The concept of the time value of money: a Shari'ah viewpoint

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The concept of the time value of money (TVM) has been well accepted and widely applied in the conventional financial system for a very long time. However, Islamic scholars hold differing views regarding its conceptual and practical foundation in the Islamic financial system. The opponents of TVM have argued that recognizing it will lead to acceptance of riba, against which Islam is at war. This may, however, be a hasty judgment. Islam does not reject any concept that aligns with its teaching, promotes justice among people and secures their interests, particularly in financial transactions. The concept of TVM establishes that time can be given a counter-value in association with real commercial activities. Therefore, Islamic acceptance of TVM should not be disregarded, particularly in financial transactions, such as deferred sales and loan contracts, in order to uphold justice. However, the concept of TVM must be applied in accord with specific Shari'ah parameters because applying it without complete adherence to its Shari'ah parameters may lead to actual riba. In contrast, if the Shari'ah parameters are completely complied with, the application of TVM may result in removal of riba and achievement of fair economic effects in financial transactions. Hence, this study aims to examine the legal status of the time value of money in Islam and then formulate the Shari'ah parameters for its application in Islamic finance. The study employed the library method to collect information, which was analysed using comparative, deductive and inductive methods. The study establishes that Islam recognizes the legitimacy of the time value of money arising from deferment (ajal), but its application must be in conformity with the Shari'ah parameters in order to avoid riba.
Time preference , Time value of money , Al-bay' bi al-taqsit
Abdul Khir, M. F. (2012). The concept of the time value of money: a Shari'ah viewpoint. Kuala Lumpur, Malaysia: ISRA.

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