Microcredit and usury

Today's Wall Street Journal online has an interesting article about a microloan credit bubble. Is this not the very definition of usury:

Here in Ramanagaram, a silk-making city in southern India, Zahreen Taj noticed the change. Suddenly, in the shantytown where she lives, lots of people wanted to loan her money. She borrowed $125 to invest in her husband's vegetable cart. Then she borrowed more.

"I took from one bank to pay the previous one. And I did it again," says Ms. Taj, 46 years old. In four years, she took a total of four loans from two microlenders in progressively larger amounts -- two for $209, another for $293, and then $356.

At the height of her borrowing binge, she says, she bought a television set. The arrival of microfinance "increased our desires for things we didn't have," Ms. Taj says. "We all have dreams."

Today her house is bare except for a floor mat and a pile of kitchen utensils. By selling her TV, appliances and jewelry, she cut her debt to $94. That's equal to about a fourth of her annual income.

As with every other type of credit, when it can be extended for profit, the incentive to overfinancialize can be impossible to overcome. I have made the argument more than once, in part based on works in classical Islamic jurisprudence and legal theory, that profiting from the act of credit extension is the essence of forbidden usury/riba. The approach through non-profit mutuals, credit-union style, is vastly superior, and agrees with the spirit of early experiments in Islamic finance in Egypt and the Subcontinent.

Unfortunately, people's good intentions have been subverted in Islamic finance toward serving the interest of profit-maximizing multinational banks that have, de facto, rewritten modern Islamic jurisprudence to maximize their profitable arbitrage opportunities. Likewise, this article shows how the very essence of microfinance has been subverted by rent seekers to enrich themselves at the expense of the poor debtors (who may benefit briefly, but will ultimately suffer when the bubble bursts).