Mohatra contract

A mohatra contract is way of loaning money with interest without breaking the letter of the usury laws. The lender sells the borrower a trivial object to be paid for on the loan due date. The borrower then sells the same object back immediately for cash at the price minus the interest. [1][2] An example would be a lender selling a pencil for $120 to be paid in a year's time and immediately repurchasing it for $100 in cash. The borrower has effectively borrowed $100 at a 20% interest rate.[3]

Name

The term was shared among Latin and Western European languages, from Arabic mokhatara (مخاطرة).

History

Mohatra contract was so common that it became a standard commercial term used for centuries. Issuing a decree in 1679, the Holy Office of the Vatican condemned the idea that 'contractus "mohatra" licitus est', stating that such contracts violated the biblical prohibitions on usury.[4]

References
  1. Warde, Ibrahim (2000). Islamic Finance in the Global Economy. ISBN 9780748612161.
  2. Stephen, Leslie (1898). "Pascal" . Studies of a Biographer. 2. London: Duckworth and Co. p. 256.
  3. False Economy: A surprising economic history of the world, Alan Beattie, page 130
  4. False Economy: A surprising economic history of the world, Alan Beattie, page 130
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