This question often comes to our mind that Why is Usury (Riba) haram when the Creditor is at a loss if we take into account the concept of Time Value of Money I.E The value of money which the creditor is lending would not be the same at the time when he would receive his money back, so why not charge Interest for the amount to cover for the loss of creditor?
First of All, if Allah has forbidden something then we just can’t argue to find its logic as in real life example if we had asked our servant to buy some medicine and he would’ve questioned the logic behind buying a particular medicine, would we’ve been able to bear his attitude? Similarly, if the creator of the mankind has made trade halal and usury haram then we’re no one to question its logic just as we don’t tend to find the logic behind the fact that he has commanded us to pray 5 daily prayers at their particular time and forbidden us to pray at the time of Sunset and Sunrise so the main objective is being a slave to Allah and adhering to his commandments.
(But, as the loan practice has become too often and you can’t convince people without giving logic and the consequences that the economy has suffered because of the interest-based system then there is no harm in providing logic also.)
Secondly, According to shariah if the creditor is lending money then he should decide whether he is doing it under the basis of Donations/Charity or he is doing Musharkat (Partnership) if he is doing these couple of transactions then in the first case, I.E charity he should only receive the principal amount as according to Shariah when you’re lending someone money, you’re doing an act of kindness and voluntary contribution (تبرع، احسان ) towards the debtor so making a profit out of that is haram if the medium of exchange is same between them, so a creditor should only receive the principal amount he has lend (the concept of Takaful in Islamic Banking is based on this rule). However, if he is doing partnership then both the creditor and debtor may divide the return according to the Profit/loss or Capital ratio.
Thirdly, Time value of money is not totally haram if the medium of exchanges are different such as lending Commodity and taking money as its return or either way, for example in ancient times people use to lend goods and in return, they would get the money (with a surplus) after the agreed period of time, it was a common practice but it was permissible as the medium of exchanges were different and that was Money vs Commodity but if the debtor is unable to pay the amount for the goods at the decided time of paying then the creditor cannot take excessive amount over that as the excessive amount (Penalty) then would be against the basis of the same medium (جنس) For example excessive money taken over principle amount of money agreed before and that’s why the concept of interest on late payment is also haram.
In a nutshell, taking Time value of Money into consideration is haram if the gender of both media of exchanges is same I.E money vs Money or Commodity vs Commodity but if the Medium of exchanges is different for example money vs Commodity then it is permissible. plus one should also keep in mind that the condition in which credit sale is allowed (apart from differences in the medium of exchange) is also that whether it is the case of (commodity vs money) or (commodity vs commodity) the weight and volume of both the mediums must be different for example in money vs commodity, money should be measured by weighing and commodity for eg Wheat should be measured by volume.
As The Prophet said, “Sell gold in exchange of equivalent gold, sell silver in exchange of equivalent silver, sell dates in exchange of equivalent dates, sell wheat in exchange of equivalent wheat, sell salt in exchange of equivalent salt, sell barley in exchange of equivalent barley, but if a person transacts in excess, it will be usury (Riba). However, sell gold for silver anyway you please on the condition it is hand-to-hand (spot) and sell barley for a date any way you please on the condition it is hand-to-hand (spot).”
Written by: Jareer Usmani