Nouslife: Banks -legal challenge over penalties on overdrafts

20 February 2006

Banks -legal challenge over penalties on overdrafts

The UK has one Islamic bank and the issue of taking interest on loans is something we should grapple with in view of the international debt issue. The Muslim solution of no interest has the virtue of simplicity and it was the Christendom solution up until the middle ages. Now this is not so much interest as fees for unauthorised overdrafts but it may involve the same issues. The absolute prohibition on interest tends to leave a lender with no recompense for the deprivation of their money during the period of the loan, interest allows the 'fee' for the 'compensation' to be related to the length of time the money is borrowed. Usury has changed meaning in the west to the charging of excessive interest, basically the lender leveraging their power to screw the borrower is seen rightly as unjust. If I understand it aright, the church allowed the charging of moderate interest on condition that it was seen as a just compensation for the service offered and the deprivation of the money to the lender.

I'm less sure whether the fact that financial institutions lend out tenfold the deposits they receive was in the purview but I do think that banking needs monitoring carefully in view of the virtual licence to print money that this gives them. Morally, it leaves them nary a leg to stand on when it comes to charges.

I personally came face to face with the issue a few years ago when the account I used for fees and work-related purchases, through my own oversight, went marginally and unauthorisedly overdrawn. About eleven pounds I think it was. I looked at my statement and discovered a fee of at least twice the overdraft had been immediately charged and then interest on the whole amount charged and despite further deposits that would have put things in the black were it not for the bank charges, a further fee charged for the next charging period. I was not impressed. As it happened the bank concerned were persuaded that there was an injustice involved and, on a goodwill basis [of course, they didn't want precedents] retracted the interest and compounded charges on the original fee [which I thought was fair, it was my oversight after all]. But it was shocking to see how all of a sudden a few pounds of debt escalated towards a hundred within a few weeks. I have subsequently been involved with a bit of debt counselling and seen the same sort of story retold and small debts become relatively huge by the compounding of charges just when people are most financially vulnerable. That is usury in the post-medieval sense.

It seems to me that God's concern in a society with little by way of regulatory mechanisms, inflation or even monetary exchange, the banning of interest-taking was a way to protect the most vulnerable from exploitation [of the kind that still goes on in rural societies like India's]. It could otherwise become a way to penurise and so enslave many of the rural population. So I support this guy...

"Customers have taken banks to the small claims court over penalties, generally winning because the banks settle on the courtroom steps," he said. "Instead, rather than all these piecemeal actions, I want the courts to settle the legal basis of this once and for all. This case is in the public interest."
The legal argument will revolve around whether banks can charge more than the real costs incurred when a customer passes an overdraft limit. One bank has told the Guardian that the charges are needed to "discipline customers who would otherwise have free rein".
Mr Hone realises he is taking on the combined firepower of the major banks. "This could be the biggest legal case the banks have ever faced and I am aware of the difficulties if I lose. But I have no assets, am willing to go bankrupt and I shall be legally aided. I already have a solicitor and barrister ready."