Opponents of usury, particularly in the Islamic school, don't necessarily come from an economic position that denies the time value of money. Rather, the argument that is often raised against lending at interest comes in two parts:
1. It creates a moral paradox between the responsibility of the creditor and that of the debtor
2. It leads to the poor overleveraging themselves and effectively functions as an anti-insurance policy.
The first argument basically asks the question: whose fault is it if the borrower defaults? One side of the coin is the it's all the borrower's fault; he made a promise to pay the money back, and promises should be kept. The creditor was defrauded, ie. stolen from, and we should feel sorry for him as a victim of this crime. However, this position is very problematic: it denies all responsibility to the lender and effectively creates a paradox in capitalist economic philosophy: you have an investment that generates a guaranteed fixed rate of interest with zero risk. All other businessmen trying to earn a return from their capital must take care to ensure that their funds are used wisely, but the lender has no such concerns. There is no mechanism built into the system to reward more careful creditors for their prudence and punish less careful creditors for their oversights. All debt enforcement systems must somehow come to terms with this fundamental problem, and some sort of balance between debtor responsibility and creditor responsibility is reached - in our society through the bankruptcy mechanism. Emphasizing exclusively debtor responsibility is impossible because if a creditor tries to shake down a nonpaying debtor too hard the debtor will simply die, at which point any further persuasion is physically impossible. Emphasizing exclusively creditor responsibility is actually possible - essentially, it would be a world where the only reason to repay a loan would be to encourage banks to lend you more money in the future, but without at least a moral component to their backing such debts would be far too flimsy to be practical.
The second argument is from the point of view of the debtor. If someone borrows money to upgrade the equipment for their business, buy more energy-efficient home appliances, establish a new location for their store, or perform whatever action that generates greater future returns for smaller present expense, they haven't just given themselves a temporary boost in capital. They've also increased their risk. The problem is that while the present expenses are guaranteed, the future returns are not. There could be bad business conditions which would, in retrospect, make the spending not worth it, the physical capital created or bought with the loan may be destroyed by a disaster, or anything else could happen. Consider two businessmen, whom we'll call A and B. Let's say A and B both have $10000 in the bank, and over the course of a year their business would take up some expenses and generate some revenue, leaving them with, at a 95% confidence level, between $5000 and $30000 at the end of the year - it'll probably be profitable, but something bad could potentially happen. Now, let's say B decides to get a loan for expansion, agreeing to receive $100000 now and pay $106000 at the end of the year. With this loan, B's business doubles in size. What does the probability distribution for B's balance sheet look like now? At the top margin, profits increase from $20000 to $40000, adding the original $10000 and subtracting interest gives a final balance of $44000. But what if B gets the short end of the stick this year? The loss of $5000 would become a loss of $10000, and the interest payment on top would leave B with -$6000 at the end of the year - in short, in a debt trap.
What Islamic and other anti-interest thinkers promote as an alternative to debt is any kind of system where the creditor's return, and therefore the debtor's fee, is based not on a fixed sum but on the success of the debtor. Purchasing shares in a business is great, as if B gets his capital that way he can pay, for example, $12000 if the business does well that year and leave his investors with even a slightly negative return if the business does poorly. For consumer credit, informal arrangements between friends are ideal, as the economics of owing and receiving favors take circumstance and need into account. At a somewhat higher level of formality, an interest rate of 0% plus a voluntary tip is the norm.
Our current system does have some creditor responsibility in the form of the bankruptcy mechanism, but the problem with this is that the level of creditor responsibility is not fluid - it's an either/or, pay in full or utterly default, situation. Such unbalanced reward mechanisms create what's known as a
Taleb distribution for the creditor, where the risk distribution appears to be stable, as the creditor is getting the same return from the system no matter what happens, but this leads the creditor to eventually forget the looming risk of total failure - losing everything to defaults. When there are many millions of debtors the distribution appears to even out, but one of the issues that people who understand Taleb distributions point out is that society is more connected than we think - if the risk of default is 1%, the risk of all 100 people defaulting is much higher than 10^-200, because defaults both lead to chain reactions and have common causes. The housing bubble can be seen as a case of creditors taking the illusory certainty of their returns for granted and suffering for it (okay, in reality they barely suffered at all, and the libertarian interpretation of Taleb distribution theory is that government-enforced stability mechanisms like FDIC and bailouts create a Taleb distribution themselves, which I'll leave others here to debate). Islamic theorists, or rather an Islamic-inspired anti-interest ideology that takes into account the much more modern work of Nassim Taleb, would argue that much greater stability can be achieved if the system is designed so that all parties involved in a credit transaction suffer the consequences of a failure in a graduated way.
