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.
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. 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.
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.
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.