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Ethical Commitments and Credit Market Regulations

Author

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  • Saad Azmat

    (Lahore University of Management Sciences)

  • Hira Ghaffar

    (Lahore University of Management Sciences)

Abstract

In this paper we examine some of the economic and ethical consequences of different credit market regulations, including usury laws, complete prohibition of interest and providing ease to the borrower upon default (bankruptcy laws). The references to these credit market regulations can be found in many religious and moral philosophy texts. We first examine the effectiveness of these regulations in deterring exploitative lending by developing a model that shows lending can be regulated through either act-based or harm-based regulations. We show that act-based regulations which comprise usury laws and complete prohibition of interest deter lenders more than harm-based regulations which constitute bankruptcy laws. We then analyze that while the regulations may deter certain forms of lending behavior, they may also create certain externalities by contributing towards inequity and societal risk. We propose that a regulator’s choice of implementing credit market regulations maybe dependent on her ethical commitment towards growth and reduction of inequity. We suggest the usury laws are more ethical than bankruptcy laws; however, discouraging the use of debt contracts through prohibition of interest and encouraging the use of risk sharing contracts maybe the most ethical way to regulate the credit markets.

Suggested Citation

  • Saad Azmat & Hira Ghaffar, 2021. "Ethical Commitments and Credit Market Regulations," Journal of Business Ethics, Springer, vol. 171(3), pages 421-433, July.
    • Handle: RePEc:kap:jbuset:v:171:y:2021:i:3:d:10.1007_s10551-019-04391-6
    DOI: 10.1007/s10551-019-04391-6
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    References listed on IDEAS

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    More about this item

    Keywords

    Usury laws; Bankruptcy laws; Financial exclusion; Inequity aversion; Islamic finance;
    All these keywords.

    JEL classification:

    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • Z12 - Other Special Topics - - Cultural Economics - - - Religion

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