Term Deposits (2) - Ownership and Risk

Some defenders of the modern financial system argue that money loaned to the bank belongs to the bank. This is not correct. The money loaned still belongs to the person who saved it. The bank just has the use of the money for a specified period of time.

This is obvious in the case of the tractor. When a farmer leases a tractor, it does not become his property. What he buys is the right to use the tractor for a specific time. The farmer will not list the tractor as an asset on his balance sheet. Rather he will record the rent paid for leasing the tractor as an expense in his Profit and Loss Account. Ownership of the tractor does not pass to the farmer.

The difference is that in the case the owner cannot demand the tractor back whenever he chooses. He can only demand it back, when the lease has expired. The other difference is that the farmer can use the tractor how he likes, provided that he complies with the conditions of the leasehold agreement. The lease may place limits on the load he can pull and specify regular maintenance that must be done, but provided the farmer complies with these conditions, he can use the tractor how he pleases.

The principles for leasing an productive equipment are confirmed in the scriptures.

If a man borrows an animal from his neighbor and it is injured or dies while the owner is not present, he must make restitution. But if the owner is with the animal, the borrower will not have to pay. If the animal was hired, the money paid for the hire covers the loss (Ex 22:14-15).

This refers to a productive animal. Even when it has been lent to a neighbour it still remains the property of the owner. The owner is still the owner. If the animals are lent free, then the borrower has all the duties of someone who has been given something for safekeeping. However if the animals were lent for a fee or lease, then the neighbour is required to take reasonable care. However, if something unexpected goes wrong, then he does not have to pay compensation. The lease fee will have included something to cover the risk of the animal dying. The owner must carry the risk of the animal dying. He would not lease the animal unless the fee was sufficient to compensate for that risk.

Applying this to a tractor, the person leasing the tractor remains the owner even after it has been leased. The person leasing the tractor, has control over it use, but does not have ownership. If the engine unexpectedly blows up, the person leasing is not responsible (unless the lease specifies something different). The owner of the tractor carries the risk of the tractor not performing as was expected. The lease fee should compensate for that risk. If it did not, then the owner would be foolish leasing the tractor.

These principles apply to a bank loan. When I loan some money to a bank, I still own the money. Therefore the bank should not record the money as an asset in their balance sheet. The bank should pay interest for the use of the money. Although the lender still owns the money, they cannot demand the money back at any time. The lender must wait until the end of the term for the money to be returned (unless he pays a penalty for breaking the contract).

The bank has responsibility for using the money wisely. However, if something unexpected goes wrong, the bank is not responsible for the loss. Every transaction that involves the future has risk, so risk is unavoidable. The owner of the money must bear this risk. The interest received should compensate the lender for this risk. If it does not, then the lender would be better to leave the money on demand deposit, so the banker carries the risk.