GENERAL REVIEW OF THE USURY CONCEPT(3)

[omar_Abu_Rassa]

3. New understanding of usury prohibition in the light of ?Time value of money? theory

In the early Islamic time, inflation wasn?t a familiar science, as their currencies were in goods, naming gold and silver. The value of these currencies was stable and the Economy was not getting in inflation fluctuation. In this environment money kept most of its purchasing power for a long time.
In the modern economy inflation surfaced in the new understudy Economy, currency now is not good, even evaluating a currency according to any good fail as a rule since Brittan-woods system which obligates central banks to standardize it?s currency according to specified amount of gold, even if this rule could set different currencies in front of each other it couldn?t standardize currency purchasing power.
It?s very important to understand the differences between the values of money in previous Muslims? time and now money while dealing with the concept of usury.
Time value of money theory represents erosion of money value over time; the main logical puzzle in this theory is how to estimate the money with respect to the time dimension.
?Time enhances the value of grand today and erodes the value of grand spent or received in the future. Because individuals consider waiting to be a cost? (Jenkins, 2004).
If we want to ignore all factors but inflation; what would be the value of a grand one year later?
In other words what is the purchasing power of a grand one year later?
In this case Inflation rate serve as a discount rate in the formula
NPV0 = 1000 / 1+r
If the period of time is two then
NPV0 = 1000 / ((1+r)*(1+r))
In which NPV0 is the present value or purchasing power of 1000 today, r is the discount rate; Inflation rate.
The rule presents ?The greater the rate of discount, r, used and further in the future the date when an amount is to be realized, the smaller is its present value? (Jenkins, 2004).
Depending on purchasing power, the value of a grand today equals a grand after one year if there were no inflation (r = 0).
As was mentioned previously, the reason of prohibiting usury by Koran verse definition is {? without inflicting injustice or incurring injustice?}, preventing injustice, the question if justice is to receive back lower values of creditor money?
Besides, creditor bears several kinds of risks such as default risk and in the case of the bank there would be a different kind of costs such as management and services cost.
Banks now estimate interest rates according to several kinds of risks ?such as inflation risk, default Risk, term to maturity risk, marketability risk, call risk, and so on? (Rose, 2002).

1. Surplus usury

In Arabic Riba Al-fadel direct translation of Al-fadel is the surplus (Ibn-Manthoer,2000), and Surplus usury in the field of finance is ?the exchange of unequal qualities or quantities of the same commodity simultaneously? (Islamic-finance.com, 2003), however this type of surplus is prohibited in Islam recalling Prophet Mohamed (PBUH) speech (Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates, and salt by salt - like for like, equal for equal, payment being made on the spot. If the species differ, sell as you wish provided that payment is made on the spot) (AHMED, 197 (Al-Bukhari, 1991).
Ali Al-Saloos says that ?Surplus usury is forbidden under the unequal exchange of six goods gold, silver, dates, wheat, salt, and barley by text and unanimous? (Al-Saloos, 2004).
2) Postpone usury Riba Al-Nasia in the Arabic language is postponing (Ibn-Manthoer, 2000), and Postpone usury in trade is to sell on credit (Ba?albaki, 2002). Nevertheless, what is forbidden in Surplus usury is forbidden in Postpone usury as well.
Hence postpone usury; the usury of waiting involves the non-simultaneous exchange of equal qualities and quantities of the same commodity and does not therefore involve a surplus but only a difference in the timing of exchange. ? (Islamic-finance.com, 2003)
Different jurists say this type is forbidden just in things which are measured by dry measures or balances if the commodity and or its price from the same kind ?this is Abi-Hanefa point of view? (Al-Saloos, 2005), others say it?s just in the eatable materials, ?This is Al-Shafehe point of view? (Al-Saloos, 2005).
Thus, an exchange in which I buy 1000 grams of gold now in return for 1100 grams of gold to be paid by me tomorrow can be described as Postpone usury. An exchange in which I buy 1000 grams of gold now in return for 1100 grams of gold to be paid now as well can be described as surplus usury.
Clearly Surplus usury then is the interests added to the capital amount of borrowing when paid back.

Nevertheless Postpone usury historically is the addition to the main credited capital which is added when the creditor postpones the mature date because the debtor couldn?t pay back, Al-Razi Koran interpreter writes
Postpone usury was known before Islam, money was paid and receive monthly certain payment by debtor, in where the essential capital remain as it is, when the loan mature the borrower is asked to pay back the capital and if not they postponed the mature date for addition to capital, this is the forbidden usury.(Al-Razi,1996).

As a result of Al-Razi interpretation Postpone usury which was known before Islam and God has forbidden it clearly as the addition to the main credited capital which was added when the creditor was postponing the mature date because the debtor couldn?t payback.
Credit usury The Arabic word Al-Qarud?s direct translation is thus the forbidden kind of loans as the one ?which combines both surplus usury and postpone usury since there is both a delay and a surplus involved in such transactions? (Islamic-finance.com, 2003).

The loan is permissible in Islam if unless it includes the conditions of the mentioned two kinds Surplus usury and Postpone usury, It has mentioned before that the longest verse in Koran no.282 of chapter two explains the procedures of borrowing agreement by details.
Sell usury the usury of trade is a second major form where the elements of surplus usury and postpone usury may appear. In order to avoid sell usury, both the quality and quantity of the exchanged items should be equal and the exchange must be simultaneous. If dates are to be exchanged for dates, the quality and quantity of the new dates must be the same and the exchange must be made on the spot (Al-Mhmood, 2005).
Why would anyone involve into such exchange is another matter, but Mahmoud El-Gamal has pointed out that the requirement may simply exist in order to encourage the sale of cash goods in order to achieve fair market values for buyers and sellers (El-Gamal, 2005).
This is supporting the Islamic understanding of money circulation which has been argued previously.
Finally usury In Islam can be explained as a result of two actions First Surplus, takes place when exchange of unequal qualities or quantities of the same commodity simultaneously, under the circumstance of six kinds mentioned earlier.
Second postpone usury; the addition to the main credited capital which is added when the creditor postpones the mature date because the debtor can?t pay back.