Islamic Finance Instruments gif
Autor: Dr. Majdi Ali Ghaith King Saud University Assistant Professor Business Administration Department
Islamic legislative logic has considered time a reason for discounting the money sums of due debts that arise from sales, not from a loan. Time has also been considered a reason for discounting expected cash flows in investment projects when ascertaining their current value. This is what is called “Time Value Discount Theory” in the Islamic financial Figh.
Figh as basis for theory
This theory represents a comprehensive concept and general framework that constitutes an objective rightful system. It encompasses various is- sues distributed among the different branches of Figh. It is essentially based on a set of pillars, conditions, and judgments, each of which shares a Figh bond and objective unity that governs them all. Moreover, it has been proven by Islamic judgments and stressed by Islamic proofs from the Holy Quran and the Sunnah, Muhammad’s Traditions. In addi- tion, various Figh reports and texts have participated in reinforcing the theory. These reports include ‘Time Has a Part of the Price,’ ‘Price In- creases with the Date of Delivery,’, and ‘Five Paid in Cash Equals Six to be Paid Later On.’
Times value in sales
This theory presents an explanation of time value in sales. It shows that the price can increase because of time in the case of installment sale, a sale with deferred payment in planned installments, or can decreased because of time in Al-Salam Sale, a purchase with deferred delivery.
It is essentially based on a set of pillars, conditions, and judgments between each
of which there is a Figh bond and objective unity that governs them all.
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This increase or decrease in the price is, of course, due to the time quality. Moreover, the theory holds that cancelling, or not considering, the financial value of time in the case of loans can be attributed to not meeting the discount conditions. The theory also explains the nature of discount in deferred debts that occurs as a result of hastening the paying back - i.e. paying back early before the due date -and it limits this discount to deferred debts that result from sales, not from loans. This is, in fact, embodied in the Figh phrase “Lessen it (the debt) and Hasten”. If the debtor pays back the deferred debt that results from early sale before the due date of paying back, or if he dies, the process of discount
Important definitions:
Haram : Unlawful; prohibited by Sharia. (that which is against Islamic law). Riba: Usury Bay salam : A sales contract where the price is paid in advance and the goods are delivered in the future, provided that the characteristics of the goods are fully defined and the date of delivery is fixed. Fiqh: This refers to Islamic jurisprudence. In addition to issues like the five pillars of Islam, it covers family law, inheritance and commerce, to name just a few areas. Fiqh is based primarily on Quran and Sunnah. It is an important source of Islamic economics. (Islamic jurisprudence) Riba al-nasia: Increment on the principal of a loan payable by the borrower. It refers to the practice of lending money for any length of time on the un- derstanding that the borrower would return to the lender at the end of this period the amount originally lent together with an increment in consideration of the lender having granted him time to pay. The increment was known as riba al-nasia. It was in vogue in Arabia in the days of the Prophet Muham- mad.
2010 October Global Islamic Finance 43
is conducted with what equals the remaining period - which separates the actual date of paying back from the due date of paying. Installment Sale, Al-Salam Sale, “Lessen it and Hasten” and Al-Sarf Sale are Fiqh witnesses from the Islamic financial Figh perspective on Time Value Discount Theory. For example, in ‘Lessen it and Hasten’, the dis- count is conducted with what equals the remaining time. In Al-Salam Sale, the price is decreased due to the time. The necessity of paying at once in the same session in Al-Sarf Sale shows the role of time. If a party doesn’t take the money in the same session, paying will inevitably be deferred and this, because of the cash peculiarity, proves the suspicion of usury.
the theory attributes cancelling, or not considering, the financial value of time in the case of loans to not meeting the discount conditions.
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What distinguishes time value discount from usury, and the increase of price in selling or the decrease of the deferred debt due to time from the increase in AL-Nasa’ usury and Al- Nasee’ah usury, lies in the fundamen- tal difference in the nature of the two items under exchange. Selling is exchanging two different things or items (food for money for example) while usury is exchanging two similar things (money for money for ex- ample). The difference in the two exchanged things or items in the case of selling - besides the fact thatthe increase due to time in selling is com- pensated by exchange benefit - is what makes the exchange beneficial for both parties. However, the increase in loan is a due debt by itself and it does not have any economic utility in return; therefore, it is Haraam, forbidden or not allowed in Islam. The aforementioned distinction clari- fies the difference between the increase in loan and the financial value of time.
Time Value Discount Theory has a clear influence on Islamic banking. This appears clearly through Islamic banks’ commitment to the regula- tions and standards of time value discount with regard to the client’s temporising or procrastinating, early repayment, and promissory notes or commercial papers discount.
Among the most outstanding effects of this theory is its influence on analysing the investment. In light of time preference notion which im- plies that the instant cash is better than the deferred one, future cash flows are discounted according to a suggested discount rate away from the interest rate in order to get to the current value.
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