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.

2. Kinds of Usury in Islam

The literal translation of the Arabic word usury (Riba) is ?to increase?, ?addition or growth?, though it is usually translated as usury. The Islamic jurists followed several methodologies for describing usury; two Kinds of usury are identified

1. Surplus usury.
2. Postpone usury.
   And two main kinds of transaction into which these elements may be incorporated are described
   a) Credit usury.
   b) Sell usury.

3. Fixed interests in new banking system, between forbidden and allowance

3.1 Fixed interests Forbidden point of view

This point of view is the most famous one, and the one that Islamic banking system depends on to establish new non-fixed interest banking system. Forbidden point of view depends first of all on the verse no.275 of chapter two
{Those who charge usury are in the same position as those controlled by the devil's influence. This is because they claim that usury is the same as commerce. However, god permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with god. As for those who persist in usury, they incur Hell, wherein they abide forever} (Koran Translation, 2005), which is mentioned before in this study.

Furthermore, in Prophet Mohamed?s (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) (Ahmad, 197 (Muslim) (Al-Bukary, 1991).

They consider all the new banks? activities as usury implementations, any kind of lending money with fixed interest rate is considered as a forbidden activity, ?by proved evidences which can?t be refused by a Muslim, banks? deposit and investment certificates in Islamic jurisprudence is forbidden?(Al-Saloos,2005)

Dr. Saloos defines forbidden usury as ?Any conditional addition on loan in all money forms, all addition to the deposit which mature in case of lengthening, and selling usury in its two kinds? (Al-Saloos, 2005), then he add ?The Islamic rule says every loan bringing profit is usury, that means every loan has a condition to be paid back with addition that includes usury. We consider this addition as usury? (Al-Saloos, 2005).

On the other hand Dr. Saloos? point of view is supported with several historical Islamic jurists such as Al-Tabari ?if one man has credited other one for a certain period of time, and the man can?t pay on time , he asks to postpone with additional amount of money for the essential loan , that is the accumulative forbidden usury? (Al-Tabari, 1994).
Al-Razi ?postpone usury was well known before Islam, money was paid and received monthly with a certain payment from the debtor, in where the essential capital could remain as it is, when the loan matured, debtor was asked to pay back the capital and if he couldn?t pay the capital, they used to postpone the maturity date with addition to capital, this is what is called as forbidden usury? (Al-Razi, 1996).
Al-Ges?sas ??It?s known that usury was a loan to maturity for conditional addition, that the addition was instead of maturity, God cancelled and forbade it? (Al-Ges?sas, 1994).
There is a significant difference between al-Ges?sas speeches and both Al-Razi and Al-Tabari, in their explanation both Al-Razi and Al-Tabari defined usury as addition to the essential capital when the loan matures, while the debtor can?t pay back. So usury is not the monthly payment which is asked for, it?s the addition to the essential credit amount when the loan matures and the debtor can?t pay it back, ?...if he can?t pay the capital, they postpone maturity date with addition to capital, this is the idea behind forbidden usury?. (Al-Razi, 1996), ?...and he asks to postpone with additional amount of money for the essential loan, this is the idea behind cumulative forbidden usury? (Al-Tabari, 1994).
The difference between the monthly payment and the additional amount to the essential capital is that monthly payment has been assessed at the crediting time as creditor revenue from his capital, but the addition to the essential capital which is mentioned as usury is not assessed in the agreement; it?s added when the loan matures and the debtor can?t payback the capital, the creditor put him to face two choices either he pays or he adds to the essential capital, in the first case the debtor can refuse the agreement but in the second he can?t because he has already borrowed the loan and has no choice to refuse.
Dr. Saloos as one of the famous Islamic banks authoritative source accounts the kind explained by Al-Razi and Al-Tabari as the cumulative usury, while Al-Ges?sas explains the normal usury which is forbidden as well; ??we?ll abandon the sources that are involved with cumulative usury to Al-Ges-sas speech?which clearly explained that credit for conditional addition is forbidden? (Al-Saloos, 2005).
Al-Saloos concludes referring to Al-Ges?sas argument that it is not right; that postpone usury clearly is the addition to the main credited capital added when the creditor postpones the mature date because the debtor can?t pay back.
Al-Saloos Justifies prohibiting as crediting for certain monthly payment with fixed interest rates including postpone usury, saying ?surplus usury is in selling activities not in credits and surplus usury is received in the same moment in where both commodity and prices are of the same type of money?( Al-Saloos, 2005).
Then Dr. Saloos comes to his main point which is; banks? activities nowadays have become as usury because they includes postpone usury not surplus usury; ??It?s known that banks? interest is not a result of present sell that we can account as surplus usury, even surplus usury couldn?t be imaged in recent days? money? ( Al-Saloos, 2005).
Further more this seems logical since surplus usury which is defined as the exchange of unequal qualities or quantities of the same commodity simultaneously, and surplus usury as well is forbidden under six conditions gold, silver, dates, wheat, salt, and barley by text and unanimous other wise all kind of trade will be forbidden, as surplus usury is not an introduction to prohibit loan interest, Saloos depend on postpone usury which is related to the postpone in mature date to conclude that loans interests and normal banks activities are prohibited by Islam law.
As a result the Forbidden point of view of fixed interest crediting accounts this action as a type of postpone usury that fixed interest crediting activities include addition to the essential capital due to postponing of mature payment?s date.
There are various perspectives in defining the prohibiting reason of banks? interests. Dr. Abed Al-Monem Al-Nemer the previous minister of Religious Endowments argues that
?Our scholars had forbidden bank activities since specification of profits lead to this prohibition, the lesion is the prohibition reason; when fixed interest causes lesion for the debtors? (Al-Nemer, 1989).
Saloos opposes this opinion; ?the prohibition is the conditional addition not the lesion? (Al-Saloos, 2005), and ?surplus usury which is forbidden in six kinds gold, silver, dates, wheat, salt, and barley by text and unanimous? (Al-Saloos, 2004). He adds ?surplus usury which is forbidden proved in six kinds gold, silver, dates, wheat, salt, and barley by text and unanimous? (Al-Saloos, 2004). He further adds that ?The conditional addition is prohibited in all kinds of loans; even if it was not in the six mentioned kinds? (Al-Saloos, 2005).
If we turned back to the main verse which prohibits usury no.280 in chapter 2 {? you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew} (usury verses translations, 2005). Depending in Koran the forbidden reason clearly is included in God speech {? without inflicting injustice or incurring injustice?} hence, Islam forbids the addition on capital for the reason of not inflicting injustice or incurring injustice, so the forbidden reason is not the conditional addition as Saloos mentioned, but rather the result of this activity which is injustice.
Defining the prohibition reason is very important, according to jurisprudences ?the legitimate judgment related to the reason, if the reason remains the judgment remains, and if the reason disappears the judgment disappears as well? (Al-Jabery, 1991).
This leads us to an important question in the new monetary system if we prohibit any kind of interest in loans; is this ensuring justice and preventing injustice? That?s why this study focuses later on usury in the light of time value money theory.

3.2 Fixed interests Allowance point of view
The greatest Sheikh of Al-Azher the highest Islamic authority in the Islam world, Ahmed Shaltoot issue in 1952 one of the most important Islamic legal opinion or Fatwa about the interest of postal savings account and declined that there is nothing forbidden by Islamic law in this type of accounts, by not disobeying Islamic rule ?no harm and no harming? (Shaltoot, 1952).
The greatest Sheikh of Al-Azher Dr. Mohamed Al-Tantawee issued later a new legal opinion in 11th of September 1989 published in all the Egyptian newspapers ?the specialist banks, such as industrial banks, agricultural banks, lending banks, and other similar kinds of banks that offer the needed money to the beneficial different project owners and tack suitable payments estimated by acceptable experiences as revenue or managerial expenses, acceptable in Islam law? (Al-Mosawer, 1989).
Why did Al-Tantawee account banks activities as an acceptable one? He then adds; ?because banks utilize this money for its services which are offered to the banks? customers, this is an example of dealings and profiting which scholars accede as acceptable dealings due to Islamic law?( AL-Mosawer 1989).
All Egyptian Newspapers published that Dr. Tantawee gives the conclusive Islamic opinion when deciding that ?fixing profit percentage previously is acceptable in Islam or Halal, and investing money in the banks which gives certain level of profit previously is acceptable as well? (Gedal, 2005).
The highest Islamic law authority in Egypt Islamic searching academy accepts Dr. Tantawee opinion in banks interests (Gedal, 2005), he thus justifies his opinion about this type of investments by ?there is no texts in Koran or Sonnah prohibiting this type of investment, and fixing the level of profits is one of the acceptable things in Islamic law and logic? (Gedal, 2005).
He estimates banks as depositor?s agent ?The banks are depositor?s agents; banks take depositors? money to invest it? (Gedal, 2005).
Hence, Tantawees? opinion is based on
1- Banks? fixed interest activities are not usury activities.
2- Banks? activities are a type of investment.
3- Banks are depositor?s agents.
4- Fixing interest rate previously is an acceptable action and there is no Islamic text forbidding this activity.
5- Dr. Tantawee as mentioned previously evaluated banks? revenue as consideration of its services, offered to the banks? customers.
Actually this opinion raises several matters
1- Banks are not depositor?s agents, thus they account the depositor?s money as liabilities under requests in any time, and the bank has an obligation by the law to payback the depositor his money when ever demanded. Banks? balance sheet appears ?Non interest-bearing demand checking deposits, saving deposits and NOW account, Money market deposit accounts, Time deposits, and Deposits at foreign branches as deposits not as equities? (Rose, 2002).
2- Deposits are the principal liability for any bank, ?banks dependent upon their deposits, which today usually support between 70 and 80 percent of their total assets? (Rose, 2002).
3- Depositor?s money is not affected by banks profits limit and doesn?t give money to the bank as an agent, so the agreement between the bank and the depositor is an independent agreement in which the bank should pay back the money with the interest when the date matures how ever the bank uses the money.
4- The proxy agreement , gives the right to use but at the same time the results of use reflect on subject of the agreement which is here the deposited money, and this is not right in the case of banks? deposits where deposits and interests are accounted as ?bank dept liability?( Rose, 2002).
Hence, deposits and interests are nothing but banks? deposits, banks have the obligation to pay back its deposits no mater how it invests this deposits.
Depending on this truth Dr. Tantawee?s opinion considering banks as a depositor?s agent is not true, the bank is a shareholder agent not a depositor?s agent.
5- Bank revenues are not only considered as services but as revenues for curing several kinds of risks as well; ?credit risks, liquidity risks, market risks, interest rate risks, earnings risks, and solvency risks?( Rose, 2002).
Dr. Gamal Al-Deen Mhmoed The general secretary of the Islamic affairs highest council published in Al-Ahram journal a related important article ?The usury concept and new Economy? (Mhmoed, 2002), Dr. Mhmoed defines the reasons of forbidden usury ?usury forbidden aims to prevent debtor exploitation by the creditor, that the debtor is in need of the money to survive, if this is denied usury is denied as well? (Mhmoed, 2002).
This reason doesn?t include in the relation between the banks and depositors, so Dr. Mhmoed concludes that there is no usury in this type of credits ?Banks these days are under governmental control and the depositor didn?t even imagine that he is exploiting the bank? (Mhmoed, 2002).
Then Dr. Mahmoed refers to the Islamic rule arguing that jurists shouldn?t expand in prohibiting, as Islamic texts didn?t prohibit clearly this type of banks? activities ?the tendency to expand usury prohibition is against the Islamic jurisprudent rule which prevents prohibiting without clear text? (Mhmoed, 2002).
Mhmoed also adds that banks are essential institutions in the new economy to finance the big projects which is important to improve the country?s Economy, ?the new manner in investment depends on big projects, which needs huge amounts of money, this needs thousands of depositors and trusted institutions which are banks? (Mhmoed, 2002).
Hence, the major points in Dr. Mhmoed opinion are
1- Usury forbidding reason is to prevent debtor exploitation by the creditor.
2- In banking system this exploitation relation is accessible.
3- The jurists who expand in usury prohibiting including banking activities break the Islamic rule while deciding that prohibiting should be by clear Islamic text.
4- Banks are important in the new Economy to finance the big needed projects.
The main weakness of this opinion is in defining the reason of usury forbidden as a preventing debtor exploited by the creditor, that even if using usury to exploit debtors was one of the mentioned forms of usury it is not the only form, usury as well was used to finance some kinds of commercial activities as an example ?Al-Abbas prophet Mohamed?s (PBUH) uncle was lending money for some merchants with usury before Islam? (Al-Saloos, 2005).
Dr. Abed Al-Monem Al-Nemer the previous minister of Religious Endowments says ?Our scholars had forbidden bank activities since specification of profits leads to this prohibition, the lesion is the prohibition reason; when fixed interest causes lesion for the debtors? (Al-Nemer, 1989).
Actually this is strange derivate of prohibiting reason ?harm which is a result of fixing interests?, the reason as the Koran verse defines it {? without inflicting injustice or incurring injustice?}, hence the reason of prohibiting usury is preventing injustice, to understand the concluded injustice, the proper way is to find what is the real value of money, justice loan prices as finance science decisions should be estimated in light of time value money.

1. Usury concept in the religious texts

Islamic texts involve the notarizing loans; the longest verse in Koran verse no. 282 of chapter two was about notarizing loans
{O you who believe, when you transact a loan for any period, you shall write it down. An impartial scribe shall do the writing. No scribe shall refuse to perform this service, according to God?s teachings. He shall write, while the debtor dictates the terms. He shall observe GOD his Lord and never cheat. If the debtor is mentally incapable, or helpless, or cannot dictate, his guardian shall dictate equitably. Two men shall serve as witnesses; if not two men, then a man and two women whose testimony is acceptable to all. Thus, if one woman becomes biased, the other will remind her. It is the obligation of the witnesses to testify when called upon to do so. Do not tire of writing the details, no matter how long, including the time of repayment. This is equitable in the sight of GOD, assures better witnessing, and eliminates any doubts you may have. Business transactions that you execute on the spot need not be recorded, but have they witnessed. No scribe or witness shall be harmed on account of his services. If you harm them, it would be wickedness on your part. You shall observe GOD, and GOD will teach you. GOD is Omniscient} (Koran Translation, 2005).

Historically the Muslims were involved with trade abroad. However; some of the payments were done in installments or totally paid in future, to insure this method Koran had laid details concerning this issue loans notarizing.

Four verses in the holy Koran treated Usury concept

First verse 130 of chapter 3 {O you who believe, you shall not take usury, compounded over and over. Observe GOD that you may succeed} (Usury verses translations, 2005).

Second verse 161 of chapter 4 {and for practicing usury, which was forbidden, and for consuming the people's money illicitly. We have prepared for the disbelievers among them painful retribution.} (Usury verses translations, 2005)

Third verse 39 of chapter 30 {The usury that is practiced to increase some people's wealth, does not gain anything at god. But if you give to charity, seeking God?s pleasure, these are the ones who receive their reward manifold} (Usury verses translations, 2005).

Forth verses 275-280 of chapter 2
{Those who charge usury are in the same position as those controlled by the devil's influence. This is because they claim that usury is the same as commerce. However, GOD permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with GOD. As for those who persist in usury, they incur Hell, wherein they abide forever; GOD condemns usury, and blesses charities. GOD dislikes every disbeliever, guilty. O you who believe, you shall observe GOD and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from GOD and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew}

Hence in the first two verses God forbids the cumulative usury that grows fast and can?t be paid {?compounded over and over?}, that kind which leads the borrower to miserable situation because usury was used to slave people before Islam when they couldn?t pay back their cumulative loans, so it was logical to prohibit this kind of lending money.
The third one enlightens that the real growth is by giving donation not by collecting usury, so it?s not a forbidden verse of lending money with interest; because it didn?t include forbidden order, its considered as the verse exerts people to give donation.

The fourth is the verse which then forbids teams accounting it as absolutely forbidden as the study will explain when it reaches this opinion of absolutely forbidden, and it?s the same verse as well that the study will depend on to explain our image of usury in light of time value money theory.