View on Time Value of Money from Shariah Perspective

Time value of money brings the concept that a dollar today worth more
than a dollar in the future. This concept has been well accepted and broadly
applied to the conventional financial system. But, there are a lot of differing
arguments arise from the Muslim scholar regarding the application of this
concept in the Islamic financial system. Some of them reject the application of
this concept in Islamic financing system due to the existing element of riba which
is clearly prohibited in Islam. In other hand, some of them argued that, time of
value is lawful to be conducted if only it is conducted according to the Shariah
perspective.
Based on the research paper written by Mohamed Fairooz Abdul Khir The
concept of time value of money: A shariah viewpoint, the time value of money is
legally to be practiced in Islam based on three bases: 1) the concept of Positive
Time Preference (PTP), 2) the permissibility of a different price in a cash sale as
opposed to a credit sale and 3) Islamic legal maxims. 1
Positive Time Preference (PTP) is whereby present goods have a higher
subjective value compared to the future goods of the same kind commodity. A
person is to be said a positive time preference when he prefers to be paid now
rather than in future. In contrast, a person is to be said as negative time
preference when he prefers to receive money later than now. It can be said that,
TVM is used to explain the individual attitudes toward time preferences either
PTP or NTP. There are debates among the Muslim scholar about the acceptance
of PTP. Monzer Khaf argued that Justice and fairness require that time value of
money be related to the outcome of investment, risky and uncertainty though it
is in real life2 In real life, every person has been bestowed with a natural
preference for the present time over the future. Without having an expectation of
higher return tomorrow, one will not give up his income today.
Next, majority of the Muslim scholar like Qatadah, Tawus and Al- Zuhri
allowed the mark up for the deferred sale. Aishah and Ibn Abbas narrated that
1 Mohamed Fairooz Abdul Khadir (2012), The Concept of the Time Value of
Money: A Shariah Viewpoint, , number 38, page 3
2 Monzer Khaf (1994), Time Value of Money and Discounting in Islamic
Perspective. In Review of Islamic Economy, volume 1, number 2, page 35

Allahs Apostle bought grain from a Jew on credit and mortgaged his amour to
him3. The hadith implies that the deferred price would have been higher than the
on the spot price for the same commodity and the increment should been stated
in the contract. Thus it can be said that a mark up in deferred sales is
compensation to the deferment and this permissibility support the time value of
money concept. People would prefer to consume money today than in the future.
Thus this permissibility create justice between the two party as the buyer benefit
from the consumption of goods and the seller gets the compensation for the
money that he let go today.
In addition, the Shariah ruling of the primary and its auxiliaries is used to
support the the concept of time value of money.

The auxiliary follows [the primary in its ruling].

Things may be excused in the secondary that are not excused in the primary. 4
The legal maxims give a difference between the increment in the loan and the
increment in the deferred payment of deferred sales. This maxim stated that a
thing that is considered secondary is not separated from the primary and it is
come under the same dictates and legal ruling of the primary. The excess money
in the loan contract is unconnected to the principal as it is imposed in total
separation from the amount of the loan. In contrast, the excess in the deferred
sales contract is considered as supplementary to the primary which is the on the
spot price of the commodity. Mohamed Fairooz said that a financial countervalue incorporated in the price is recognized by the Shariah only if it is
associated with the original price of the commodity. 5 Thus, in case of the
deferred sales the time has part in the price because it has monetary value
3 Sahih al-Bukhari 3:1068, hadith no 2759; Sunan al-Tirmidhi, 3:519
4 Mohamed Fairooz Abdul Khadir (2012), The Concept of the Time Value of
Money: A Shariah Viewpoint, , number 38, page 26
5 Mohamed Fairooz Abdul Khadir (2012), The Concept of the Time Value of
Money: A Shariah Viewpoint, , number 38, page 27

related to the subject matter. Different from the loan contact, there is no
existence of transacted commodity. Thus it will only resulting to exchanging of
time for money and lead to making money out of money which is clearly
prohibited in Islam.
In my point of view, Islam recognized the concept of time value of money, but
the recognition is totally different from the conventional finance. It a lawful to
applied time value of money to the Islamic finance but it must be carried
according to the Shariah. The increment in the payment of the deferred sales is
acceptable since it is the compensation for the delay payment and it is
associated to the subject matter. In contrast, the increment in the loan contract
is haram as it is considered as riba since there is no subject matter.

ARTICLE:
Mohamed Fairooz Abdul Khadir (2012), The Concept of the Time Value of Money:
A Shariah Viewpoint, number 38