Unproductive Use of Proceeds
God’s intent is that finance be a form of sharing, over time, among borrowers and lenders. There is only something to share if the loan makes increased productivity possible. So borrowers and lenders both have a responsibility for the use of borrowed money. A mortgage may increase the borrower’s productivity by reducing housing costs. A car lease may make it possible for the borrower to get to work efficiently. A business loan may be used to finance equipment, inventory, receivables or other assets for growth. On the other hand, a mortgage made on speculative property or without income verification or without sufficient equity may damage both the borrower and lender. A car lease with teaser rates or a back-end balloon payment of more than the car is worth may encourage the borrower to buy a car he or she can’t afford. A business loan made without due diligence may be squandered on unproductive assets.
These examples reinforce the biblical view that finance is a shared obligation of borrower and lender. Borrowers are obligated to limit themselves to loans that will make them productive and that they can be reasonably expected to repay. Lenders are obligated to assist borrowers in this task and to decline to lend in unsuitable circumstances. In practice, this can be quite difficult to accomplish. Borrowers may lack the knowledge to gauge the suitability of loans, or they may simply be short-sighted or impulsive. Lenders may also mis-gauge the suitability of a loan, or they may be greedy, unscrupulous, or short-sighted.
For example, the global financial crisis of 2008 began with defaults on mortgages that were based more on speculation—by both borrowers and lenders—than on good housing opportunities. Lenders were aware that repayment would depend on housing prices continuing to appreciate from their already rapidly-growing levels. But because they generally sold the mortgages on to institutional investors and recouped their money quickly, they had little incentive to exercise care for borrowers’ long-term interests. Ultimately all three kinds of participants—borrowers, mortgage originators, and investors in collateralized mortgage obligations—paid little attention to the time-bound nature of finance and the importance of relationships in which all parties share in the risks and gains. By contrast, lending according to biblical principles requires that all parties care whether the loan—the borrower’s use of proceeds—is truly productive.