Interest, Ribit and Riba: Must These Disparate Legal Concepts Be Integrated or Is a More Nuanced Approach Appropriate for the Global Financial Community?
US CONSTITUTIONAL CONSIDERATIONS UNDER THE ESTABLISHMENT CLAUSE
Legal efforts to accommodate religious practices may sometimes violate the US Constitution by unlawfully fostering a particular religion or favoring one religious view over another within a particular religion or creed.
The First Amendment to the US Constitution contains the so-called “Establishment Clause” which prohibits the establishment of any particular religion and provides for a separation between church and state. The First Amendment also provides for freedom of exercise of religion. The line between permitting the free exercise of religion and the prohibition against establishing religion can sometimes be blurred. After all, the free exercise of religion in its many various forms can sometimes lead to civil disputes among adherents to a particular religion. Does that mean that the courts are off-limits to disputes that may involve religious as well as monetary disputes. Where to draw the line is also a fair question. The US Supreme Court, in dealing with these kinds of issues, has developed a body of case law that can help analyze the questions posed in this article.
The test for determining whether the enforcement of a particular principle of religious origin is constitutionally prohibited is commonly referred to as the “Lemon Test”. It is named after the Supreme Court decision in Lemon v. Kurzman.[1]
In the Lemon case, the Supreme Court outlined its analysis of whether the government was acting impermissibly to support the enforcement of a particular religious practice or principle. It sets out a three-pronged test. Thus, a law or governmental activity, dealing with a religious practice or principle, is unconstitutional, unless it satisfies all three prongs of the Lemon Test summarized below:
(i) it has a secular purpose;
(ii) its principal or primary effect neither advances nor prohibits religion; and
(iii) it does not foster excessive entanglement with religion.
If a law or governmental activity fails to meet any of the three prongs of the Lemon test then the law or activity violates the Establishment Clause.
To violate the secular purpose test, the law or governmental activity must be motivated wholly by religious considerations as the Supreme Court found in Lynch v. Donnelly.[2] If there is also a secular purpose articulated then this first prong of the Lemon test is deemed satisfied.
In the case of Riba and Ribit, it is hard to justify that there is any secular purpose. It is wholly a matter of religious law and practice. It does not have a comparable purpose under US law, where the matter of charging interest on a loan is not wrong. Indeed, it has become the basis of one of the most successful economic systems in history. The only concern under US law is usury (i.e., the charging of excessive interest). The prohibition in principle against charging any interest just does not resonate under US law and practice. Given the lower rates of interest prevailing in our economy (especially when compared to the alternative of a wholly equity based transaction), it is fair to say that it is often the debtor who desires (or even insists) on paying interest instead of a share of the profits. A loan is typically less expensive than the equity equivalent. The risk and credit profile is exceedingly different for a loan (and especially a first mortgage loan against income producing property) as compared to the alternative of a partnership or other equity like investment. There is no genuine reason for anyone to use the Heter Iska or the Sha’ariah compliant vehicles, noted above, other than to fulfill a religious obligation.
There is also no plausible secular purpose for codifying under US law these religious oriented financial structures. The only reason to deal with them at all is to respect religious sensibilities. While that is admirable, the Establishment Clause was designed to curtail that impulse. This is especially so where there are differing views and practices within the religion or as to the particular religious principle at issue. In effect, the US courts would be forced to enforce one particular view within the religion over another. However, as noted herein, the Courts are prohibited constitutionally from choosing one religious view within a particular religion over another. This is a critical impediment to US court involvement in what is after all a religious question, as more fully discussed below.
It is also important to note that the governmental activity may still be unconstitutional if the valid secular objectives can be readily accomplished by other means (see Larkin v. Grendel’s Den, Inc.[3]). The secular purpose cannot be a sham or secondary to a religious objective. While opening up additional sources of capital may be an admirable objective, it is secondary to enforcing a religious requirement.
The second prong of the Lemon Test deals with whether the law or activity has the primary or principal effect of either advancing or inhibiting the religion. In recent decisions, the Supreme Court has further analyzed this element of the Lemon Test as precluding the endorsement or disapproval of religion. It cannot, in effect, make Islam or Judaism the law of the land. It is one thing to harmonize with religious canons; it is another to foster religion by endorsing an Islamic or Jewish law or practice. Accommodation of religion is different from fostering religion. It is a continuum and at some point it may devolve into an unlawful fostering of religion (see Corporation of the Presiding Bishopric of the Church v. Amos[4]).
The second prong of the Lemon Test is violated where the government itself has advanced religion through its own activities and influence.[5] Thus, cases involving Ribit and Riba and defining and enforcing a Heter Iska or a Sha’ariah compliant structure to mimic a loan plus interest are in effect endorsing and incorporating Halacha or the Sha’ariah into US law. This alone may be sufficient to invalidate any court action under the Lemon Test.
The third and final prong of the Lemon Test analyzes whether there is “excessive entanglement” between government and religion. The third prong of the Lemon Test originated in an earlier decision of the Supreme Court in the United States v. Ballard.[6] In the Ballard case, the Supreme Court held that secular courts are incompetent to determine the truth or falsity of religious beliefs.
In the Presbyterian Church v. Mary Blur Hull Memorial Presbyterian Church[7] case, the Supreme Court ruled that the First Amendment Establishment Clause prohibits government from resolving underlying controversies over religious doctrine or from employing organs of government for essentially religious purposes. The government may not determine issues of religious doctrine. Moreover, the job of making these determinations cannot be delegated by the government to religious authorities and then enforced by the government. In essence, under those circumstances, the government would be enforcing the decisions of a religious body over members of its religion. This is especially so where there were disputes within the religion as to the appropriateness of a particular doctrine espoused by some, but not all, of the members of that religion. This kind of court intervention would constitute excessive entanglement.
The very terms “Ribit” and “Riba” are inherently religious in meaning. They do not have a corresponding term under US law. As noted above, while loosely defined to mean interest, the actual meaning of the terms encompasses all manner of transactions that would not be defined as interest under US law. Moreover, within the applicable religious laws, there are serious disagreements as to what constitutes a prohibited transaction and what is permitted.
Thus, there are eminent Islamic scholars and authorities that assert that Riba means the equivalent of compound interest (i.e., interest on interest[8]) and not ordinary interest. Furthermore, the original Biblical proscription has greatly expanded over time been by Rabbinic or other enactment under the Halacha. This has similarly been the case under the Sha’ariah. Thus, what is or is not Ribit or Riba has changed over time and is not universally accepted by all members or authorities within the applicable religion.
The purpose and intent of the Heter Iska under the Halacha is religious in nature. Similarly, the Ijara, Murabaha and Musharaka are also religious in purpose and intent. Expert religious authorities are required to interpret these religious oriented structures and documents properly, as intended. Indeed, even with the help of religious experts they are still subject to misinterpretation. The results that might be obtained in a wholly religious context can and do differ from what a US court might find. Indeed, as shown above, a US court might render a wholly unintended (and even wrongful) result from a religious prospective. Moreover, religious exerts can and do disagree. As shown above, there are legitimate differences among religious authorities.
Consider another example of this Constitutional issue in practice. The government has attempted to deal with matters of Kashrus and Halal. It has created organs of government that were designed to enforce standards of what is Kosher and what is Halal. However, there is no universally accepted standard of just what is Kosher and what is Halal within the respective religions. The Government’s attempts to legislate a definition in accordance with a particular standard have been rejected by a number of courts as unconstitutional under the Establishment Clause. For example the NJ Supreme Court[9] recently threw out the New Jersey Kashrus Law because of the Constitutional principle of separation of Church and State. This is because the definition of the term “Kosher”[10] can only be decided under religious law. There are divergent views as to the meaning of the term. If the US courts require religious scholars to testify as to the meaning of the term religiously, then it violates the Establishment Clause of the Constitution. Moreover, not everyone within the religion agrees as to the meaning of the term Kosher. There are different standards enunciated by various authorities within the religion. Defining kosher as in accordance with a particular standard was held to be excessive entanglement of the sort prohibited by the Constitution.[11]
The term Halal[12] is similarly the subject of divergent views. Thus, for example, whether a particular prayer is recited at the moment of slaughtering or not can make something that is Halal according to many, Haram[13] according to some.
Championing one view over another within a particular religion is just the sort of excessive entanglement the Establishment Clause (and the case law thereunder) was intended to curtail.
Consider too that both the terms Kosher and Halal, on the one hand, and Ribit and Riba, on the other hand, are defined and encompassed within the body of law within their respective religions dealing with sins.[14] This as opposed to matters of commerce between parties. In Halacha, the body of law encompassing the laws of what is and isn’t Kosher are known as Yoreh Deah.[15] The laws of business and other interactions between one individual and another are known as Choshen Mishpat.[16] Interestingly, the law of Ribit is not a part of the section known as Chosen Mishpat. Rather, it is a part of the body of law known as Yoreh Deah (just like the laws of what is and is not Kosher). Similarly, the term Halal and the fact that if something is not Halal it is Haram (i.e., it is a sin to violate this requirement).
Violating these religious laws is not a matter of civil liability. Instead, it is a matter of sin. How more religious can the terms be? Indeed, but for the Biblical prohibition (that is the religious source of these rules), they would not have been prohibited in the natural order of things.
Consider how Western civilization developed the concepts of trade and commerce and how vital the banking/lender function is to the proper functioning of the economy and society. Thus as a matter of rational development of laws, there is no intuitive bar to charging interest. Indeed, the contrary is likely true. Hence the US laws that permit and, indeed, encourage the loan/interest structure, as a foundational element in our economy. The first mortgage loan financing structure (and the capital markets that encompass this financing product) developed naturally over time. As it turns out, it yielded an enormous benefit to society, in the form of substantially lower cost of funds than was prevalent at the time when the religious rules against charging interest were first promulgated.[17] As many Halachic and Sha’ariah religious scholars agree,[18] the capital markets have benefitted and not burdened our society. In line with the foregoing, usury (excessive interest) is prohibited under US law. Ordinary and reasonable rates of interest are encouraged. These substantive issues are at the heart of the problem, since choosing one view over another within the religion constitutes excessive entanglement. In this regard, I can’t help but note the trend in Sha’ariah compliant banks to have a religious board that supervises various aspects of lending. This goes beyond just dealing with the permissible versus impermissible loan structures (that would constitute prohibited Riba); it goes to whether the intended purpose of the loan is Haram. Thus, a loan to a developer for the purpose of creating a drinking establishment (or other such prohibited uses under the Sha’ariah) might be rejected because it is Haram. The government, in enabling this kind of banking establishment and insuring bank accounts, as well as, creating a secondary market (Freddie Mac or Fannie Mae) to purchase Sha’ariah compliant (wholly religiously motivated financing) products, may be violating the third prong of the Lemon Test.
The kind of governmental actions noted above may even violate the second and even the first prong of the Lemon Test. In essence, the Government is enabling a religious view and delegating to a religious board its role as an organ of government. It is empowering the religiously oriented bank to act for purely religious purposes. In doing so it is also endorsing it. This goes well beyond excessive entanglement.
Beyond the Lemon Test, there is also the test enunciated in Larson v. Valente.[19] In the Larson case, the Supreme Court held that, even where the Lemon Test is not violated per se, there can still be an issue of choosing one religious denomination over another. One religious denomination cannot be officially preferred over another. Taking sides in a religious matter, effectively discriminating in favor of one sect requires the state to take an official position on religious doctrine and creates an impermissible fusion of governmental and religious functions by delegating civic authority to individuals or bodies chosen according to religious criteria (see Commack Self-service Kosher Meats, Inc. v. Weiss).[20] Deferring to the interpretation of religious authorities in reaching an official position constitutes excessive entanglement under these circumstances. It is impermissible for the state including a court to weigh the significance and the meaning of disputed religious doctrine (see Presbyterian Church in the US v. Mary Blue Hull[21]). Similarly, can’t employ a religious organization as an arm of the civil [government] to perform the function of interpreting and applying state standards.[22]
We are a land of toleration and of diversity of views. Our country has thrived on the principles enunciated in the First Amendment Establishment Clause that prohibits just this kind of governmental activity. People should not be required to accept religious practices contrary to their own religious beliefs. Efforts by the courts or government to interfere with the religious beliefs and the free exercise of religion by individuals are just wrong.
Rather than seeking protection by the government of a particular religious view or practice, recourse should be had to religious authorities as to religious matters. The Establishment Clause was enacted for this very purpose. As the Supreme Court stated in McCollum v. Board of Education,[23] by allowing government to interpret a inherently religious term and impose its interpretation on members of that religion is constitutionally defective. The government, including the courts, should not be interpreting religious doctrine and its proper application. A US court should not be deciding who is a good Christian, Jew or Muslim and whether their actions are right or wrong from a religious point of view. This not only violates the Establishment Clause it could possibly lead to interference with free exercise as well. As noted below, the better view constitutionally is to allow each to function within their own sphere and not mix religious practices with financing structures, but more on this below. Both religion and government can best work to achieve their lofty aims if each is left free from the other within their respective sphere.”
Denominational preference violates the Establishment Cause (see Barghout v. Bureau of Kosher Meats and Food Control,[24] a 4th Circuit Court of Appeals opinion, citing Larson v. Valente, Hernandez v. Commissioner[25] and of course the Lemon case. It is impermissible for the court to sponsor one view and create a symbolic union between church and state (see Larkin v. Grendel’s Den, Inc.,[26] and see also Ran-Dav’s County Kosher, Inc v. New Jersey.[27] The Larson[28] denominational preference test takes precedence over Lemon. The concept predates Lemon (see Hernandez, see also the Estate of Thorton, et al v. Caldor.[29]) In the Thorton case, the court struck down a Connecticut blue law. The court held that government can’t impose an absolute duty on businesses to conform their business practices to the particular religious practices of the employee. An individual in pursuit of his own religious views can’t use the courts to impose those views on others and force them to conform their conduct to his own religious beliefs.[30] Government action that has the primary, not incidental or remote, effect of impermissibly advancing a particular religious practice, is constitutionally prohibited. It conveys a message of endorsement of a particular religious belief to the detriment of those who don’t share that belief, a’la Lynch.[31]
The English courts have taken a similar position. Thus in Islamic Investment Company of the Gulf v. Symphony Gems NV[32] and in Beximco Pharmaceutical v. Shamil Bank of Bahrain,[33] there were assertions made that the markup charged was prohibited Riba and that Islamic Sha’ariah Law governed. In both cases, the English Courts reasoned that the Sha’ariah was not the recognized law of the State. Moreover, different Islamic legal scholars might differ in practice as to whether a particular structure was or was not prohibited Riba. The English Courts determined that they could apply English law only.
[2] 465 U.S. 668, 680 (1984)
[3] 459 U.S. 116, 123-124 (1982)
[4] 483 U.S. 327, 334 (1987)
[10]A term that denotes the fact that only certain types of meat, fish and fowl may be eaten and then only after satisfying the requirements for ritual slaughtering, salting and watering, as applicable, as well as other detailed rules and regulations (including no mixing of meat and milk products), collectively referred to as the Laws of Kashrut.
[11] I.e., under the Establishment Clause of the First Amendment.
[12] An equivalent concept to Kosher; but under the Sha’ariah, with its own detailed rules and regulations.
[13] Forbidden under the Sha’ariah (the equivalent of a sin).
[14] Yoreh Deah vs. Choshen Mishpat
[15] A codification of the Halacha (set out topically) by Rav Yosef Karo. It is viewed as one of the most definitive works of the Halacha.
[16] The Volume dealing with commercial law by Rav Yosef Karo.
[17] See Section 88 of the Code of Hammurabi and the 20% interest rate noted therein. In the Middle Ages, rates even higher rates were prevalent.
[18] See the discussion relating to the Sha’ariah below.
[22] Id. at 451. Furthermore, in the case of the religious advisory board for a Sha’ariah compliant bank, there is in effect state reliance or sponsorship of a religious authority on matters of religious doctrine. It provides a symbolic, and more so an actual benefit, in sponsoring the activities of one view and in effect disparaging other views within the same religion.
[23] 33 U.S. 203, 212 (1948)
[24] 66 F3rd 1337 (4th Cir.-1995).
[25] 490 U.S. 680, 695 (1989)
[26] 459 U.S. 116, 125-126 (1982)
[27] 608 A.2nd 1365 (NJ-1992); cert. denied 113 S.Ct. 1366 (1993)
[28] 608 A2nd 1353 (NJ-1992).
[30] Justice Learned Hand cited in the Burger[30] decision at page 709
[31] See discussion of Lynch above.
[32] 2002 WL 346969 (QBD–Comm Ct-2002)
[33] 1 W.L.R. 1784 (Court of Appeals England and Wales-2004)
Leonard Grunstein 