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The Time Value of Money (TVM) Concept in Islamic
Finance
Introduction
One of the fundamental principles in finance is the time value of money.
People more prefer money now to money later. For instance, everyone, in almost
all circumstances, prefers money today to having the same amount of money in the
future. This is known as the time value of money. Some early writers on Islamic
finance appeared to believe that it required there be no time value of money. More
recent academic writers generally recognize the time value of money, but then
struggle to distinguish its application in Islamic Finance from that in conventional
finance. Islam prohibits giving and taking riba. It can be considered a sort of denial
of time`s monetary valuation. Modern banking and finance also based on the
concept of money time`s value. It is considered a basic investment concept and
also a basic element of conventional financial theory and return is compatible with
system of economics science. Islamic finance does not prohibit increment in loan.
For instance, price of commodity in any sale contract to be paid at a future date. It
requires that a loan should be paid back in the same currency. In views of Islam,
loan as a gratuitous contract, lending at a premium amount of riba. Since it is a
fundamental principle of finance, the time value of money is applicable to both
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conventional finance and to Islamic finance. Islamic finance can be definite as
finance conducted under the rules specified by shariah scholars. Any modern type
of contract not mentioned in the shari`ah is allowed if it does not conflict with the
Islamic perspective (Qur`an an Sunnah) and based on ijma and qiyas and
maslahah, and also is free from any injustice. It also deal with the concept of
money time`s value. Islam prohibits the mutual exchange of gold, silver, or
monetary values except when this is done simultaneously. The reason is islam does
not allow people to get a profit from using currency that they have received before
being given its counter value. For instance, the other party could take advantage.
Time valuation is possible when goods are traded, and its prohibited when
exchange monetary values and loans or debts. Shari`ah considers a loan to be
gratuitous contract. This is when someone make a qard hasan, the loan is
forwarded to the hereafter. Thereby making the loan a loan to god for which in
return reward will be multiplied.
No time value can be added to the loan. Islam also prohibits any conditional
increase in the loan principle in return for deferred repaying due to an expected
depreciation in the value time of money.
A Review of the Literature
This research helps to understand the shari`ah position on time`s monetary
valuation in the Islamic perspective. It examines about money and increasing
prices when dealing with cash and credit transaction based on Islamic perspective.
Based on Zaqra studies, time preference need not always be positive. It could not
provide a valid base for discounting. Otherwise, he claimed that discounting is one
of the define requirements for efficiency in investment in both the private and the
public sectors. His opinion the rate return on private project with similar risks
should be an appropriate rate of discounting. However, discount rate should be
