to the entrepreneurs future customers, employees, suppliers, and community, in addition to the shareholders who purchase the stock. All of these are market-rate transactions that bring love to bear for both borrowers and lenders.

Finally, love can be shown by honoring and fulfilling the promises made in the transaction. Of course much of this is required by law, but here we are arguing that love is shown in market transactions by going above and beyond the law by acting in the other party’s best interest even if it is not required or deserved and even if there is no expectation of a future benefit of doing do so. This means seeking the flourishing of the other party as an end in itself. Again, markets for other goods and services routinely do this—think of health care, for example—and there is no reason finance cannot do the same. Most if not all market transactions could feature this kind of love, and many do. 

Does the Bible Prohibit Charging Interest?

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Another question is whether financial prices—interest in particular—are prohibited by the Bible. For centuries Christians have debated the applicability of the biblical texts which seem to prohibit interest or the taking of collateral[1] as for example in this passage:

You shall not charge interest on loans to another Israelite, interest on money, interest on provisions, interest on anything that is lent. On loans to a foreigner you may charge interest, but on loans to another Israelite you may not charge interest, so that the Lord your God may bless you in all your undertakings in the land that you are about to enter and possess.(Deuteronomy 23:19-20)

To explore this and other relevant passages, see “Employing Assets for the Common Good (Deuteronomy 23:1-24:13)”, “Lending and Collateral (Exodus 22:25-27)”, "The Sabbath Year and the Year of Jubilee (Leviticus 25)”, “The Righteous Man Does Not Take Advance or Accrued Interest (Ezekiel 18.8a)”, “The Righteous Man Does Not Oppress, But Restores to the Debtor his Pledge (Ezekiel 18:5,7)”.

For the most part, Christians have concluded that interest is not inherently prohibited in modern societies, but that lending practices— including interest rates and collateral—must not take advantage of vulnerable people or make people destitute. This is in fact what we are advocating here—that finance is meant as a means of stewardship, care, and respect.

For more on this see Paul Mills, “Interest in Interest: The Old Testament Ban on Interest and its Implications for Today,” Jubilee Center Publications Ltd., 1993; Eric Elder, “The Biblical Prohibition Against Charging Interest: Does It Apply to Us?”, The Journal of Biblical Integration in Business (Fall 1999) 32-41; Brian E. Porter, “Charging Interest: Is it Biblical? A Response”, The Journal of Biblical Integration in Business (Fall 1999) 43-46; or Liang, “The Global Financial Crisis: Biblical Perspectives on Corporate Finance”.

Conclusion to Financial Institutions

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To sum up our theology, we have argued that the purposes of finance are to bring glory to God, to enable humans to be creation stewards, and to allow justice and love. We argued this by showing that God created the foundations of finance and then showing how these foundations enable humans to build four specific institutions on those foundations. These institutions enable humans to obey God’s creation stewardship mandate and God’s justice and love mandates. Below we provide several examples of how in this framework Christ’s redemption can enable stewardship, justice, and love.

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