The time value of money has long been recognized in Islamic jurisprudence, especially in financial transactions like Murabahah and prepayment of loans.
Classical Islamic scholars acknowledged the impact of time on financial dealings, often discussing three-time dimensions—delay, spot, and acceleration—and how they affect commodity pricing.
For instance, a deferred sale might be higher than a spot sale, and some scholars permit discounts for early debt repayment.
In this article, we will look very deeply at the concept of TVM from a Shariah perspective.
We will explore the Shari’ah viewpoint on TVM, contrasting it with conventional finance, the Islamic stance on Positive Time Preference (PTP), and how it differs from the conventional approach.
These discussions underline Islam’s recognition of time’s financial and economic significance.
Note: The following article is a summary of a research paper, as below:
- The Concept Of The Time Value Of Money: A Shari‘Ah Viewpoint
- International Journal of Islamic Banking and Finance
- ISSN: 2220-8291, Vol. 3, Issue 2
- Mohamed Fairooz Abdul Khir, Researcher, International Shari‘ah Research Academy for Islamic Finance
- Email: fairooz@isra.m
Source: Maybank
Understanding TVM
Islamic scholars and economists debate the time value of money (TVM) and its relation to interest, particularly in Islamic finance. Critics argue that TVM, a key concept in conventional economics justifying interest, contradicts Islamic principles.
However, proponents believe Islam acknowledges TVM in commercial transactions without endorsing conventional finance’s interest-based system. They highlight three Islamic payment modes – deferment, acceleration, and spot – affecting commodity pricing, as discussed in classical jurisprudence.
The Islamic Perspective on the Time Value of Money
The Shari’ah foundation for the monetary value of time concept in Islam is complex. A key aspect, often debated, is its historical roots in non-Islamic contexts, primarily as a rationale for interest.
Positive Time Preference (PTP) Theory
Eugene Von Bohm-Bawerk, an Austrian economist, introduced PTP in his book “Positive Theory of Capital.” He suggested that present goods typically hold greater subjective and objective value than future ones. However, this view has faced criticism, with alternative theories like zero or negative time preference emerging. Some Islamic scholars interpret PTP as a natural aspect of human nature, favoring immediate gratification (Kahf, 1994; al-Masri, 1990).
PTP in Islamic Context
Analyzing PTP in Islam involves questions about preferences for immediate versus future returns. The key question is whether PTP aligns with Islamic virtues or contradicts them. Furthermore, reasons behind preferring the present over the future, such as uncertainty, opportunity loss, or diminishing future purchasing power, are considered.
Exploring TVM in Islam
TVM in Islam extends beyond mere investment, representing a natural human tendency towards immediate gains. While some Muslim scholars completely reject PTP, others accept it under specific conditions. Khan (1991) suggests that time preference aligns with Islamic teachings if no fixed time value is assigned to money. However, Kahf (1994) counters this, arguing that time preference should be investment-linked, acknowledging the inherent risks.
The esteemed companion and scholar, ‘Abd Allah ibn Mas’ud, was reciting Surah al-A’la’ to his students. As he recited, he approached the following verse:
But you prefer the life of the world, although the hereafter is better and more lasting (Qur’an, 87:16-17).
He paused and remarked, “We have preferred the worldly life over the hereafter.” There was silence among his listeners. Ibn Mas’ud explained, “We prefer the life of the world because we see its ornament, its women, and its food and drink, while the hereafter is remote for us. Therefore, we prefer this, which is immediate, over deferred.” (Al-Tabari, 2000). This inclination also explains why one tends to prioritize immediate use of an asset over future use.
The Qur’an often describes human nature as being drawn to the temporary, present life, leading to a tendency towards impatience. In Surah al-Qiyamah (75:20-21), Allah addresses this aspect of human behavior.
Classical and Contemporary Perspectives on Present vs. Future Value in Islamic Jurisprudence
Classical Jurists on Present Superiority
Classical jurists largely agree on the higher value of immediate consumption over future consumption. Al-Sarakhsi, discussing deferment disputes, supports this with Zufar and al-Shafi’i’s views on oath-taking for price verification, emphasizing lesser value for deferred payments. Similarly, Al-Zayla’i, addressing Murabahah contracts, notes the increased price due to the earlier purchase with deferment, comparing it to selling deferral and commodities. He argues this amounts to cheating due to the lower financial value of deferred prices than the spot price.
Views of Contemporary Scholars
Contemporary scholars diverge on this issue. Rafiq Yunus al-Masri aligns with classical views, whereas others, like Mawdudi and Akram Khan, challenge Positive Time Preference (PTP). Mawdudi questions the natural human inclination to value the present more than the future, pointing to people’s tendency to save for the future. In his quest against Riba, Akram Khan considers the concept of favorable time preference as logically flawed, not legitimating Riba. On the other hand, Al-Masri supports PTP, justifying it with Qur’anic evidence and juristic reasoning.
Fahim Khan supports PTP under certain conditions, arguing for its compatibility with Islamic principles as long as the time value isn’t predetermined. Monzer Kahf emphasizes the investment aspect of time preference, urging the isolation of other factors for clarity in TVM’s role in exchanges.
Anas al-Zarqa’ presents a detailed view, acknowledging varying consumer time preferences. He asserts that favorable time preference is not a universal or rational principle but one of several patterns of temporal choice.
Synthesis of Islamic Views on PTP
The rejection of PTP by some Muslim economists seems to stem from rational arguments and a reaction to its Western economic utilization to justify interest. However, this doesn’t require denying the time value of money inherent in PTP, which Islam accepts but applies differently from capitalist economics. While conventional PTP leads to interest-based profit, Islamic applications avoid Riba.
In Islam, PTP is accepted as a natural tendency. But it results in Riba through factors like opportunity cost, inflation cost, and credit risk premium. The critical question is whether Islam permits these factors in profit calculation for contracts involving TVM, such as standard Murabahah contracts, considering the fundamental differences between sale and loan contracts in Islamic law.
Legitimacy of Price Increment in Deferred Sales (Bay‘ Mu’ajjal) in Islamic Jurisprudence
Scholarly Consensus on Deferred Sales
Islamic jurists, including the imams of four primary schools and early scholars like al-Zuhri and Sa’id ibn al-Musayyib, generally agree on the permissibility of a markup in deferred sales (bay‘ mua’jjal). This view aligns with Qur’anic teachings, hadith, and logical reasoning. They cite the Qur’anic verse (2:275), which differentiates trade from usury, countering pre-Islamic Arab views that equated the two.
Historical Context and Hadith Interpretation
Al-Tabari narrates a historical context where creditors would offer debt extensions in exchange for higher repayment, likened to usury. This practice was condemned, with Allah confirming the permissibility of trade but not usury. Additionally, hadiths, including those from ‘A’ishah and Ibn ‘Abbas in Sahih al-Bukhari, illustrate the Prophet’s involvement in credit transactions, implying his indirect endorsement of deferred sale increases.
Usufruct and PTP in Sales vs. Loan Contracts
Some jurists argue that the markup is justified by usufruct – the buyer receives both the asset and its immediate use. If PTP were the sole reason, it would apply to loan contracts. This raises questions about its application in Mudarabah and Musharakah contracts, where guarantees of principal and predetermination of returns could imply a form of interest.
Islamic Legal Principles and the Time Value of Money
Islamic legal principles provide a foundation for understanding the time value of money (TVM) in Shari‘ah. Fundamental principles include: “The secondary follows the primary in the ruling” and “Things may be excused in the secondary that are not excused in the primary.” These principles differentiate between increments in loans (qard) and deferred sales (bay‘ mua’jjal). In loans, any excess is separate from the principal, whereas, in deferred sales, the excess is integral to the commodity’s spot price.
The principle emphasizes that time can only indirectly have a monetary value linked to the commodity’s original price. This prevents exchanges of money for time, which could result in making money from money, corrupting money’s essential function. Another maxim, “What is supplementary does not have its particular ruling,” supports this viewpoint.
Jurists like al-Suyuti and al-Zarkashi have applied these principles to debt repayment issues like the deferment period (al-ajal). They assert that the deferment period, being ancillary, cannot command an independent ruling. Therefore, time is not directly priced but is considered in conjunction with the commodity’s price in contracts like deferred payment sales. In such contracts, time is ancillary to the primary subject matter; thus, the juristic rulings of the primary extend to it.
Related: Islamic Finance in Asia: Rapid Growth of The Industry in the Region
TVM in Islamic Finance: Key Principles and Applications
Principles of TVM in Islamic Finance
The legitimacy of the time value of money (TVM) in Islamic finance, especially in dual banking systems, requires careful handling to avoid Riba. Any monetary increase due to time in contracts must be linked to the commodity’s price. This prevents Riba al-nasi’ah, which occurs when time-for-money exchange is independent of the commodity. Unlike loans, where increments are separate liabilities, increases in deferred sales are part of the commodity’s price, as supported by the principle: “Issues can be excused in something when included with something else that would not be excused when it is intended independently.”
In deferred sales, price increases are for the deferment of the commodity’s original price, not just for time. This avoids the direct money-for-time exchange typical in conventional finance. The Islamic principle is that money in deferred sales isn’t a commodity; thus, it doesn’t produce more money. A guiding maxim is: “The deferred period can be transacted for property in association, not independently.”
Contemporary TVM Applications
TVM influences financial methods like discounting future values, typically based on interest rates, raising concerns about Shari‘ah compliance. However, Islam accepts discounting when it aligns with Positive Time Preference (PTP), recognizing humans’ natural inclination for present consumption.
Consequently, discounting future cash flows to present values is permissible. An increase in deferred contracts like Murabahah is valid since deferment affects pricing. This approach balances justice in exchange for contracts.
Classical juristic views, like those of al-Dasuqi, further support this: the value of the produce at the time of disaster versus its value at maturity needs to be considered. This demonstrates that deferment impacts price, justifying discounting in Islamic finance.
Read: Five Islamic Finance Podcasts You Should Listen To
Final Thoughts
Islam acknowledges the time value of money (TVM), but its approach significantly differs from conventional finance. Islamically, a fixed and predetermined increase in price for deferred sales is acceptable if it relates to the commodity’s price.
This means deferment (ajal) cannot be compensated with a set additional amount separated from the commodity’s price, unlike loan contracts, where time alone is financially valued. This distinction prevents the scenario of money generating more money, the core concept of interest (‘ayn al-Riba), and is the primary reason for Riba’s prohibition in Islam.
If you want to learn more about Islamic Finance-related topics, please visit our academy here.
Also, feel free to sign up for our free Halal stock screening service at musaffa.com
Disclaimer: Important information