What is Usury?

Usury (from the Latin usus meaning “used”) was defined originally as charging a fee for the use of money. This usually meant interest on loans, although charging a fee for changing money (as at a bureau de change) is included in the original meaning. After moderate-interest loans became an accepted part of the business world in the early modern age, the word has come to refer to the charging of unreasonable or relatively high rates of interest.

Usury laws are state laws that specify the maximum legal interest rate at which loans can be made. This makes most loansharking, another name for usury, illegal. Often, loansharks use illegal “scare” tactics to ensure that the lent money is paid back.

Usury (in the original sense of any interest) is scriptually and doctrinally forbidden in many religions. Judaism forbids a Jew to lend at interest to another Jew. It’s forbidden in Islam. The most recent Catholic teaching on usury is by Pope Benedict XIV in his Vix Pervenit from 1745 which strictly forbids the practice, though many Jews, Catholics and Muslims break their own laws in this matter.

While Jewish law forbids the charging of interest to another Jew, Jews are not forbidden to charge interest on transactions to non-Jews. Throughout history, the interest attached to loans by Jews to non-Jews is widely considered to have been a central issue in causing a perception of usury, and contributing to a climate of anti-Semitism: Forceful confiscations of property, and discrimination toward Jews in business practice. Ethnic-based distinctions surrounding the application of interest charges are often perceived as pronounced, discriminatory and unjust, and can inflame existing ethnic divisions.

Usury has been denounced by almost every major spiritual leader and philosopher of the past three thousand years. Plato, Aristotle, Cato, Cicero, Seneca, Plutarch, Aquinas, Jesus, Mohammed and Moses are just a few.

Cato in his De Re Rustica said:

“And what do you think of usury?”
“What do you think of murder?”

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What is Interest Rate?

An interest rate is the “rental” price of money. When a resource or asset is borrowed, the borrower pays interest to the lender for the use of it. The interest rate is the price paid for the use of money for a period of time. One type of interest rate is the yield on a bond.

When money is loaned the lender defers consumption (or other use of the money) for a specific period of time. The lender does this in exchange for an expected increase in future income. The expected increase in real income (relative to the amount loaned) is the real interest rate. Note that the real interest rate is calculated by adjusting the actual rate charged (known as the money or nominal interest rate) to take inflation into account. (See real vs. nominal in economics.) A first approximation for the real interest rate for a one-year loan is:

ir = in — pe

where:

in = nominal interest rate
ir = real interest rate
pe = expected or projected inflation over the year.

After the fact, there is the realized or ex post real interest rate:

ir = in — p

where p = the actual inflation rate over the year.

Thus, if the (expected) inflation rate is 5% and the nominal interest rate is 7%, the (expected) real interest rate is 2%.

If financial markets have adjusted for the effects of expected inflation and the real interest rate is given, then the nominal rate approximately equals:

ir + pe

Thus, if the real interest rate is 3% and the inflation rate equals 5%, the nominal interest rate = 8%. The theory of rational expectations is sometimes applied to say that this equation applies in most cases. Most economists would agree that it applies over several years, as financial markets adjust: higher inflation leads to higher nominal rates, all else being equal.

Irving Fisher proposed a better approximation of the relationship between nominal interest rate, inflation and real interest rate. For a one-year bond, the expected real rate equals

ir = [(1 + in)/(1 + pe)] — 1

Using the first numerical example above, the expected real rate equals [1.07/1.05]-1 = 0.19 or 1.9%, which is similar to (but not the same as) the 2% calculated above.

When comparing different interest rates on different kinds of loans, a different kind of formula is used. For the nominal rate on a single type of asset,

in = i*n + d + mrp + lp

 

i*n = the nominal interest rate on a short-term risk-free liquid bond (such as U.S. Treasury Bills).
d = default premium (reflecting the likelihood of default by the borrower)
mrp = maturity risk premium (risk factor for length of borrowing period)
lp = liquidity premium (reflecting the perceived difficulty of converting the asset into money and thus into goods).

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What is a Debenture?

In finance, a debenture is a long-term debt instrument used by governments and large companies to obtain funds. It is similar to a bond except the securitization conditions are different. A debenture is unsecured in the sense that there are no liens or pledges on specific assets. It is however, secured by all properties not otherwise pledged. In the case of bankruptcy debenture holders are considered general creditors.

The advantage of debentures to the issuer is they leave specific assets unencumbered, and thereby leave them open for subsequent financing.

In practice the distinction between bond and debenture is not always maintained. Bonds are sometimes called debentures and vice-versa.

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What is a Loan?

A loan is a type of debt. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower. The borrower initially receives an amount of money from the lender, which they pay back, usually but not always in regular instalments, to the lender. This service is generally provided at a cost, referred to as interest on the debt.

Acting as a provider of loans is one of the principal task for financial institutions. For banks loans are generally funded by deposits. For other institutions issuing of debt contracts, such as bonds is a typical source of funding.

Other types of debt include mortgages, credit card debt, bonds, and lines of credit. A mortgage is a very common type of debt instrument, used by many individuals to purchase housing. In this arrangement, the money is used to purchase the property. The bank, however, is given the title to the house until the mortgage is paid off in full. If the borrower defaults on the loan, the bank can reposess the house and sell it, to get their money back.

The abuse in the granting of loans is known as predatory lending. It usually involves granting a loan in order to put the borrower in a position that one can gain advantage over them.

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What is Currency?

A currency is a unit of money (or monetary unit). Typically, each country has given monopoly to a single currency, controlled by a state owned central bank, although exceptions from this rule exist. Several countries can use the same name, each for their own currency (e.g. Canadian dollars and US dollars), several countries can use the same currency (e.g. the Euro), or a country can declare the currency of another country to be legal tender.

Each currency typically has one fraction currency, valued at 1/100 of the main currency: 100 cents = 1 dollar, 100 centimes = 1 franc. However, some currencies use a fraction of 1/10 (and a very few some other value such as 1/5 or 1/20), or do not have a minor unit currency at all. These fractions are NOT listed below.

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What is a Standard of Deferred Payment?

A standard of deferred payment is the accepted way (in a given market) to settle a debt. For example, while the gold standard reigned, gold or any currency convertible to gold at a fixed rate constituted such a standard. As of 2003, the US dollar and the euro are the most generally accepted standards for international settlements.

However, for certain kinds of transactions (such as for illegal goods like narcotics or weapons), gold or diamonds may be preferred as the medium of exchange — there being no recourse in case of counterfeit currency being used — and there is rarely any deferral of payment: if there is, it will most likely be stated in dollars.

This is distinct from the store of value function which relates to the saving, storing, and retrieval of value, and from the unit of account function which requires fungibility so accounts in any amount can be readily settled. It is also distinct from the medium of exchange function which requires durability when used in trade, and a minimum of opportunity to cheat others — as the diamond or gold example makes obvious.

When currency is stable, money can serve all four functions. When it isn’t, or when complex and volatile forms of financial capital are involved, it becomes important to identify a single standard of deferred payment to avoid cheating by selecting a denominator of debt that one knows is dropping in value.

Historically, there have been many times when creditors have had to hide from debtors to avoid being paid off in near worthless currency.

Time-based currency such as Ithaca Hours establishes fixed amounts of human labour as the only standard of deferred payment.

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What is a Predatory Lending?

In the strictest and legal sense, predatory lending refers to secured loans such as home or car loans which are made by the lender with the intention that the borrower will not repay the loan, allowing the lender to seize the car or home and sell it for a profit. Colloquially, the term has been expanded to refer to the practice of convincing borrowers to agree to unfair and abusive loan terms. Such loans could take place either through outright deception or through aggressive sales tactics, taking advantage of borrowers’ lack of understanding of extremely complicated transactions. For instance, predatory loans for the purchase of a home could lead to foreclosure. Opponents of predatory lending often include transactions such as tax refund anticipation loans (or RALs), pay day loans, and credit cards, along with mortgage lending, in the term. The terminology is thus loaded, where proponents and opponents often intentionally blur the line between the two definitions in order to make their case sound better.

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What is a financial Bond?

In finance and economics, a bond or debenture is a debt instrument that obligates the issuer to pay to the bondholder the principal (the original amount of the loan) plus interest. Thus, a bond is essentially an I.O.U. (I owe you contract) issued by a private or governmental corporation. The corporation “borrows” the face amount of the bond from its buyer, pays interest on that debt while it is outstanding, and then “redeems” the bond by paying back the debt.

Bonds are securities but differ from shares of stock in that stock is an ownership interest (termed “equity”), but bonds are merely “debt”: Therefore a stockholder is an owner, but a bond-holder is merely a creditor.

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What is a Bank?

A bank is a financial institution that provides banking and other financial services. By the term bank is generally understood an institution that holds a banking license. Banking licenses are granted by financial supervision authorities and provides rights to conduct the most fundamental banking services such as accepting deposits and making loans. There are also financial institutions that provides certain banking services without meeting the legal definition of a bank, a so called Non-bank.

The word bank is derived from the Italian banca, which is derived from German and means bench. The terms bankrupt and “broke” are similarly derived from banca rotta, which refers to an out of business bank, having its bench physically broken. Money lenders in Northern Italy originally did business in open areas, or big open rooms, with each lender working from his own bench or table.

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What is a Javan Rhino?

The Javan Rhinoceros (Rhinoceros sondaicus) is one of the rarest and most endangered large mammals anywhere in the world. According to 2002 estimates, only about 60 remain alive, in Indonesia and Vietnam. Even these tiny populations are still being poached and the outlook for the species is grim.

The Javan Rhinoceros occupied lowland rainforests through much of South-east Asia. It is grey in color, hairless, and adults typically weigh up to 1.4 tonnes. Like the closely related larger Indian Rhinoceros, it has only one horn, and in common with the almost equally endangered Sumatran Rhinoceros it is exclusively a browser on leaves rather than a grazer on grasses. Favoured feeding strategies include knocking down saplings to reach the leaves and shoots, and gathering fruit.

There are two subspecies:

  • Vietnamese Javan Rhinoceros (Rhinoceros sondaicus annamiticus) (Vietnam only 2 – 7 animals left)
  • Indonesian Javan Rhinoceros (Rhinoceros sondaicus sondaicus) (Java 50 – 60 animals left)

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