Redeemed Finance

Article / Produced by TOW Project

Fidelity and Banking: An Interview with John Gage (Click Here to Read)

In this interview at the Washington Institute for Faith, Vocation, and Culture, banker John Gage discusses how while attending theological seminary he realized that God uses all of us in our various vocations for His mission in the world, and developed a renewed sense of calling to live out a faithful life in the banking industry. 

What would it look like for finance to participate in God’s redemption of the world? God in his grace offered his Son so to that we can be reconciled to him and that his entire creation can be freed from the effects of sin. God’s redeeming grace, operating through people in financial institutions, can redeem finance’s ability to honor God, foster good stewardship, and show justice and love to people. A reminder of what these terms mean may be useful here. Stewardship is obedience to God’s mandate to increase his creation from something like a garden to something like a city, remembering that resources ultimately belong to him. Justice is treating persons with due respect for their rights, which are based on the fact that every human is loved by God. Love is caring for other people by seeking to bring about their flourishing as an end in itself. Using this framework, let us consider some brief examples of redeemed finance in operation.

Working in a Bank

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Bank workers are at the front lines of financial services. Their first step in acting as means of redemption is to work out how their particular function within a financial intermediary is connected to justice and love for savers or borrowers, and then focus their efforts at being especially good at that kind of justice and love.

For example, a member of a bank loan resolution department could advocate for paying attention to the particular situations of borrowers. The uproar over “robo-signers” in the U.S. mortgage crisis shows that too many borrowers felt that the relational aspect of finance had been lost, and that their needs were not being taken into account. This does not necessarily mean a bank worker should oppose all foreclosures. But, it does suggest advocating for personal attention to distressed borrowers.

 A human resource professional at a bank could give special attention to a job applicant’s passion for justice and love as a factor in hiring. If finance workers cannot, over time, figure out how their work promotes justice and love for savers and borrowers or cannot transform the organization in that direction, perhaps they are not a good fit for the organization.

Finance professionals need to pay attention to their own practice of two of the biblical foundations of finance. First, finance professionals are usually acting as their customers’ agents or stewards. This gives them an obligation to put customers’ good ahead of personal gain. Second, finance professionals are frequently negotiating and entering into contracts, or promises. This gives them an obligation to assess carefully their organizations’ ability and willingness to perform what they are agreeing to. Stewardship and promise keeping are literally the sacred foundations of finance and finance professionals must thus act before God.

Making Lending Decisions

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How does our finance theology inform whether to make a loan to a particular customer and at what interest rate? Several of the foundations of biblical finance come to the fore here. First bankers are not omniscient, so they need to work diligently to understand potential borrowers’ situations and needs. They have an important role in helping borrowers evaluate whether a loan is truly beneficial to them, and how to use the proceeds productively.

Second, neither party knows the future, so both parties should be prudent and conservative in thinking about future scenarios. Both are well-advised to discuss what could potentially go wrong over the course of the loan and how to recover from potential difficulties.

Third, bankers can guide lenders towards loans that best show justice and love to the borrower. A loan that the borrower can repay without hardship is a just and loving loan. A loan that does not tease the borrower with a low interest rate that increases later is more likely to be a just and loving loan. Conversely a loan—in many cases a credit card—that is likely to lead to more accrued debt in the future is not a good way to show justice and love.

Interests rates vary with the riskiness of a loan as is necessary for the borrower to share in the risk-adjusted return on the loan. But, an interest rate so high that it prevents the borrower from flourishing is contrary to the biblical purpose of finance. Biblical principles suggest several courses of action when the market rate for a borrower’s credit standing is too high for the borrower to afford. First, make the loan at a subsidized interest rate. Second, help the borrower find a way to use the proceeds gainfully even if the rate is high. Third, help the buyer find resources through government or charity rather than borrowing. Fourth, help the borrower discover how to live without the loan. Perhaps the most biblical solution for loans to the poor are zero interest rate loans extended by a nonprofit organization coupled with financial and livelihood counseling.[1] Some of these solutions fall outside of finance as we have defined it, but those working in the financial institutions may be the only contact a poor person has to help them navigate the financial maze. This may present an opportunity to show justice and love beyond the requirements—and paid hours—of a financial job. Lending to the poor is very challenging, which is almost certainly why the Bible teaches specifically on the topic.[2]

McIlroy, “Christian Finance?”, refers to this as the “virtue of generosity” and calls for interest free loans and other support for the poor.

Microfinance is an example of loans at high interest rates to the poor extended in a loving supportive community. Although this model seems to work in certain cultures, it is hard to argue that charging a high interest rate to the poor is a Biblical model.

Working at a Hedge Fund

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A hedge fund is a mutual fund that invests in specialized financial instruments not usually available to individual savers. Hedge funds are often lightly regulated, highly-leveraged, and can invest in a wider variety of financial instruments, and charge a higher management fee than ordinary mutual funds. Hedge funds have been in the news recently because a few hedge fund managers have earned huge management fees, a few hedge fund managers have been accused of insider trading, and when stock prices sharply decline hedge funds tend to be blamed.

Hedge funds can be understood with the help of our finance framework. Hedge funds can love savers by providing savings opportunity with a higher return for the risk and a lower correlation with economic cycles. Many hedge funds invest in derivatives and as such provide risk reducing opportunities for the parties on the borrowers’ side of the derivative contracts, in addition to the investors’. In this way the hedge fund can show love to firms that are looking to reduce risk. Hedge funds can be viewed as wholesalers in the securities market who are in the business of buying oversupplied product and selling undersupplied product, and thus both attempting to make a profit and helping to make the market work better. In this way they are serving society by helping security prices to more accurately reflect intrinsic value.

The complexity of any particular hedge fund’s investments can make it hard to describe exactly how they bring justice and love. If all the positions are voluntary, market-rate exchanges, it can be assumed that each party expects to benefit. But, the complexity may also mask hidden subsidies, power imbalances, information asymmetries, tax dodges, or other infringements of the biblical foundations of finance. Some hedge funds, because of their particular investment strategy, can be quite clear about how they are loving savers and borrowers, whereas other hedge funds will have a harder time doing so. Finance professionals and investors would do well to research diligently whether a particular hedge fund—or any investment—results in good stewardship, justice, and love, or whether it primarily serves to make as much money as possible for the hedge fund managers at the expense of other parties. 

Borrowers

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We have seen that borrowing can be an act of stewardship, justice, and love, enabled by God’s creation. Borrowing can allow people to gain access to resources which are used to help both borrower and lender flourish.

The Right Amount of Debt

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Can biblical principles help us determine how much to borrow or when to borrow? Several of the biblical foundations of finance can help. First, we inhabit God’s time-bound world with social cycles and heterogeneous individual life cycles. There is a time to borrow to invest in a growth or infrastructure opportunity which will serve customers or citizens and then there will be a time to repay debt, and those times will differ among individuals. For example, those with excess resources during a recession can bring justice and love by investing them then rather than hoarding them in cash. In terms of personal cycles, younger people generally benefit from the borrowing that the savings and lending of older people make possible.

Second, the purpose of borrowing is to obtain access to resources which can we can use to create future resources which can be used for repayment. Borrowing for education, growth opportunities, and to reduce housing costs can honor God. Borrowing as a crutch to support living above your means does not, as discussed above under “Unproductive use of proceeds.” The Bible teaches against greed of all kinds, which can include borrowing money for the wrong reasons (Luke 12:14).

Third borrowers should be reasonably certain they can fulfill their promise to repay the debt—or at least that the risks of non-repayment are understood and agreed by lenders—as an act of love. This rules out false or misleading loan applications or personal references. Borrowing today because you expect to lose your job tomorrow is unlikely to show much love to the lender, for example. Running up a credit card balance without a clear plan to repay it is no act of love, either.

Fourth, the amount borrowed should be a modest or prudent amount compared to the risks we face. How could it be loving—either to ourselves or to those who lend to us—if we routinely borrow right up to our credit limits with no cushion for unforeseen circumstances?

Biblical principles of finance apply to personal, institutional, and governmental financial decisions, although the examples above are primarily individual. In general, these principles suggest moderate levels of debt in most cases and greater use of equity for individual, corporate, and government finance. In particular, borrowers would probably not take on as much debt if they remembered that by God’s design, borrowing creates a long term mutual relationship that God intends to benefit lenders as well as borrowers. Access to debt is not our sole concern. Blessing others through our lending and borrowing is.

Offering Collateral to Get a Loan

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We explore some of the biblical passages about collateral in the section, “Bankruptcy, debt forgiveness and loan modification”. The mainstream Christian view is that using your house as collateral for a loan is not contrary to biblical teaching. This view is consistent with our arguments regarding the God-intend role of finance in society. However, in light of Proverbs 22:26-27 and in light of the biblical teaching to be prudent risk takers, it seems that at a minimum lenders should not accept a house as collateral unless they are very certain that the borrower will be able to repay the loan. Similarly, according to biblical teaching, homeowners should not pledge their home as collateral unless they are very certain they will be able to repay the loan. This is in stark contrast to current lending practices in many developed countries which allow a person to get a loan which is quite large relative to their level and stability of income and relative to their history of repaying debts. With collateral there is a tendency for the lender to think “I can foreclose if need be, so I don’t need to think too hard about whether this is good for the borrower or can be repaid” and a tendency for the borrower to think, “If I cannot make my payments the bank can have the house and I’ve done no harm.” Neither party’s thinking is consistent with biblical teaching and with the God-intended role for finance as a form of justice and love.

Bankruptcy, Debt Forgiveness and Loan Modification

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The created foundations of finance include our creation as social beings who take risk and do not know what the future holds. Inevitably, this will lead to cases where the loans cannot be repaid. Thus, a loan which cannot be repaid is not necessarily a sin. Of course, a loan default may very well result from imprudent borrowing, incompetent management of affairs, hiding, or shielding income from the lender, misrepresentations to the lender when the loan was made, misrepresentations to the borrower when the loan was made, or the loan conditions that are not designed to help the borrower flourish. But in other cases, unexpected circumstances may cause a well-made loan to fail. The borrower may lose a job, incur unexpected medical bills, or suffer loss in a natural disaster, for example.

In situations like these, lenders do have an obligation to forgive the debt or modify repayment of the loan. In the Bible this takes the form of letting the borrower keep his or her collateral if it is necessary for well-being or the ability to earn a living.

If you take your neighbor’s cloak in pawn, you shall restore it before the sun goes down; for it may be your neighbor’s only clothing to use as cover; in what else shall that person sleep? (Exodus 22:26–27)

No one shall take a mill or an upper millstone in pledge, for that would be taking a life in pledge. (Deuteronomy 24:6)

When you make your neighbor a loan of any kind, you shall not go into the house to take the pledge. You shall wait outside, while the person to whom you are making the loan brings the pledge out to you. (Deuteronomy 24:10–13)

A neighbor’s cloak taken in collateral must be returned before sundown because the neighbor needs it to keep warm overnight. A millstone cannot be repossessed because that would deprive the miller of the ability to earn a living. Even valid collateral cannot be repossessed by force, e.g. entering the borrower’s house. All of these protect distressed borrowers from further calamity, even though they deprive lenders not only of the expected profit from the loan, but actually impose the loss of capital. The borrower’s circumstances are shared by the lender. This is the nature of the time-based relationship inherent in finance.

In modern economies, these protections are embodied in bankruptcy laws, which may also be known as insolvency, examination, receivership, administration, or sequestration. Generally, such laws prevent lenders from taking the necessities of life and work as payment from borrowers who default. Modern laws also prevent lenders from entering borrowers’ homes to repossess items, although they may allow officers of the law to do so. Laws also prevent borrowers from being thrown in prison for defaulting, a counter-productive and inhumane practice that was common for centuries prior to the modern age. Perhaps the development of modern bankruptcy laws represents a long-delayed fulfillment of principles embodied in the Bible in this regard.

Nonetheless borrowers should do whatever they can to repay their debts. Chewning argues, based on God’s immutability and Proverbs 6:1-5, that if we cannot pay our debts we should humble ourselves and plead with our lenders for mercy, rather than seek bankruptcy court protection from our lender.[1] Perhaps, this goes too far, given that the passages above protect distressed borrowers by God’s law, not lender’s mercy. But Chewning is surely right that the first step is for the borrower to seek the lender’s aid and counsel. As we have seen, lending is meant to create a long-term relationship between borrower and lender. Filing for bankruptcy without first attempting to work out a mutually agreeable plan with the lender is hardly the way to respect a relationship. Tiemstra urges us to treat risk as a serious matter and that borrowing is not “an easy way to make money instead of working: it is a serious expression of our responsibility before God.”[2] Finance is about serious justice and love, and when events unfold different from what a prudent lender and borrower expected, the justice and love should not cease, but indeed should be increased on both sides.

Richard Chewning, “Hermeneutics and Biblical Ethics: An Illustration – God’s Immutability and Human Integrity”, The Journal of Biblical Integration in Business (Fall 2000) 49-68.

Tiemstra, “Financial Crisis and the Culture of Risk”.

Savers and Lenders

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Those who provide resources—lenders and savers—have a responsibility to invest their resources for the common, and not only for their own, gain. This perspective is sometimes called “socially responsible investing.” We will explore it through the example of investing in stock, rather than depositing money at a bank or making a loan, although similar principles apply in all kinds of investments.

A company issues stock because it believes it has more productive opportunities than it has resources. It gains access to additional resources by selling stock to investors.[1] The investor is loving the company—and ultimately its customers, suppliers, workers, and community—by letting it use some resources for a period. The company is loving the saver by providing an appropriate return in the form of dividends or stock appreciation.

Investors should buy stock only in companies that fulfill God’s purposes for finance. These would be companies acting as good stewards of God’s creation, companies showing care and love through the products and services they sell, and companies acting justly in their employment practices and community relations. In practice, this is hard for investors to do, since it is time consuming to gather and analyze the information on thousands of companies. However, there are now several options where investors can invest in mutual funds that filter out companies with poor practices of stewardship, justice, and love. Much has been written on socially responsible investing and biblically responsible investing, and a detailed treatment of this is beyond the scope of this paper.[2] However, this approach to investing is completely consistent with, and indeed is mandated by, the framework developed in this paper. We do not see any biblical basis for delinking one’s faith from stock investment decisions.

As explained in "What Finance Is", we are using “borrower” to capture all those households, businesses and governments who have current use for resources and thus borrow those resources, to be returned at a later date.

For one example see Rob Moll, “Overturning the Money Tables”, Christianity Today (July 15, 2008).