RESEARCH PAPER (No: 38/2012)
THE CONCEPT OF
THE TIME VALUE OF MONEY:
A SHARÔÑAH VIEWPOINT
DR. MOHAMED FAIROOZ ABDUL KHIR
www.isra.my
International Shari’ah Research Academy for Islamic Finance
ISRA @ INCEIF (718736-K)
Lorong Universiti A
59100 Kuala Lumpur
Tel
Fax
Email
: + 603 7651 4200
: + 603 7651 4242
: [email protected]
THE CONCEPT OF THE TIME VALUE OF MONEY:
A SHARÔÑAH VIEWPOINT
Mohamed Fairooz Abdul Khir*
ABSTRACT
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 ribÉ, 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 SharÊÑah parameters because applying it without complete
adherence to its SharÊÑah parameters may lead to actual ribÉ. In contrast, if the
SharÊÑah parameters are completely complied with, the application of TVM may result
in removal of ribÉ 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 SharÊÑah 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 SharÊÑah parameters in order to avoid
ribÉ.
Keywords: time preference, time value of money, al-bayÑ bi al-taqsÊÏ.
*
Dr. Mohamed Fairooz Abdul Khir is researcher at the International SharÊÑah Research Academy for Islamic
Finance (ISRA), Kuala Lumpur, Malaysia. He can be contacted at [email protected].
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ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
1. INTRODUCTION
The time value of money (TVM) is a concept that has been hotly debated by Islamic
scholars and economists. The question of its similarity to interest remains a significant
issue, particularly when interest is calculated on the basis of TVM. Hence, those who
reject the legitimacy of TVM in Islam do so largely because TVM is an established
financial concept in conventional economics that is used to justify interest on the loan
principal. They argue that the acceptance of TVM provides justification for ribÉ and
helps entrench it in the economy.
There are others who hold that Islam does not negate TVM in commercial transactions;
rather, it recognizes its significance and its implications for justice in contractual
arrangements. They argue that the Islamic view of TVM is distinct from that of
conventional finance since Islamic recognition of TVM does not amount to a sanction
for making money out of money as it does in conventional finance. It is worth noting
that there are three payment modes that may affect the price of a commodity: deferment
(ajal), acceleration (Ñajal) and spot (ÍÉl). This can be clearly observed in various
financial issues that jurists discussed extensively in the classical literature; for example,
an immediate claim for payment of debt (‫مؤجل؟‬
‫)القرض حال أم‬,1 prepayment of debt at a
discounted price (‫)ضع وتعجل‬,2 and mark-up sales (bayÑ al-murÉbaÍah).
If TVM is acceptable in Islam, it should be different from conventional finance’s
concept of it, particularly as regards its basis and financial implications. Hence, this
paper attempts to illuminate the SharÊÑah perspective on TVM and distinguish it
from the conventional perspective. It is undeniable that the main argument for TVM
in conventional finance is deeply rooted in the concept of Positive Time Preference
(PTP). Hence, the Islamic viewpoint on the concept of PTP is carefully examined to
distinguish it from the conventional viewpoint.
See Ibn QudÉmah, al-MughnÊ, (Cairo: Maktabat al-QÉhirah, 1968), 4:137; al-KÉsÉnÊ, BadÉ’iÑ al-ØanÉ’iÑ
fÊ TartÊb al-SharÉ’iÑ, (Beirut: DÉr IÍyÉ’ al-TurÉth al-ÑArabÊ, 2000), 4:317; al-ShÊrÉzÊ, al-Muhadh-dhab fÊ
Fiqh al-ImÉm al-ShÉfiÑÊ, (Damascus: DÉr al-Qalam, 1996), 3:184; Ibn MufliÍ, al-MubdiÑ, SharÍ al-MuqniÑ,
(Beirut: DÉr al-Kutub al-ÑIlmiyyah, 1997), 4:198.
2
See Ibn Rushd, BidÉyat al-Mujtahid wa NihÉyat al-MuqÏaÎid, (Cairo: DÉr al-×adÊth, 2004), 3:162; alShawkÉnÊ, al-Sayl al-JarrÉr al-Mutadaffiq ÑalÉ ×adÉ’iq al-Azhar, (Beirut: DÉr al-Kutub al-ÑIlmiyyah,
n.d.), 3:149; Ibn Qayyim al-Jawziyyah, IÑlÉm al-MuwaqqiÑÊn Ñan Rabb al-ÑÓlamÊn, (Beirut: DÉr IÍyÉ’ alTurÉth al-ÑArabÊ, n.d.), 3:442; YËsuf ibn ÑAbd AllÉh ibn MuÍammad Ibn ÑAbd al-Barr, al-IstidhkÉr, (Cairo:
Maktabat al-ThaqÉfah al-DÊniyyah, 1993), 20:262; Zafar AÍmad al-ÑUthmÉnÊ al-TahÉnawÊ, IÑlÉ’ al-Sunan,
Beirut: DÉr al-Kutub al-ÑIlmiyyah, 1997), 14:407.
1
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
Conventional economists are of the opinion that the present value of anything is
greater than its future value, based upon the widespread human preference for the
present possession of an asset over its possession in the future. Thus, conventional
finance stresses that a sum of money loaned to someone should be repaid with a
contractually stipulated increment. Similarly, the deferred price of a commodity should
be higher than its spot price to compensate for the difference between its present and
future values.
It is worth examining the Islamic viewpoint on this concept because Islam prohibits
usury without rejecting the concept of Positive Time Preference in TVM, despite its
use to justify interest in conventional economics. The Islamic legitimacy of TVM is
established 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. These three bases are delineated in this paper to distinguish
between the conventional and Islamic understandings of TVM and, thereafter, to
construct the SharÊÑah parameters for TVM in Islamic finance.
2. LITERATURE REVIEW
The time value of money is not a new concept in Islamic jurisprudence; the classical
jurists of all schools of law discussed it indirectly in many cases, particularly in financial
transactions such as murÉbaÍah, bilateral ibrÉ’(ÌaÑ wa taÑajjal),3 stipulation of a deferred
period in a loan (al-qarÌ ÍÉl am mu’ajjal),4 and zakÉt al-dayn.5 Their discussions on
these issues generally reflect Islamic acceptance of the financial and economic effects
of the time factor in financial transactions. There are three dimensions of time that have
such financial effects in Islamic financial transactions, namely deferment (ajal), spot
(ÍÉl) and acceleration (Ñajal). Each of them can make the price of a commodity either
lower or higher. For example, deferment causes the price of a commodity in a deferred
sale to be higher than its spot price (thaman ÍÉl) while giving a rebate when a debt is
paid before its due date is permissible, according to some scholars.
See Ibn QudÉmah, op. cit., 4:189; al-ShawkÉnÊ, al-Sayl al-Jarrar, 3:149; Ibn Qayyim al-Jawziyyah, IÑlÉm
al-MuwaqqiÑÊn, 3:442; Ibn ÑAbd al-Barr al-IstidhkÉr, 20:262; al-TahÉnawÊ, IÑlÉ’ al-Sunan, 14:407.
4
See al-KÉsÉnÊ (2000), op. cit., 8:317; al-ShÊrÉzÊ, op. cit., 3:184; Ibn MufliÍ, op. cit., 4:198; Ibn QudÉmah, op.
cit., 4:387.
5
See al-NawawÊ, al-MajmËÑ, (DÉr al-Fikr, n.d.), 6:22.
3
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4
ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
However, those classical jurists did not explicitly discuss the features of TVM that
distinguish it from ribÉ. Consequently, the Islamic concept of TVM shares certain
similarities with the conventional concept, particularly in contemporary finance where
the interest rate is regularly used as a benchmark for financial decisions. Although some
modern Islamic thinkers have attacked TVM because it is the rationale for payment
of interest in a capitalist economy,6 it can be argued that the classical discussion of
the abovementioned issues in Islamic jurisprudence provides a strong indication for
Islam’s recognition of TVM and that deferment does earn a portion in the price. In fact,
classical jurists justified the economic value of deferment by acknowledging that the
spot price of an asset is lower than its deferred price.
However, this raises the question as to whether their concept is the same as the
conventional theory of Positive Time Preference that justifies ribÉ in conventional
economics. Classical scholars did not differentiate between the time factor that causes
ribÉ and that which does not lead to ribÉ but, rather, acts as a mechanism for fairness
that avoids ribÉ. In this respect, several contemporary scholars have attempted to
distinguish between the acceptance of TVM in Islam and ribÉ in conventional finance.
For example, SulaymÉn al-TurkÊ and MuÍammad ÑUqlah discuss the main differences
between the permissible increment (ziyÉdah) in a deferred sale and the impermissible
increment in a loan contract.7
In addition, some scholars have also invoked the concept of TVM in relation to the
issue of discounting in project evaluation. This is manifested in the use of Net Present
Value (NPV) to determine the fair value of an asset by discounting its future value to
compensate for its present value. This is undoubtedly deeply rooted in the theory of
Positive Time Preference. Anas al-ZarqÉ’ argues that positive time preference is neither
a fixed rational principle nor an empirically established predominant tendency among
consumers. It is simply one of three patterns of inter-temporal choice (the other being
zero and negative time preference), each of which is rational and observable under its
own conditions.8
Al-KÉsÉnÊ (2000), op. cit., 8:317; al-ShÊrÉzÊ, op. cit., 3:184; Ibn MufliÍ, op. cit., 4:198; Ibn QudÉmah, op.
cit., 4:387.
7
The author’s view is that an increment in a deferred sale on the basis of TVM should not only be compared
to an increment in a loan on the same basis, but it must also be compared to other contracts which may be
characterized as qarÌ under certain circumstances and, hence, assume the same legal ruling as qarÌ. For
example, in muÌÉrabah and mushÉrakah contracts, increment on the principal due to TVM, stipulated in the
form of fixed return and capital guarantee, is not permitted by the SharÊÑah because it is deemed riba since
the contracts have changed into qarÌ.
8
SulaymÉn al-TurkÊ, BayÑ al-TaqsÊÏ wa AÍkÉmuh, (Riyadh: DÉr IshbiliyÉ, 2003), p. 228, MuÍammad ÑUqlah,
×ukm BayÑ al-TaqsÊÏ fÊ al-SharÊÑah wa al-QÉnun, (Amman: Maktabat al-RisÉlah al-×adÊthah, 1987), p. 108.
6
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
Kahf has a different argument regarding PTP; he stresses that time preference in real
life is an investment phenomenon more than a purely consumption phenomenon9
because people will not forgo the present consumption of their money unless the future
investment gives higher return. On the contrary, al-MaÎrÊ argues that PTP, which he
calls tafÌÊl zamanÊ, is in fact a man’s natural preference for present consumption of a
commodity over his future consumption of it. He expounds many items of evidence
from the revealed sources which illustrate that humans by nature are inclined toward
immediate gratification. However, no scholar has attempted to harmonize the
aforementioned views, even though, the preferred methodology in uÎËl al-fiqh is to
harmonize different views as much as possible rather than disregarding one or all of
them. Despite many attempts made by classical and contemporary scholars to explain
TVM from a SharÊÑah perspective, no parameters have been suggested for TVM. Doing
so is vital for ensuring that it is not applied outside its actual purview, which may
lead to ribÉ. Keeping in mind that the proper application of TVM can actually remove
ribÉ from the economy, is important that its parameters be established and complied
with. Therefore, this study seeks to complement the previous attempts of classical and
contemporary scholars in determining the Islamic viewpoint on the concept of TVM
and suggesting comprehensive parameters for its application in Islamic finance.
3. THE ISLAMIC VIEWPOINT ON THE CONCEPT OF THE TIME
VALUE OF MONEY
The concept of the monetary value of time is established upon a strong SharÊÑah
basis. There are three elements that constitute the basic legal authority of the concept
of monetary value of time in Islam. The first, as mentioned earlier, is a matter of
controversy because the concept was articulated in its modern form by non-Muslims as
a justification of interest.
3.1 The Theory of Positive Time Preference (PTP)
This term was coined by Austrian economist Eugene Von Bohm-Bawerk (1851-1914),
in his book Positive Theory of Capital.10 He states, “As a rule present goods have
a higher subjective value than future goods of like kind and number. And since the
Monzer Kahf, Time Value of Money and Discounting in Islamic Perspective: Revisited, in Review of Islamic
Economics, 1994, vol. 3, no. 2, p. 33.
10
Ibid.
9
5
6
ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
resultant of subjective valuations determines objective exchange value, present goods,
as a rule, have a higher exchange value and price than future goods of like kind and
number.”11 Although the theory became influential, its critics sought to refute it with
two contrary concepts: zero time preference12 and negative time preference.13 Some
scholars argue that PTP is built upon intrinsic human nature, which urges people to
always prefer present gratification to future gratification.14
3.1.1 Positive Time Preference: An Islamic Viewpoint
The concept of PTP can best be explained by answering the following questions: “If
A loaned RM1000 to B, would A prefer to get the money back immediately or in the
future? If he prefers having it at present then he is considered to exhibit Positive Time
Preference (PTP) whereas, if he prefers having it in the future, then his attitude is called
Negative Time Preference (NTP).
The question that arises in this case is whether PTP is compatible with the tenets of
Islam and hence considered praiseworthy (maÍmËdah), or is it in conflict with Islamic
teachings and hence considered blameworthy (madhmËmah)? The next question is: if A
prefers the present to the future, i.e., exhibits PTP behavior, what is the reason for that?
The above questions give rise to other questions discussed in conventional economics.
First, does he prefer the present because of the uncertainty of the future, or because of
lost opportunities, or because of the money’s loss of purchasing power in the future? It
may be all of the above.
Based on the above questions, it can be said that TVM provides a framework for
explaining individual attitudes toward time preference; either PTP or NTP. If PTP is the
dominant preference, then a person who forgoes his present consumption of an amount
of money by lending it to someone should deserve the principal amount with a fixed
incremental amount upon maturity in the future. This means that the future value of a
Eugene Von Bohm-Bawerk, Positive Theory of Capital, trans. William Smart, (London: MacMillan and
Co., 1888), Book V, Chapter I, Section 16. Retrieved on July 6, 2012 from http://www.econlib.org/library/
BohmBawerk/bbPTC30.html#Book V,Ch.I
12
If a person perceives that future time and present time are equal, he is considered as having zero time
preference.
13
If a person perceives that future time is preferable to present time, he is considered as having negative time
preference.
14
RafÊq YËnus al-MaÎrÊ, BayÑ al-TaqsÊÏ: TaÍlÊl FiqhÊ wa IqtiÎÉdÊ, (Beirut: al-DÉr al-ShÉmiyyah, 1990), p. 68.
11
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
good should be sufficiently and reasonably increased to compensate for the difference
from its present value. This difference is termed “the natural rate of interest”.15
Does Islam accept PTP as praiseworthy behavior? Does it consider it a natural and
inborn attitude? Muslim scholars and economists have expressed a range of opinions
as to what the Islamic viewpoint is on this concept. Some Muslim scholars totally reject
PTP16 while others affirm certain aspects of it.
Khan opines that time preference is a concept compatible with Islamic teachings as long
as no fixed and predetermined time value is assigned to money.17 However, Khan’s idea
of time preference has been criticized by Kahf, who argues that time preference is an
investment phenomenon rather than mere preference of present consumption of money
over its future consumption: “Justice and fairness require that the time value of money
be related to the outcome of investment, risky and uncertain though it is in real life” 18
In reality, TVM is not restricted to consumption and investment; rather, from the very
beginning of their creation, every person has been endowed with a natural preference
for the present over the future. Hence, Kahf’s argument is partly right, i.e., one will not
give up part of his income today without having an expectation of earning higher return
tomorrow.
The great Companion and scholar ÑAbd AllÉh ibn MasÑËd was once reciting SËrah alAÑlÉ’ for some of his students. When he reached the following passage
ُّ ‫الَيَا َة‬
‫) َو آْال ِخَرةُ َخ�يٌْر َوأَ�بَْقى‬61( ‫الد�نْيَا‬
ْ‫بَ ْل �تُْؤثُِرو َن ح‬
“But you prefer the life of the world, although the hereafter is better and
more lasting,”19
Muhammad Akram Khan, “Time Value of Money”, in GhazÉlÊ, ÑAbËd, et al. (eds.), An Introduction to
Islamic Economics and Finance, (Kuala Lumpur: CERT Publications Sdn Bhd, 2005), p. 154.
16
One of those who refuted the concept of PTP is Muhammad Akram Khan while one of those who accepted
it is RafÊq YËnus al-MaÎrÊ. See Muhammad Akram Khan, op. cit., p. 154, RafÊq YËnus al-MaÎrÊ, al-JÉmiÑ fÊ
UÎËl al-RibÉ, p. 20-22.
17
M. Fahim Khan (1991), Time Value of Money and Discounting in Islamic Perspective, in Review of Islamic
Economics, vol. 1, no. 2, p. 35.
18
Monzer Kahf (1994), Time Value of Money and Discounting in Islamic Perspective: Revisited, in of Islamic
Economics, vol. 3, no. 2, p. 33.
19
SËrah al-AÑlÉ’ (87):16-17.
15
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ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
he stopped and commented, “We have preferred the life of the world over the hereafter.”
No one said anything. Ibn MasÑËd continued, “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 that which is deferred.”20 This
same consideration leads one to naturally prioritize the present consumption of an asset
over its future consumption.
The Qur’Én repeatedly characterizes human nature as loving the fleeting present life,
a trait that inclines humans toward impatience. Allah says in SËrah al-QiyÉmah (75):
20-21:
ِ َ‫آْال‬
)21( ‫خرَة‬
َ
ِ ‫َك اَّل بل حُِتبُّو َن الْع‬
‫) َوتَ َذ ُرو َن‬20( َ‫اجلَة‬
َ
َْ
“Nay, but you love this fleeting life, and give no thought to the life to
come.”21
Some have argued that the above verses have nothing to do with TVM in that they
admonish those who act only for worldly gains and neglect the hereafter. It could be
counter-argued that these verses admonish people for preferring the worldly life to the
hereafter despite the hereafter being of higher value. Hence, the deferred gratification
of higher value should be preferred to the present gratification of lower value. By
implication, if the value of the deferred (hereafter) were the same as the present (world),
it should not be preferred. Therefore, the Qur’Én condemned those people for faulty
judgment. Al-ÙabarÊ said:
‫يقول تعاىل ذكره لعباده املخاطبني هبذا القرآن املؤثرين زينة احلياة الدنيا على‬
،‫ ليس األمر كما تقولون أيها الناس من أنكم ال تبعثون بعد مماتكم‬:‫اآلخرة‬
،‫ لكن الذي دعاكم إىل قيل ذلك حمبتكم الدنيا العاجلة‬،‫وال جتازون بأعمالكم‬
.‫وإيثاركم شهواهتا على آجل اآلخرة‬
Allah says to those who are addressed by the Qur’Én and prefer the
pleasure of the worldly life to the hereafter: It is not as you have said,
O people, that you will not be resurrected after your death and that you
will not be requited for your deeds. In fact, what led you to that claim is
Al-ÙabarÊ, JÉmiÑ al-BayÉn fÊ Ta’wil Óyi al-Qur’Én, (Mu’assasat al-RisÉlah, 2000), 24:375.
See also SËrah al-IsrÉ’ (17): 11.
20
21
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
your love for the immediate world and your preference of its pleasure to
the deferred hereafter.
Allah says in another verse:
ِ ُ‫آيات فَال تَس�تع ِجل‬
ِ‫النْسا ُن ِم ْن َع َج ٍل َسأُ ِري ُك ْم ي‬
ِْ‫ُخلِ َق إ‬
‫ون‬
َْ ْ
“Man is a creature of haste; [but in time] I shall certainly show you My
signs; do not, then, ask Me to hasten.” 22
Al-ZamakhsharÊ comments:
‫ مث هناهم‬،‫ وأنه مطبوع عليها‬،‫فقدم أوال ذم اإلنسان على إفراط العجلة‬
‫ ليس ببدع منكم أن تستعجلوا فإنكم جمبولون على ذلك‬:‫ كأنه قال‬،‫وزجرهم‬
.‫وهو طبعكم وسجيتكم‬
“Allah begins by condemning humans for their excessive hastiness and
[declares] that it is their very nature. He then prohibits them [from that]
and rebukes them. It is as if He said: “Your impatience is not an innovation;
indeed, it is implanted in you, and it is your nature and disposition.” 23
In this regard, al-ÙabarÊ mentioned that some commentators of the Qur’Én averred that
the above verse refers to the creation of SayyidinÉ Adam. When his soul reached his
eyes, he saw the fruits of the paradise; when it reached his stomach, he desired food
and tried to leap up to get the fruits before the soul had reached his legs.24 Although
haste (al-Ñajalah) can be considered an aspect of human nature, can it be considered
commendable? After all, the Qur’Én admonishes humans for this tendency. This can
be compared to the attribute of envy; the Prophet (peace be upon him) condemned
it in certain statements, but in other statements he encouraged people to envy those
endowed with wealth and wisdom (i.e., to wish for the same). Envy is a natural attribute
that can motivate people to struggle and exert effort to better their lives. However, if
it is not properly managed, envy can easily become a blameworthy trait that nullifies
one’s good deeds. Similarly, al-Ñajalah is mentioned in a ÍadÊth as a blameworthy trait,
SËrah al-AnbiyÉ’ (21): 37.
Al-ZamakhsharÊ, al-KashhÉf Ñan ×aqÉ’iq GhawÉmiÌ al-TanzÊl, (Beirut: DÉr al-KitÉb al-ÑArabÊ, 1407 AH),
p. 325.
24
Al-ÙabarÊ, op.cit., 18:441.
22
23
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10
ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
but it can be a positive trait if properly managed, such as being quick in the race for
Allah’s forgiveness.
3.1.1.1 The Views of Classical Jurists on the Superiority of the Present to the
Future
Jurists overwhelmingly recognize the superiority of present consumption of money
or a commodity to its future consumption. Al-SarakhsÊ mentioned it in his discussion
of a dispute between the buyer and the seller concerning the period of deferment. He
mentioned the view of Zufar and al-ShÉfiÑÊ that both the seller and the buyer must
swear an oath to the veracity of their claims because this oath is related to the value of
the price (miqdÉr mÉliyyah al-thaman). The reasoning being that
ِ
ِّ َ‫ال‬
‫ال يِف الْ َمالِيَّ ِة‬
ْ‫ص ِم ْن ح‬
ُ ‫فَإ ّن الْ ُم َؤ َّج َل أَ�نَْق‬
“the deferred [payment] has less proprietary value than the present
[payment].”25
Al-ZaylaÑÊ also advocates the superiority of the present over the future. This can be
found in his discussion on cheating in a murÉbaÍah contract:
If a person purchased a commodity for 1000 on a deferred payment basis
and sold it at a mark-up price of 1100 without disclosing to the buyer that
the first transaction was conducted on deferred payment basis, the buyer
should be given the option [to annul] (khiyÉr). The reason is that the price
was increased on account of the deferral (al-ajal), and the deferral in this
case is tantamount to a part of the sold item (al-mabÊÑ). It is as if the seller
bought two things (the deferral and the commodity) and sold one of them
at the [combined] price of both through the murÉbaÍah contract.
He argues that this is a form of cheating because
ِّ َ‫ال‬
َّ
‫ال‬
ْ‫ص يِف الْ َمالِيَّ ِة ِم ْن ح‬
ُ ‫إن الث ََّم َن الْ ُم َؤ َّج َل أَ�نَْق‬
“the deferred price certainly has less financial value than the spot
price.”26
Al-SarakhsÊ, al-MabsËÏ, (BeirËt: DÉr al-Kutub al-ÑIlmiyyah, 2001), 13:42.
Al-ZaylaÑÊ, TabyÊn al-×aqÉ’iq SharÍ Kanz al-DaqÉ’iq, (BeirËt: DÉr al-Kutub al-ÑIlmiyyah, 2000), 4:433;
al-ÑAynÊ, al-BinÉyah SharÍ al-HidÉyah, (BeirËt: DÉr al-Kutub al-ÑIlmiyyah, 2000), 8:244.
25
26
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
KamÉl ibn al-HumÉm, also of the ×anafÊ School, explained the same idea in his
discussion of ribÉ al-faÌl.27 In order to avoid this type of ribÉ when selling a ribawi
item for a ribawi item of the same genus, the value of the items must be of equal
weight. However, the condition of equivalence also requires taqÉbuÌ, i.e., delivery of
both items during the contract session. Ibn al-HumÉm argues that delay in the delivery
of the subject matter can cause ribÉ because
ِ ِ
ِ ُ‫َّماثُِل الْ ُم َس َاواةُ يِف ال�تََّقاب‬
‫ض فَِإ َّن لِْل َح ِال َم ِزيَّةً َعلَى الْ ُم َؤ َّخ ِر‬
َ ‫م ْن �تَْتمي ِم الت‬
“perfect equivalence includes taking possession at the same time. That is
because present [possession] is superior to deferred [possession].”28
Likewise, in Ibn al-HumÉm’s discussion of a currency sale (Îarf), he stresses the
scholarly consensus that the two counter-values (ÑiwaÌayn) must be delivered before
the contracting parties separate. The reason, again, is that present possession is more
valuable than possession after a grace period. If one party were to make deferred
delivery, he would gain excess value (faÌl) since he received the price for it on the
spot. This absence of equivalency violates one of the requisites of a currency sale. Ibn
al-HumÉm says:
ِ ‫َن لِل�تََّقدُِّم م ِزيَّةً علَى الن‬
َّ ‫أ‬
‫الربَا‬
ِّ ‫َح ِد الْعِ َوضَينْ ِ َوُه َو‬
ْ ‫َّسيئَ ِة �فَيَتَ َح َّق ُق الْ َف‬
َ َ
َ ‫ض ُل يِف أ‬
“Indeed, earlier [possession] is superior to deferred [possession] and,
hence, an excess is realized in one of the two counter-values, which is
ribÉ.”29
In his discussion on ribÉ, al-KÉsÉnÊ concurs with Ibn al-HumÉm:
ِ
ِ
َّ ‫أل‬
‫يمةً ِم ْن الْ ُم َؤ َّج ِل‬
َ ‫ َوالْ ُم َع َّج َل أَ ْك�ثَُر ق‬، ‫َن الْ َعينْ َ َخ�يٌْر م ْن الدَّيْ ِن‬
This concept is summarized in the statement of the Prophet (peace be upon him), “[Sale of] gold for gold,
silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt [must be] like for like and
equal for equal, [payment to be made] hand-to-hand.” Muslim b. ×ajjÉj al-QushayrÊ, ØaÍÊÍ Muslim, (Beirut:
DÉr al- JÊl, n.d.), 5:44, ÍadÊth no. 4147.
28
KamÉl ibn al-HumÉm, SharÍ FatÍ al-QadÊr, (BeirËt: DÉr al-Fikr, n.d.), 7:7.
29
Ibid.
27
11
12
ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
“…because the tangible is better than a debt and what is [delivered] sooner
has more value than what is deferred.”30
Al-KÉsÉnÊ made this statement in explaining why deferment is not allowed in the sale
of food for food and currency for currency and why it leads to ribÉ. Conversely, if both
counter-values (badalayn) are delivered on the spot, such sales are permissible.31
Ibn Qayyim al-Jawziyyah, of the ×anbalÊ School, mentions the same argument in his
discussion of being deceived by the worldly life (al-ightirÉr bi al-dunyÉ):
ِ ‫الد�نيا وع‬
‫ َوَر ِض َي بهَِا‬،‫ فَآ�ثََرَها َعلَى آْال ِخَرِة‬،‫اجلُ َها‬
ْ‫َوأ َْعظَ ُم خ‬
َ َ َْ ُّ ِ‫الَْل ِق غُُر ًورا َم ِن ا ْغ�تََّر ب‬
ُّ :‫ض َه ُؤلاَ ِء‬
‫ َوال�نَّْق ُد‬،ٌ‫ َو آْال ِخَرةُ نَ ِسيئَة‬،‫الد�نْيَا �نَْق ٌد‬
َ ‫ َح ىَّت �يَُق‬،‫ِم َن آْال ِخَرِة‬
ُ ‫ول �بَْع‬
ِ ‫أَحسن ِمن الن‬
.‫َّسيئَ ِة‬
َ َُ ْ
The most deeply deceived of all people is one who is deceived by the
worldly life and its immediacy and hence prefers it over the hereafter
and is pleased with it more than the hereafter, to the extent that some of
them say: The world is spot [cash] and the hereafter is deferred, and spot
[payment] is better than deferred.
He comments that the best answer for this kind of person is:
‫إذا تساوى النقد بالنسيئة فالنقد خري و إن تفاوتا و كانت النسيئة أكثر و‬
‫أفضل فهي خري‬
“When the immediate is at par value with the deferred, the immediate
is better. If they differ, and the deferred has greater worth and more
advantages, then it is better.”32
Al-KÉsÉnÊ (1998), op. cit., 4:407; al-ZaylaÑÊ, TabyÊn al-×aqÉ’iq, 4:433; al-ÑAynÊ, al-BinÉyah, 8:244, Ibn
al-HumÉm, SharÍ FatÍ al-QadÊr, 7:7. Al-KÉsÉnÊ argued that salam contract cannot be effected on edibles
(maÏÑËmÉt) and currency (athmÉn) to avoid the ribÉ element in the form of excess without counter-value
(al-faÌl al-khÉlÊ Ñan al-ÑiwaÌ). This is because, in the salam contract, delivery of one of the counter-values
is deferred, and if both counter-values are of the same genus, such as currency-for- currency or ediblesfor-edibles, then delay of one counter-value can cause ribÉ al-faÌl, which arises from the superiority of the
present to future. Al-KÉsÉnÊ (1998), op. cit., 4:407.
31
Al-KÉsÉnÊ (1998), op. cit., 4:407.
32
Ibn Qayyim al-Jawziyyah, al-JawÉb al-KÉfÊ li Man Sa’ala Ñan al-DawÉ’ al-ShÉfÊ, (BeirËt: DÉr al-JÊl, 1998),
p. 45.
30
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
In their discussion of whether or not the creditor must pay zakÉh on a debt that is not
yet due, the majority of jurists argue that it is not an immediate obligation. Al-RÉfiÑÊ, in
his commentary on ImÉm al-GhazÉlÊ’s al-WajÊz, states:
ِ ‫ قيل إِنَّهُ �ي ْلح ُق بِالْم ْغ‬،‫والدَّيْن الْم َؤ َّجل‬
ِ ِ‫ وقِْيل َكالْغائ‬،‫ب‬
‫ب الَّ ِذ ْى يَ ْس َه ُل‬
ُ َ
َُ َ ُ ُ ُ َ
َ َ ‫ص ْو‬
ِ
ِ‫لأ‬
ِ
ِ
ِ
ِ
ِ‫ي‬
َّ ْ‫َص ِّح الْ َو ْج َهين‬
ْ‫َن خ‬
ً‫الَ ْم َسةَ �نَْقدا‬
َ ‫ب ال�تَّْعجْي ُل ْف أ‬
ْ ‫ضارهُ؛ فَإ ْن أ َْو َج�بْنَا مَلْ جَي‬
ُ ‫إ ْح‬
ِ ‫الجح‬
ِ ِ
ِ
.‫اف بِِه‬
َ ْ ِْ‫ �فَ�يَُوِّد ْى إلىَ إ‬،ً‫تُ َسا ِو ْى ستَّةً نَسْيئَه‬
[Regarding zakÉh on a] debt that is not yet due, some say it is to be treated
like usurped property (maghÎËb) while others say it is like property that is
not present with someone but is easy to get hold of. If we say that [zakÉh]
is obligatory, it is not obligatory immediately, according to the most
correct of the two opinions, because five [dirhams] now is equivalent to
six [dirhams] later, which would be unfair to [the creditor].33
Similarly, ImÉm al-ShÉfiÑÊ, in his discussion of purchasing 200 hundred ÎÉÑ of wheat
where the first 100 ÎÉÑ is to be delivered in a specified month while the other 100
ÎÉÑ is to be delivered in a month to be specified after the first delivery, rules that this
procedure is invalid. The basis of his view is that the price is not specified for each
ÎÉÑ. That is because, when two things are equal in amount (kammiyyah) and quality
(nawÑiyyah), their monetary value may still differ due to the time factor: “The value of
100 ÎÉÑ which is to be paid after a short period of time is higher than the value of 100
ÎÉÑ which is to be paid after a longer period of time.”34
Al-ShÉfiÑÊ’s argument applies to the concept of bayÑ mua’jjal in which a contractual
and predetermined increment on the cost price of a commodity is permitted on account
of deferment in payment. This indicates that time assumes a monetary and economic
value in financial transactions in conformity with the natural inborn human attitude.
ÑAbd al-KarÊm ibn MuÍammad al-RÉfiÑÊ, FatÍ al-ÑAzÊz, SharÍ al-WajÊz, (n.p.), 5:498, in al-Maktabah alShÉmilah, version 3.28..
34
Al-ShÉfiÑÊ, al-Umm, (Beirut: DÉr al-Kutub al-ÑIlmiyyah, 1993), 3:101.
33
13
14
ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
3.1.1.2 The Views of Contemporary Scholars on the Superiority of
the Present to the Future
Contemporary scholars have different views regarding the superiority of the present
to the future. Some, like RafÊq YËnus al-MaÎrÊ, are totally in agreement with the
aforementioned views of the classical jurists on this issue. However, a few scholars
oppose Positive Time Preference for a variety of reasons. Most of their proofs are
rational arguments. The contemporary views on PTP can be summarized as follows:
(i) Al-MawdËdÊ
His condemnation of usury extends to denying the legitimacy of the concept
of Positive Time Preference. In his book al-RibÉ, he argues that making a
distinction between the present and future value of a thing is a misconception.
He raises the following question: “Is it even slightly true that it is human
nature to believe that the present is more valuable than the future? If so, then
what about the majority of people who do not spend their money immediately
but, rather, prefer to keep some for their future life?”35
From this statement it can be seen that al-MawdËdÊ’s fundamental argument
against the concept of Positive Time Preference is empirical without further
deliberation on the Qur’anic verses that describe man as a being who prefers
immediate satisfaction to satisfaction in the future. He has overlooked the
scholars’ interpretations of those Qur’anic verses and the ÍadÊths of the
Prophet (peace be upon him) which discuss the human preference for
immediacy and quick results. His view, in fact, defeats the objective of his
book al-RibÉ because total rejection of PTP may lead to ribÉ in financial
transactions. This matter will be expounded in the last section of this paper,
which discusses some examples of contemporary application of TVM in
Islamic finance.
(ii) Muhammad Akram Khan
He holds the same view as al-MawdËdÊ in his struggle to eliminate ribÉ by
rejecting the concept of Positive Time Preference. His arguments against
PTP are also primarily based on logical reasoning, which can be found in his
Time Value of Money. He states, “The main conclusion of the chapter is that
Al-Mawdudi, al-RibÉ, (Damascus: DÉr al-Fikr, n.d.), p. 39.
35
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
the time value of money is an unsound concept on rational grounds….The
argument that theory of positive time preference does not necessarily
legitimize ribÉ is a logical contradiction.” 36
He argues that acceptance of PTP creates serious confusion in Islamic
economics. Since PTP is a justification of interest, its proponents should
also legalize ribÉ.37 His arguments against the concept of Positive Time
Preference lie in his perception that the concept is only applicable to goods
and commodities that are consumed immediately.38 PTP becomes a
contentious issue with regard to commodities that are saved for future
consumption. In the latter case, the future is more valuable than the present.
He repeats al-MawdËdÊ’s argument: “The fact that people want to save
something from current income is sufficient proof that they attach higher
value to the future over the present, otherwise, nobody would wish to save.”39
If the future is of lower value than the present, then it is certain that the
commodity or money acquired today should have been consumed at present.
However, his arguments are not presented based on any specific revealed
evidence from the Qur’Én and the ÍadÊth. Khan’s failure to examine the
scholarly works of the classical jurists on jurisprudential subjects deserves
criticism, for these texts clearly indicate their overwhelming acceptance of
the concept of Positive Time Preference. His arguments against PTP seem
to be based primarily on rational grounds that must be rejected when they
conflict with specific revealed texts and the views of the majority of Islamic
jurists.
(iii) RafÊq YËnus al-MaÎrÊ
Al-MaÎrÊ is one of those contemporary scholars who affirm that Islam
recognizes the concept of PTP, based on substantive juristic argumentation
and justification. In his book BayÑ al-TaqsÊÏ: TaÍlÊl FiqhÊ wa IqtiÎÉdÊ, he
spells out the views of the classical jurists on PTP, which include the
abovementioned juristic texts concerning the superiority of the present to
the future.40 In another book, al-JÉmiÑ fÊ UÎËl al-RibÉ, he justifies the
Muhammad Akram Khan, op. cit., p. 154.
Ibid.
38
Ibid., p. 151.
39
Ibid., p. 158
40
RafÊq YËnus al-MaÎrÊ, BayÑ al-TaqsÊÏ, pp. 39-43.
36
37
15
16
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Mohamed Fairooz Abdul Khir
superiority of the present over the future on the basis of the Qur’anic
testimony to the natural human preference of immediacy. He cites the verses
mentioned above, as well as others.41 In his book al-RibÉ wa al-FÉ’idah, he
discusses in depth all justifications of interest, including the concept of PTP,
and he cites scholars’ arguments against PTP and then rebuts them.42
In contrast to the conventional understanding of PTP, which uses it to justify
imposing interest on the loan principal, al-MaÎrÊ points out that Islam
distinguishes between PTP in sales and loans.43 In a deferred sale, deferment
adds a time dimension that has economic value and makes the deferred price
higher than the spot price. The same scenario is found in loan contract, but
it is not allowed to stipulate any incremental amount on the principal loan.
Almighty Allah will compensate the creditor who forgoes it with a multiplied
reward on the Day of Judgment.44
The difference between TVM’s application in a sale contract and a loan
contract is due to the different principles that constitute their foundational
bases. A sale contract is built upon the principle of justice (Ñadl) while a loan
contract is founded upon the principle of benevolence (iÍsÉn). 45
Al-MaÎrÊ’s treatment is stronger than that of both Khan and al-MawdËdÊ. He
presents Qur’anic evidence that clearly indicates the Islamic acceptance of
the PTP concept. Moreover, he has thoroughly examined the classical texts
of Islamic jurisprudence concerning the issue and conclusively discovered
that the classical jurists from all major schools of law have accepted the
concept of PTP. Hence, his opinion regarding PTP seems stronger and more
substantial because it is derived from the Qur’Én, the ÍadÊth and the views
of the classical jurists.
(iv) M. Fahim Khan
M. Fahim Khan is also considered a proponent of the concept of PTP. He is
of the opinion that PTP does not oppose any Islamic principle. However, he
Rafiq YËnus al-MaÎrÊ, al-JÉmi‘ fÊ UÎËl al-RibÉ, p. 230.
RafÊq YËnus al-MaÎrÊ, al-RibÉ wa al-FÉ’idah: DirÉsah IqtiÉdiyyah MuqÉranah, (Beirut: DÉr al-Fikr alMu‘ÉÎir, 1999), pp. 31-65.
43
RafÊq YËnus al-MaÎrÊ, al-RibÉ wa al-×asm al-ZamanÊ, (n.p., 2000), pp. 20-22.
44
Ibid., p. 7.
45
Ibid., p. 23.
41
42
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
does not accept it on a general basis; he has stipulated certain conditions for
its acceptance. In his article “Time Value of Money and Discounting in
Islamic Perspective”, he argues “There is nothing against Positive Time
Preference or realizing [the] time value of money in [the] Islamic framework
as long as a time value of money is not claimed as [a] predetermined value.”46
He argues that the difference that the jurists allowed between the deferred
price of a commodity and its spot price does not necessarily mean that they
also allowed getting a predetermined value for money. In fact, they allowed
it because supply and demand forces differ from time to time. This signifies
that pure time value should not be the basis of allowing the difference
between the spot and deferred prices in a deferred sale (bayÑ mu’ajjal) and
wage (ijÉrah) although the TVM in both contracts is fixed and predetermined.
The points that he presents in the article invite criticism and further
discussion from Islamic scholars. His arguments are lacking in terms of
reference to works of classical jurisprudence that deal specifically with the
subject.
(v) Monzer Kahf
In his article “The Value of Money and Discounting in Islamic Perspective:
Re-Visited,” Kahf argues that time preference is a phenomenon related to
investment more than consumption.47 The article reviews M. Fahim Khan’s
assertions on PTP and TVM, disagreeing with some of them. For example,
he argues that one should not incorporate other factors such as changing
supply and demand because meaningful treatment of TVM requires isolating
other factors in order to avoid ambiguity regarding TVM’s effect on
exchange transactions. In fact, Kahf’s argument is in line with some Qur’anic
verses that deal with this subject. He stresses that one will not give up part
of his income today for investment purpose without having an expectation
of getting higher income or higher investment return tomorrow. The expected
incremental value of investment return is the compensation for making
saving or investment today. According to him, this is the main source of
time preference and time value of money.48
M. Fahim Khan (1991), Time Value of Money and Discounting in Islamic Perspective, Review of Islamic
Economics, vol. 1, no. 2, p. 35.
47
Monzer Kahf (1994), The Value of Money and Discounting in Islamic Perspective: Revisited, Review of
Islamic Economics, vol. 3, no. 2, p. 33.
48
Ibid., p. 32.
46
17
18
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Mohamed Fairooz Abdul Khir
(vi) Anas al-ZarqÉ’
Anas al-ZarqÉ’ holds a different opinion from both proponents and rejecters
of the concept of PTP. In his scholarly article “An Islamic Perspective on the
Economics of Discounting in Project Evaluation,” he stresses that time
preference is not always positive and that economists acknowledge that
some consumers may have negative time preference.49 Historically, many
consumers kept on saving in interest-bearing accounts even when the real
expected rate of interest was clearly negative for certain years. He states: “It
seems fair to conclude that positive time preference is neither a principle of
rationality nor an empirically established predominant tendency among
consumers. It is simply one of three patterns of inter-temporal choice (the
other being zero and negative time preference), each of which is rational
and observable under its own conditions.” 50 Al-ZarqÉ’ argues that a
preference for the future or the present is dependent upon individual
situations, which will vary; therefore, it cannot be a SharÊÑah rule. He does
not present the views of any classical jurists, who had already discussed this
issue at length long before Von Bohm-Bawerk articulated the concept of
PTP as a justification for interest. Although he mentions the opinion of his
father (MuÎÏafÉ al-ZarqÉ’)—and his father was an expert on the ×anafÊ
School—Anas al-ZarqÉ’ makes no mention of the ×anafÊ opinions on the
matter, even though their literature is full of such references and many
×anafÊ scholars accepted the concept of PTP.
Based on the aforementioned views of Muslim economists regarding the concept of
PTP, it can be concluded that those who rejected the concept in totality based their
arguments on rational grounds without examining the specific SharÊÑah texts and
juristic views related to the concept. They were also reacting to Western economists’
use of PTP to justify the legality of interest. In fact, the prohibition of ribÉ in Islam
should not lead to denial of the time value of money, which lies in the concept of PTP.
This is because, while PTP is acceptable in both Islamic and capitalist economics, its
application in the two economic systems is totally different. Conventional application
of PTP or TVM leads to ribÉ in the form of making money out of money whereas the
Islamic application of TVM removes ribÉ from the economy.
Anas al-ZarqÉ’ (2005), An Islamic Perspective: The Economics of Discounting, in GhazÉlÊ, ÑAbËd, et al.
(eds.), An Introduction to Islamic Economics and Finance, Kuala Lumpur: CERT Publications Sdn Bhd, p.
116.
50
Ibid., p. 119.
49
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
3.1.1.3 The Rationale for Positive Time Preference
Of the aforementioned views of Islamic scholars concerning the concept of PTP, alMaÎrÊ’s view seems most in line with the SharÊÑah as he bases it on SharÊÑah texts and
classical juristic references regarding the subject. In contrast, other Muslim scholars
base their views on rational grounds and use logical argumentation to either defend the
concept or reject it. Therefore, the rational arguments of the opponents of this concept,
such as Muhammad Akram Khan, M. Fahim Khan and al-MawdËdÊ, will be rationally
examined to prove that Islam admits the concept of PTP.
1. A sound mind admits the reality that time preference is a natural human
behavior that constitutes an aspect of fiÏrah (pristine human nature). People
consistently prefer present value to future value except when there is a need
that requires otherwise. An employee who receives his salary at the beginning
of every month would certainly dislike payment of his salary to be postponed to
the end of the month. Similarly, a lessor of a house who has made an agreement
with the lessee that the rental payment must be made at the beginning of every
month definitely would not prefer the payment to be delayed to the end of the
month.
2. There are some individuals who save, and under certain circumstances that
behavior becomes habitual for them. Muhammad Akram Khan correctly
observes that this reflects their preference for the future over the present.
However, as explained by Anas al-ZarqÉ’ and Kahf, people generally prefer
to save only when there is a reasonably good investment return from the
saving. Hence, if there is no good investment return or higher income that can
be expected from the savings, they would not forgo present consumption of
their money for future use. Thus, if there is no return at all from the savings,
they would definitely consume their salaries immediately without delay, which
signifies that, in reality, they prefer the present to the future. Kahf correctly
observes that the use of savings for investment that yields higher income would
make a higher level of consumption possible. Hence, human beings actually
prefer more consumption to less consumption.51
3. Al-MaÎrÊ mentions that people’s preference for the present does not necessarily
mean that they neglect their future lives. Logically, a seller who enters into a
Ibid., p. 32.
51
19
20
ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
deferred sale (bayÑ mu’ajjal) can be seen to be concerned about his future. He
is pleased with the markup price in the deferred sale even though the payment
is delayed to a specified time in the future. Evidently, if this were not the case,
he would not choose to enter into a deferred sale contract as he would prefer a
spot sale in which he can earn the profit immediately without delay.52
Even though PTP is accepted in Islam as a natural human behavior that is inborn in
each and every person, it is said to result in ribÉ in the form of compensation for three
things: 1) opportunity cost, 2) inflation cost, and 3) credit premium risk, which are all
taken into account in determining the interest rate in a conventional loan. A question
arises as to whether or not Islam allows these three things to be taken into account in
determining the profit in a sale contract that obviously involves TVM; for example,
a standard contemporary murÉbaÍah contract. This issue is important because sale
contracts differ from loan contracts in their basis and legal effects.
3.2 The Permissibility of Increasing the Price Due to Deferment
in a Deferred Sale (BayÑ Mu’ajjal)
Jurists hold different opinions concerning the legitimacy of increment in a deferred sale
(bayÑ mua’jjal) as it is a purely time-value-based contract in which deferment (ajal) is
exchanged for a monetary counter-value. However, a large majority of them—including
the imÉms of the four schools of Islamic law as well as earlier scholars like al-ZuhrÊ,
QatÉdah, ÙÉwËs and SaÑÊd ibn al-Musayyib—permitted a markup in a deferred sale in
the light of the Qur’Én, the ÍadÊth and reasoning. In summary, their view is supported
by the following Qur’anic verse:
‫الربَا‬
ِّ ‫قَالُوا إِمَّنَا الْ�بَْي ُع ِمثْ ُل‬
“They say: ‘Trade is like usury.’”53
This verse illustrates that the Arabs of the pre-Islamic period argued that the increment
in ribÉ is like the profit in a sale; therefore, if ribÉ is prohibited, sales should be too.
Since sales are clearly not prohibited, ribÉ should, likewise, be permitted. The way
ribÉ worked in pre-Islamic Arabic society was in the context of delayed payment sales.
If the buyer was unable to make full payment on the due date, he would tell the seller,
RafÊq YËnus al-MaÎrÊ, al-JÉmiÑ fÊ UÎËl al-RibÉ, p. 335.
SËrah al-Baqarah (2): 275.
52
53
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
“Give me more time, and I’ll give you more money.” Those who argued against the
Islamic prohibition of ribÉ said, “It is the same for us if we increase [the amount] at the
beginning of the sale or when it comes due.”54 However, Allah rejected this argument
in the next part of the same verse:
‫الربَا‬
ِّ ‫وأحل اللَّهُ الْ�بَْي َع َو َحَّرَم‬
“Allah has permitted trade and forbidden usury,”
i.e., the mark-up on a deferred payment sale is not the same as usury.
Scholars have also inferred the permissibility of bayÑ mua’jjal from a number of ÍadÊths
that indicate the SharÊÑah’s recognition of the monetary value of time. For instance,
ÑÓ’ishah and Ibn ÑAbbÉs both narrated that Allah’s Apostle bought grain from a Jew
on credit and mortgaged his armour to him.55 A sale for deferred payment without any
contractual increment would only be executed by a person who is not avidly concerned
with worldly gain. However, the Qur’Én characterizes the Jews as having the opposite
trait:
ِ َّ ِ ٍ
ِ
ِ ‫ص الن‬
‫َح ُد ُه ْم لَ ْو �يَُع َّمُر‬
ْ ‫َولَتَج َد�نَُّه ْم أ‬
َ ‫ين أَ ْشَرُكوا �يََوُّد أ‬
َ ‫َحَر‬
َ ‫َّاس َعلَى َحيَاة َوم َن الذ‬
‫ف َسنَ ٍة‬
َ ْ‫أَل‬
“You will most certainly find that they cling to life more eagerly than any
other people, even more than those who are bent on ascribing divinity to
other beings beside God: every one of them would love to live a thousand
years.”56
This implies that the deferred price in the above ÍadÊth would have been higher than the
spot price for the same commodity and that the increment would have been stipulated in
the contract. The Prophet’s acceptance of those terms constitutes tacit approval, which
indicates the permissibility of a deferred sale with increment.57 Therefore, a markup in
a deferred sale is considered legitimate compensation for the deferment.
See al-ÙabarÊ, JÉmiÑ al-BayÉn fÊ Ta’wil Óyi al-Qur’Én, ed. AÍmad MuÍammad ShÉkir, (Beirut: Mu’assasat
al-RisÉlah, 1420/2000), 6:13.
55
See ØaÍÊÍ al-BukhÉrÊ, 3:1068, ÍadÊth no. 2759; Sunan al-TirmidhÊ, 3:519; ÍadÊth no. 1214; Sunan alNasÉ’Ê, 7:303, ÍadÊth no. 4651.
56
SËrah al-Baqarah (2):96.
57
ÑAbd al-SattÉr AbË Ghuddah, al-BayÑ al-Mu’ajjal, (Jeddah: al-Bank IslÉmÊ li al-Tanmiyyah, 1999), pp. 2122.
54
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22
ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
Recognition of this reality is common in numerous classical texts of Islamic
jurisprudence; for example, al-SharbÊnÊ states:
ِ‫لأ‬
.‫ط ِم ْن الث ََّم َن‬
ٌ ‫َج َل �يَُقابِلُهُ قِ ْس‬
َ ْ‫َ ّن الأ‬
“…because a portion of the price is in exchange for the deferment.”58
The permissibility of contractual increment in a deferred sale constitutes a legal
recognition of TVM that is interrelated with the concept of Positive Time Preference. As
people generally and naturally prefer the present consumption of money since it brings
more satisfaction than future consumption, the deferred price should be higher than
the spot price to strike a balance of benefit in the contract of exchange and to uphold
justice for both contracting parties. By this, the buyer benefits from the immediate
use of the asset (house, car, etc.) without having yet paid its full price while the seller
benefits from the markup in the price as compensation for the present consumption of
the money that he has relinquished. The fact that the principle of justice constitutes the
basis for all exchange contracts is well established, as is pointed out by al-KÉsÉnÊ of the
×anafÊ School in the following argument:
َّ ‫أل‬
. ِ ْ‫ َوالْ ُم َس َاو ِاة يِف الْبَ َدلَين‬، ‫َن الْ�بَْي َع َع ْق ُد ُمبَ َادلٍَة َعلَى طَ ِر ِيق الْ ُم َقا�بَلَ ِة‬
“…because a sale contract is an exchange contract based upon the
equivalency of the counter-values.59
3.2.1 Another Argument for Increment in a Deferred Sale
Some argue that the increment in a deferred sale is permitted on the grounds of usufruct
(manfaÑah). In a sale contract with TVM, the buyer gets two things: the asset and its
use, and is thus expected to pay more in return for getting the immediate use. It is only
just that the seller be compensated for allowing the buyer to use the purchased asset
without having paid its full price. If the justification was purely PTP, then it should
have been allowed in a loan contract as well. This also gives rise to another issue:
whether TVM should also be considered in muÌÉrabah and mushÉrakah contracts.
Doing so would lead to a guarantee of capital and return. In a BBA with a markup,
MuÍammad al-KhaÏÊb al-SharbÊnÊ, MughnÊ al-MuhtÉj ilÉ MaÑrifat MaÑÉnÊ AlfÉÐ al-MinhÉj, (Beirut: DÉr alFikr, 2003), 2:107.
59
Al-KÉsÉnÊ (1982), BadÉ’iÑ al-ØanÉ’iÑ, 5:187.
58
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
the IFI gets a predetermined increase with a capital guarantee. Hence, it is important
to find a reason why a predetermined return is not allowed in a loan (cash now for
more cash later) or muÌÉrabah but is allowed in BBA. As explained, muÌÉrabah and
mushÉrakah are characterized as qarÌ if the principal is guaranteed and the increase
(return) is predetermined; hence, they take the same rule as qarÌ, particularly on the
issue of TVM. The reason that an increase is permissible in BBA but not in a loan is that
BBA is a sale contract, which must be based on justice, as explained by al-KÉsÉnÊ and
other jurists, whereas qarÌ and muÌÉrabah (which also takes the same ruling of qarÌ if
the increase is predetermined) are based on iÍsÉn (benevolence). If the predetermined
increase is stipulated in them, the principle of iÍsÉn is corrupted as iÍsÉn means doing
more than what is required and, hence, requires no counter-value.
In conclusion, equality in a financial transaction is a manifestation of the principle of
justice, which constitutes the basis for all contracts of exchange (ÑuqËd al-muÑÉwaÌÉt).
However, if the seller does not impose any increment on the original price despite
deferred payment, it is by virtue of the iÍsÉn that is firmly established in his soul.
The followings are the jurists’ statements on the permissibility of increasing the price
on account of deferment in a murÉbaÍah contract:
1. Al-DasËqÊ of the MÉlikÊ school states:
ِ
ِ
َّ ‫َج ِل ) الَّ ِذي ا ْش�تََرى إلَْي ِه أل‬
‫صةً ِم ْن‬
َّ ‫َن لَهُ ِح‬
َ ‫ب َعلَى بَائ ِع الْ ُمَر حَابَة �بَيَا ُن ( األ‬
َ ‫َو َج‬
‫الث ََّم ِن‬
“The seller in a murÉbaÍah transaction must make clear the deferred
payment period by which he bought the good, as it comprises a portion of
the price.” 60
2. Al-KÉsÉnÊ of the ×anafÊ school mentions:
ِ َّ ِ‫لَو ا ْش�ترى شيئا نَ ِسيئةً مَل يبِعه مر حَابةً ح ىَّت �ي�بينِّ ؛ لأ‬
‫َج ِل ُش�بَْهةَ الْ َمبِي ِع َوإِ ْن‬
َ َُ َ َ َ ُ ُ ْ َ ْ َ ًْ َ ََ ْ
َ ‫َن ل أْل‬
ِ ِ ُ‫مَل ي ُكن مبِيعا ح ِقي َقةً؛ لأِ َنَّه مرغ‬
ِ‫َن الثَّمن قَ ْد �يزاد لِم َكان‬
ٌ َْ ُ
َ ً َ ْ َْ
َ ُ َُ َ َ َّ ‫ أَلاَ �تََرى أ‬. ‫وب فيه‬
ِ
ِ
ِ
. ‫َج ِل فَ َكا َن لَهُ ُش�بَْهةٌ أَ ْن �يَُقابلَهُ َش ْيءٌ م ْن الث ََّمن‬
َ ْ‫الأ‬
Al-DasËqÊ, ×Éshiyat al-DasËqÊ, 4:266; see also al-DardÊr, al-SharÍ al-KabÊr, (Beirut: DÉr al-Fikr, n.d.),
3:478; al-KhurashÊ, al-KhurashÊ ÑalÉ MukhtaÎar Sayyid al-KhalÊl, (Beirut: DÉr al-Fikr, n.d.), 5:176.
60
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24
ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
If someone bought something on a deferred basis, he cannot sell it by a
murÉbaÍah sale unless he clarifies (the deferred period). This is because
the deferred period is ambiguously similar to the object of the sale, even
though it is not actually an object of sale, because it is something desirable.
Don’t you see that the price may be increased on account of the deferment?
Therefore, it is similar to being equivalent to a part of the sale price.”61
Since murÉbaÍah is a trust-based sale, the buyer has a right to know the spot price
because his payment is based on the price at which the seller bought it, plus a markup. If
something cost 1000 by deferred payment, the spot price might be 600. The difference
of 400 should not be included in calculation of the final price to the end buyer without
his knowledge and consent.
3. The ShÉfiÑÊ scholar al-SharbÊnÊ states:
ِ
ِ َ‫وَكالمه �ي ْقت‬
ِ ِ‫ضي ا ْشرِ َتا َط �تَْعي‬
َّ ‫ك ؛ أل‬
‫َج َل‬
َ ‫َج ِل ُمطْلَ ًقا َوُه َو َك َذل‬
َ ‫َن األ‬
َ ‫ني قَ ْد ِر األ‬
َ ُُ َ
ِ‫ط ِم ْن الث ََّمن‬
ٌ ‫�يَُقابِلُهُ قِ ْس‬
“His statement absolutely requires that a condition [of validity] is that the
extent of [the deferred] period be specified, and that is indeed the case, as
the (deferral) is equivalent to a portion of the sale price.” 62
4. Ibn Taymiyyah of the ×anbalÊ School writes:
ِ
ِ
ِ
‫َج َل يَأْ ُخ ُذ قِ ْسطًا ِمن الث ََّم ِن‬
َ ‫اعهُ إِيَّاهُ بِالْقْي َم ِة إِلىَ َذل‬
َ َ‫َوإِ َذا ب‬
َ ‫ فَإ َّن اْأل‬،‫َج ِل‬
َ ‫ك اْأل‬
“If he sells it to him for a price for that deferred period, then the deferred
period takes a portion of the sale price.”63
5. Al-SarakhsÊ of the ×anafÊ School says:
‫وإذا باع بألف درهم نسيئة سنة مث اشرتاه بألف درهم بنسيئة سنتني قبل قبض‬
‫الثمن مل جيز ألن هذا يف معىن شراء ما باع بأقل مما باع فإن الزيادة يف األجل‬
‫ أال ترى أن أصل األجل ميكن نقصانا يف املالية‬.‫متكن نقصانا يف مالية الثمن‬
Al-KÉsÉnÊ (2000), op. cit., 4:466.
Al-SharbÊnÊ, MughnÊ al-MuÍtÉj, 2:107.
63
Ibn Taymiyyah, MajmËÑ al-FatÉwÉ, (al-ManÎËrah: DÉr al-WafÉ’, 1998), 15:275.
61
62
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
‫ فكذلك‬،‫حىت يكون املؤجل أنقص من احلال؟ وهلذا يثبت ربا النسأ شرعا‬
‫ فإن زاد على الثمن درمها أو أكثر جاز‬،‫بزيادة األجل يزداد النقصان يف املالية‬
‫ألن الزائد يف الثمن الثاين مبقابلة النقصان املتمكن بزيادة األجل فينعدم‬
‫ فإذا مل يعلم أن الثمن‬،‫ واملمتنع شراء ما باع بأقل مما باع‬،‫النقصان به معىن‬
.‫الثاين أقل من الثمن األول كان الشراء جائزا‬
It is not permissible to sell (a commodity) at one thousand on a deferred
basis for one year and then repurchase it at one thousand on a deferred
basis for two years before taking possession of the price because this is
interpreted as repurchasing what he sold at a lower price. Indeed, the
increase in the deferred period causes a reduction in the financial value
of the price. Don’t you see that deferment originally causes a reduction of
proprietary value such that the deferred [price] is worth less than the spot
[price]? It is on this basis that [the concept of] ribÉ al-nasÉ’ is established in
the SharÊÑah. Similarly, an increase in the deferred period causes a further
decrease in the proprietary value [of the price]. If the price is increased
by one dirham or more, [the transaction becomes] permissible because
the increased amount in the second price is in exchange for the decreased
[value] resulting from the added deferment, hence the decrease is offset,
conceptually. What is prohibited is to buy what one has sold at a price
lower than one sold it for. If it is not known that the second price is lower
than the first price, the repurchase is permissible.64
6. Al-KÉsÉnÊ of the ×anafÊ school also avers:
ِ
ِ ‫ولاَ مساوا َة بني ال�نَّْق ِد والن‬
َّ ِ‫َّسيئَ ِة لأ‬
ً‫يمة‬
َ ‫َن الْ َعينْ َ َخ�يٌْر من الدَّيْ ِن َوالْ ُم َع َّج َل أَ ْك�ثَُر ق‬
َ
ََُ َ
ِ
ٍ
ِ
ٍ
ِ
‫ضل َم ْش ُروط يف الْ�بَْي ِع ربًا َس َواءٌ كان‬
ْ َ‫ فَ َكا َن �يَْنبَغي أَ ْن يَ ُكو َن ُك ُّل ف‬،‫من الْ ُم َؤ َّجل‬
ِ
َّ ‫ث‬
‫َّحُّرُز عنه‬
ُ ‫ص‬
ْ ‫الْ َف‬
ُ ‫ات أو من َحْي‬
ُ ‫ض ُل من َحْي‬
ُ ‫الذ‬
َ ‫ث الأْ َْو‬
َ ‫اف اَّإل ما ال يمُْك ُن الت‬
. ‫َد�فًْعا لِْل َحَرِج‬
“There is no equality between spot and deferred [payment] because cash is
better than a debt, and accelerated [delivery] has more value than deferred
[delivery]. Therefore, one should consider every excess stipulated in a sale
64
Al-SarakhsÊ, al-MabsËÏ, (Beirut: DÉr al-MaÑrifah, 1993), 13:125.
25
26
ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
contract to be ribÉ, whether the excess is in the corpus or in its attributes,
except what is unavoidable, [in order] to remove hardship.”65
7. Al-ShÉÏibÊ of the MÉlikÊ school states:
ِ‫لأ‬
ِ َ‫َن النَّساء يِف أَح ِد الْعِوض ِ �ي ْقت‬
َ‫َح ِد الْعِ َوضَينْ ِ لا‬
ِّ ‫ضي‬
َ ‫َج ُل يِف أ‬
َ ْ‫ة…والأ‬
َ ْ‫َّ َ َ َ َ َين‬
َ ‫الزيَ َاد‬
ِ
ِ
ِ ْ‫الزياد ِة بِِه يِف الْ ِقيم ِة؛ إِ ْذ لاَ يسلَّم ح‬
ِ ِ‫اضر يِف الْغَائ‬
‫ب‬
َ َِّ ‫يَ ُكو ُن َع َاد ًة إِاَّل عْن َد ُم َق َارنَة‬
َ
ُ َ‫ال‬
ُ َُ
ِ ِ‫إِاَّل ابتِغاء ما هو أَعلَى ِمن حْ ِ ي‬
.‫يم ِة‬
َ ‫الَاض ِر ف الْق‬
َ ْ َُ َ َ َ ْ
Because deferment of one of the two counter-values entails an increase...
and normally deferment of one of the two counter-values is not [accepted]
unless it is accompanied by an increment in the price. That is because no
one will hand over something now in return for something in the future
except with the expectation of a higher price than the cash [price].66
3.3 The Islamic Legal Maxims
The Islamic viewpoint on TVM is also premised upon legal maxims related to the
SharÊÑah ruling of the primary and its auxiliaries:
‫التابع تابع‬
“The auxiliary follows [the primary in its ruling].”67
‫يغتفر يف الثواين ما ال يغتفر يف األوائل‬
“Things may be excused in the secondary that are not excused in the
primary.”68
The above maxims indicate a critical distinction between an increment (ziyÉdah)
imposed on the principal on account of the deferred payment of a loan (qarÌ) and an
increment imposed on the spot price on account of deferred payment in a deferred sale
Al-KÉsÉnÊ (1986), op. cit., 5:187.
Al-ShÉÏibÊ, al-MuwÉfaqÉt, (Saudi Arabia: DÉr ibn ÑAffÉn, 1997), 4:381.
67
Ibn Nujaym, al-AshbÉh wa al-NaÐÉ’ir ÑalÉ Madhhab AbÊ ×anÊfah al-NuÑmÉn, (Beirut: DÉr al-Kutub alÑIlmiyyah, 1999), p. 102; al-SuyËtÊ, al-AshbÉh wa al-NaÐÉ’ir, (Beirut: DÉr al-Kutub al-ÑIlmiyyah, 2001), p.
262.
68
Al-SuyËtÊ, al-AshbÉh wa al-NaÐÉ’ir, 266.
65
66
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
(bayÑ mua’jjal). The excess in the loan contract is independent of the principal since
it is imposed in total isolation from the amount of the loan. In contrast, the excess in
the deferred sale is considered supplementary (tÉbiÑ) to the spot price of the transacted
commodity, which is considered primary (matbËÑ), and it is imposed in association
with it.
This in turn signifies that the contractual increment is derived from the existence of
the commodity and its spot price. Hence, a financial counter-value incorporated in the
price is recognized by the SharÊÑah only if it is associated with the original price of
the commodity. This situation indicates that time can only be assigned monetary value
indirectly; i.e., in association with the contracted subject matter. In contracts where
the SharÊÑah recognizes positive time value, the existence of a transacted commodity
is crucial in order to prevent a mere exchange of money for time, which may lead to
making of money out of money. Money is not intended for its physical attributes and,
hence, cannot be utilized directly to fulfill human needs. It is only desirable because
people accept it in exchange for goods and services. Making money out of money
through imposition of incremental value on the loan principal corrupts the essential
function of money. The above maxim is also supported by another maxim of its kind
which reads as follows:
.‫التابع ال يفرد باحلكم‬
“What is ancillary does not have its own particular ruling.”69
Another corollary of the maxim al-tÉbiÑ tÉbiÑ that is relevant to TVM states:
.‫صفات احلقوق ال تفرد باإلسقاط‬
“The attributes of [assets that are the subject of] rights cannot be waived
independently [of their assets].”
TÉbiÑ in this maxim refers to a specific part (juz’) of something which is not qualified to be the subject-matter
(maÍal al-Ñaqd) because it exists in association with the matbËÑ. The tÉbiÑ, by itself, cannot be assigned with
a specific ruling because it is considered non-existent when it is not associated with the matbËÑ. In contrast,
it is given its own ruling when it becomes the intended thing (maqÎad). This is applicable to the time factor
in Islamic finance, which can be given an economic share in the price of the contracted commodity because
it exists in association with the price of the commodity and is not sold in isolation from the commodity.
See MuÍammad al-ZuÍaylÊ (1999), al-QawÉÑid al-Fiqhiyyah ÑalÉ al-Madhhab al-×anafÊ wa al-ShÉfiÑÊ,
(Kuwait: Lajnat Nashr al-ÑIlm), p. 394; Ibn Nujaym, al-AshbÉh wa al-NaÐÉ’ir, p. 102; al-SuyËtÊ, al-AshbÉh
wa al-NaÐÉ’ir, p. 262.
69
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28
ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
Jurists like al-SuyËÏÊ and al-ZarkashÊ discussed the issue of al-ajal (the deferment
period) in Islamic jurisprudence in the course of discussing the abovementioned maxim:
ِ
ِ
‫ط َح ىَّت �يَتَ َم َّك َن‬
ُ ‫َج َل َه ْل يَ ْس ُق‬
َ ‫َس َق‬
ْ ‫َوم ْن ثمََّ لَ ْو أ‬
َ ْ‫ط َم ْن َعلَْيه الدَّيْ ُن الْ ُم َؤ َّج ُل الأ‬
ِ
ِ ْ‫الْمستَ ِح ُّق ِمن مطَالَبتِ ِه يِف ح‬
َّ ِ‫ط لأ‬
‫َج َل‬
ُ ‫َص ُّح ُه َما لاَ يَ ْس ُق‬
َ ‫ أ‬،‫الَال؟ َو ْج َهان‬
َ ُ ْ
َ ْ‫َن الأ‬
ُْ
ِ
ِ
. ‫الص َفةُ لاَ �تُْفَرُد باحلكم‬
ِّ ‫ َو‬،ٌ‫ِص َفةٌ تَاب َعة‬
“If a person owing a debt to be paid at a future date foregoes the deferral,
does the creditor have the right to demand payment immediately? There
are two opinions [in the ShÉfiÑÊ School]; the most correct is that [he does
not] because the payment period is an ancillary attribute, and attributes
have no independent ruling.”70
Shaykh Taqi Usmani states: “When we deliberate the issue under debate, then it will
be noted that if increase in price is considered legitimate in the case of credit sale, its
nature is the same as that of a supplementary benefit, i.e., increase in the price of goods
due to deferred payment.” He further argues: “Similarly, for every house there is a right
of way and for every agricultural land there is a right of irrigation. If someone wishes to
sell these rights without selling the property, such sale is invalid because rights are not
goods. If however, he sells the house or the land, then these rights will be automatically
sold as part and parcel and the total price would include a compensation for them.71
This maxim signifies that something that is considered ancillary is not isolated from
the specific ruling of its primary; rather, it is covered under the same dictates and legal
rulings of the primary.72 In this regard, time does not command a price directly because
it does not have all the distinctive features of property (mÉl) that qualifies it to be
treated as property. However, time can be a secondary subject matter to the contracted
commodity, and its price is to be associated with the price of the primary contracted
commodity.73
Al-ZarkashÊ, al-ManthËr fÊ al-QawÉÑid, (Kuwait: Ministry of AwqÉf, 1405/1985), 2:315. See also al-SuyËtÊ,
al-AshbÉh wa al-NaÐÉ’ir, (Beirut: DÉr al-Kutub al-‘Ilmiyyah, 1990), p. 118
70
See MuftÊ MuÍammad ShafÊÑ and MuftÊ Muhammad Taqi Usmani, The Issue of Interest, (Karachi: Darul
71
Ishaat, 1997), pp. 133-136.
SaÑad TurkÊ al-Khathlan, al-Zaman fÊ al-DuyËn wa AÍkÉmuh al-Fiqhiyyah, (n.p.). Retrieved from www.
saadalkthlan.net.
73
M. Fahim Khan (2004), Theory of Islamic Banking, a Seminar on Orientation in Islamic Economics
organized by Marmara University and Islamic Development Bank, 20-28 October 1994.
72
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
In a deferred payment sale, for example, time has a share in the price because it is
monetarily valued in association with the subject-matter (al-mabÊÑ) of the contract,
and it is not sold independently of the contracted subject matter.74 Time in this case
is considered ancillary (tÉbiÑ) whereas the subject-matter of the contract is primary
(matbËÑ). Hence, the juristic rulings of the primary should be extended to its ancillary,
as mentioned earlier.
4. PARAMETERS OF TVM IN ISLAMIC FINANCE
The preceding discussion on the legitimacy of TVM signifies that TVM is closely
related to ribÉ, particularly in contemporary Islamic finance where Islamic finance
operates in a dual banking environment. Hence, there is a need for clear parameters for
its application in modern Islamic finance in order to avoid the substance as well as the
suspicion of ribÉ. This paper suggests the following parameters to be complied with in
dealing with TVM in Islamic finance:
1. Any monetary increment resulting from exchanging time for money in
contracts involving time value must be associated with the price of the
contracted commodity.
This parameter is significant to avoid ribÉ al-nasÊ’ah, which lies in an
increment resulting from exchanging time for money independently without
linking it to the transacted commodity. The increment associated with
the transacted commodity, such as in bayÑ al-murÉbaÍah, is considered a
Mufti Muhammad Taqi Uthmani has made instructive comments on this point when he reconciles the two
remarks in the book al-HidÉyah on the existence of time value of money which are contradictory to one
another. He argues “Often it is not permitted to charge for something directly, but…compensation in an
indirect way, through sale of something related is legitimate. One example is that the location and surrounding
of every house, land and shop has considerable effect on its price. For this reason there are noticeable
differences in the price of various properties. If a house is for Rs. 10,000 in a certain locality, then a similar
house—in area and quality of construction—in or around the centre of the town may be considered cheap
even for Rs. 100,000. This difference in price is not on account of the house itself but because of location
and surroundings. When someone sells this house, the benefits on account of location and surrounding are
automatically sold. Whatever is the difference in price is owing to location and surrounding even though
these factors are not goods for which a price may be charged. Nevertheless, the sale of a house or a shop
results in the sale of these factors and then it becomes [lawful] for the seller to receive a compensation for
them as a part of the price of the property.” See MuftÊ ShafÊÑ and MuftÊ Muhammad Taqi Usmani, The Issue
of Interest, pp. 135-136.
74
29
30
ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
legitimate profit rather than ribÉ because this transaction does not amount to
money begetting money, which is the very essence of ribÉ and the ultimate
purpose of its prohibition. This issue needs to be thoroughly examined in
order that the major differences become clear between the increment in a
ribÉ-bearing loan and that of a deferred sale:
(i) The increment in a loan contract due to deferred payment is merely a
debt responsibility established on the liability of the debtor (thÉbit fÊ
al-dhimmah) whereas the increment in a deferred sale that arises from
deferred payment is not merely a debt liability (dayn) by itself; rather,
it is the price of the contracted commodity for which the buyer is held
responsible in exchange for the benefit of deferment that he enjoys upon
execution of the contract.75
(ii) The increment in a loan contract on account of deferment is not associated
or attached to anything; it stands alone; whereas the increment in a
deferred sale is ancillary to the price of the contracted commodity. This
is substantially supported by a corollary of one of the leading maxims:
‫يغتفر يف الشيء ضمنا ما ال يغتفر فيه قصدا‬
“[Issues] can be excused in something when it is included [with something
else] that would not be excused when it is intended independently.”76
In this regard, an increase in the price in a deferred sale is exchanged for
deferment in association with the original price of the commodity. It is not
merely exchanged for deferment as in the conventional concept of the
time value of money, which emphasizes exchanging money for deferment
independently and directly to compensate for opportunity loss incurred by the
lender. The period of deferred payment in a deferred sale justifies increment on
the spot price without having its own separate and independent price because
it is not intended primarily (qaÎdan); it is only intended as part of something
else (Ìimnan). This means that money in a deferred sale is not treated as a
commodity and is hence free from the element of producing money out of
SulaymÉn al-TurkÊ, BayÑ al-TaqsÊÏ wa AÍkÉmuh, p. 228; SaÑad Turki al-Khathlan, al-Zaman fÊ al-DuyËn wa
AÍkÉmuh al-Fiqhiyyah.
76
Ibn Nujaym, al-AshbÉh wa al-NaÐÉ’ir, p. 103; al-SuyËtÊ, al-AshbÉh wa al-NaÐÉ’ir, 1:266.
75
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
money. On this basis, the following maxim for governing the application of
TVM can be constructed:
‫األجل يبادل باملال تبعا ال استقالال‬
“The deferred period can be transacted for property in association
(tabaÑan) [with the commodity’s price] not independently (istiqlÉlan).”
(iii)The price in a deferred sale is predetermined and fixed. Hence, it is not
increased if payment is delayed to a specified future, whereas the increment
in a loan contract, which originally arises from deferment, will continue to
increase if payment is delayed; the longer the delay, the higher the price. 77 This
situation certainly leads to money begetting money, which is the very objective
in prohibiting ribÉ al-nasÊ’ah.
(iv)The SharÊÑah definition of ribÉ is an increment in one of two homogenous
(mutajÉnisah) items or items of nearly the same genus (mutaqÉribah) in an
exchange contract. However, in a deferred sale, the two counter-values are
heterogeneous; i.e., of different genii (jins). Therefore, it is legally unacceptable
to prohibit an increment in a deferred sale on the grounds that it resembles
ribÉ.78
(v) There is a substantive difference between assigning a specific monetary amount
as the counter-value of the deferred period in a deferred sale and identifying the
increment above the principal in a loan contract as counter-value for deferment.
For instance, the spot price of a commodity is RM100 and its price is increased
to RM105 if sold using a cost-plus sale (murÉbaÍah). This is different from a
situation in which a sum of RM100 is loaned to someone on interest, and the
increment ends up amounting to RM5. The former is permissible and free from
ribÉ because the total amount paid (RM105) was solely the price of the sold
commodity. This is evident in the fact that the commodity whose market price
is RM100 can be sold either on a deferred payment basis or spot basis at either
SaÑad Turki al-Khathlan, al-Zaman fÊ al-DuyËn wa AÍkÉmuh al-Fiqhiyyah.
MuÍammad ÑUqlah, ×ukm BayÑ al-TaqsÊÏ fÊ al-SharÊÑah wa al-QÉnun, p. 108; cf. Ibn al-ÑArabÊ, AÍkÉm alQur’Én, (Beirut: DÉr al-MaÑrifah, n.d.), 1:241. He says: “RibÉ is an increase. However…the increase only
becomes manifest in comparison to something that is exceeded, and whenever something is exchanged for
something of a different genus (ghayr jinsih), the increase is not manifest.”
77
78
31
32
ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
RM100, or RM105, or RM95, depending on market conditions.79 In contrast,
the latter is impermissible because it is deemed ribÉ al-nasÊ’ah in that time is
the ultimate objective of the contract and is hence assigned a specific price that
normally increases over time if the debtor fails to pay the debt on the stipulated
date. In conclusion, the price of RM105 in the abovementioned deferred sale
constitutes the price of the commodity in its totality and, therefore, it could also
be the spot price of the good if it were sold on a spot basis. On the contrary, the
RM105 made from a loan contract worth RM100 is in fact considered a countervalue (badal) in exchange for two counter-values. RM100 is exchanged for the
principal loan of RM100, and RM5 is exchanged for the deferment. Hence, it
is clear that the RM5 is the actual price of the deferment, which is undoubtedly
the prohibited ribÉ in the Qur’Én and the ÍadÊth.80
The above discussion indicates that deferment can be transacted with money
in association with the cost price of the transacted commodity. It cannot be
assigned monetary value independently, as it is in a ribÉ-bearing loan, which
amounts to making money out of money. Making money out of money is
in fact the essence of ribÉ and the ultimate objective of its prohibition.
However, if it is associated with the price of a commodity, the transaction
will not lead to money begetting money because the transacted commodity
is intended by the buyer and hence does not divert the essential function of
money. It is commonly known that money is not intended for its own sake;
rather, for what it can be used to acquire. Al-GhazÉlÊ pointed out about gold
and silver that:
‫أهنما حجران ال منفعة يف أعياهنما‬
“…both are minerals that have no benefit in their corpus.”81
In a deferred sale, there is no exchange of money for money; rather, it is an
exchange of a ribawi item for a non-ribawi item. In this case, the excess of
one of them over the other is not considered ribÉ.
See Muhammad Abu Zuhrah, al-ImÉm Zayd: ×ayÉtuh, wa ÑAÎruh, wa ÓrÉ’uh wa Fiqhuh, (Cairo: DÉr alFikr al-ÑArabÊ, n.d.), p. 300.
80
MuÍammad ÑUqlah, ×ukm BayÑ al-TaqsÊÏ. p. 109.
81
Al-GhazÉlÊ, IhyÉ’ ÑUlËm al-DÊn, (Beirut: DÉr al-MaÑrifah, n.d.), 4:91.
79
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
2. The time-value-based contract must be free from any attempt to circumvent
ribÉ through a legal device.
The previous discussion illustrates that deferment is closely related to ribÉ
if it is solely exchanged for money without any counter-value, particularly
in a loan contract. It may also occur in the case of a person attempting to
legalize ribÉ al-nasÊ’ah under the guise of a sale contract. The SharÊÑah does
not ban the practice of legal stratagems (Íiyal) in totality; some legal devices
are legitimate (mashrËÑ) while others are illegitimate (ghayr mashrËÑ). Each
type has distinctive features by which they can be distinguished from each
other. It is important to be clear that devising and using illegitimate Íiyal
are serious transgressions. Using a sale to circumvent the prohibition of
ribÉ is an abuse of the legally accepted concept of the monetary value of
time. The buy-back sale (bayÑ al-ÑÊnah)82 is an obvious example of a legal
trick to circumvent ribÉ by manipulating the time factor in a financial
transaction. Hence, its legitimacy had been vehemently rejected by classical
and contemporary jurists due to its end result, which reflects the substance
of ribÉ.
As mentioned earlier, the SharÊÑah only assigns monetary value to the time
factor when it is associated with the original price of the subject matter
in a sale contract. Conversely, the time factor in a ribÉ-bearing contract
is assigned a monetary value separately without being associated with
anything, which in turn leads to a direct and independent exchange of time
for money. This happens despite the fact that time is not corporeal property
that can be transacted directly in exchange for any ribawi counter-value.
The diagram below illustrates time manipulation in the sale-and-buy-back
contract that ends with ribÉ:
This contract is considered time-value-based because the murbÊ generates profit from the second transaction
when he resells the good to the buyer on credit for a higher price. The price is higher to compensate for
the economic value of time. The ÑÊnah sale is illegal, not because it is a deferred contract of exchange
which necessitates a higher price on account of deferment, but because neither party has any interest in the
commodity being sold, which makes it a legal cover for a usurious loan. See RafÊq YËnus al-MaÎrÊ, BayÑ
al-TaqsÊÏ, p. 45.
82
33
34
ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
5
Al-Ajal
Money
4
3
Bank
1
Commodity
X
Money
Customer
2
RM50
6
1. Bank sells commodity X to the customer at RM100 on a deferred-payment basis.
2. Customer pays RM100 to the bank by installments within 10 months.
3. Customer resells commodity X to the bank at RM50 on cash basis.
4. Bank pays RM50 to the customer on cash basis.
5. Bank sells al-ajal to customer at RM50.
6. Customer pays RM50 to the bank in exchange for al-ajal sold by the bank to the
customer.
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
The diagram above signifies that commodity X is not intended in the contract;
rather, it was contracted to facilitate the exchange of money for money with
one of the counter-values exceeding the other. The dotted line in the diagram
reflects an independent (mustaqil) and direct (mubÉshir) exchange of money
for money with an increment of one of them over the other without countervalue and without being associated with the cost price of the transacted
commodity. Commodity X is clearly unintended in the contract, which is
manifested in the return of commodity X to its original owner at the end of
the transaction. Ibn Taymiyyah opined that one of the distinguishing signs
of an illegitimate legal device is the unnecessary inclusion of a commodity
in the contract’s subject matter:
ِ ‫ َّإما أَ ْن يض ُّموا إلىَ أَح ِد الْعِوض ِ ما لَيس بمِ ْقص‬:‫ان‬
ِ‫م‬
ِ ‫الِي ِل �نوع‬
‫ود أ َْو‬
َُ
َ َْ َ ْ‫َوجَاعُ ح‬
ُ َ َ ْ َ ْ‫َ َ َين‬
ِ ‫يض ُّموا إلىَ الْع ْق ِد ع ْق ًدا لَيس بمِ ْقص‬
‫ود‬
َُ
ُ َ َ ْ َ َ
83
“×iyal, in toto, are of two types: they either include in the subject matter
what is not intended, or they include in the contract another contract that
is not intended.”
In this case, it is the commodity that is unintended, and hence, the actual
intention of the transacting parties is to obtain cash for cash with an increment,
which is regarded as the essence of ribÉ (Ñayn al-ribÉ). In conclusion, the
application of time-value-based contracts in Islamic finance must be in
accordance with the SharÊÑah parameters of Íiyal. 84
3. The application of time-value-based contracts must be consistent with the
objectives of the SharÊÑah in financial transactions.
It is undeniable that there are financial transactions in which deferment has
been manipulated by the contracting parties to achieve their objectives (qaÎd
al-mukallaf) at the expense of Lawgiver’s objectives (qaÎd al-ShÉriÑ). This
usually occurs in one of three ways: circumvention of definitive SharÊÑah
rulings, negation of SharÊÑah rulings (ibÏÉl al-Íukm), and alteration of
Ibn Taymiyyah, MajmËÑ al-FatÉwÉ, 29:18.
For details of the SharÊÑah parameters of ÍÊlah in Islamic finance, see Mohamed Fairooz Bin
83
84
Abdul Khir (2010), SharÊÑah Parameters of ×iyal in Islamic Finance, ISRA International Journal
of Islamic Finance, vol. 2, issue 2, Dec. 2010, pp. 159-167.
35
36
ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
SharÊÑah rulings (taÍwÊl al-Íukm). Hence, it is important to ensure that
the objectives of the SharÊÑah are not violated through the execution of
time-value-based contracts. In addition, it is commendable to identify the
hierarchy of the objectives of the SharÊÑah so that Íiyal are not used to
meet objectives of lower priority at the expense of higher objectives of the
SharÊÑah. The key dimensions to be considered for ranking the priority of
the objectives of the SharÊÑah are: 1) strength of effect (quwwat al-ta’thÊr);
2) how widespread the consideration of an objective is in various SharÊÑah
rules (ÑumËm al-SharÊÑah); 3) how many people are affected by an objective
(ÑumËm al-ummah); and 4) consideration for the welfare of the legally
responsible individual (ÍaÐÐ al-mukallaf).
In addition to the abovementioned categories, it is also vital to give due
consideration to the specific objective of the SharÊÑah (maqÎad khÉÎÎ)
intended by the Lawgiver from time-value-based contracts. This objective
can be deduced from the wisdom of allowing various kinds of time-valuebased contracts such as bayÑ al-salam, bayÑ al-istiÎnÉÑ, bayÑ mua’jjal, bayÑ
al-murÉbaÍah and ÌaÑ wa taÑjjal. For example, bayÑ al-salam is permitted
as a legal facility (rukhÎah) in financial dealings even though it involves the
sale of something non-existent (bayÑ al-maÑdËm) at the time of the contract.
The permissibility is based on the fact that a greater maÎlaÍah, accredited
by the SharÊÑah, can be realized for both contracting parties than the possible
harm of selling something non-existent. Ibn al-HumÉm explicated this case
as follows:
It is clear that its permissibility is anomalous because it is a sale of what
is nonexistent. It must be accepted [as lawful] based upon the [SharÊÑah]
texts and legal consensus, for both the seller and the buyer need it. The
buyer needs to make his expenditures for his family go further, and this is
facilitated through salam because in a salam contract the price of the subject
matter must be lower than the price [for its spot delivery] so the buyer saves
money. The seller may need cash now and have the ability to easily deliver
the subject matter in the future….It is because of these benefits that the
salam contract was made permissible.85
Ibn al-HumÉm, SharÍ FatÍ al-QadÊr, 7:67.
85
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
However, this specific objective should not be attained at the expense of
other objectives that are of higher priority such as those which are essential
(ÌarËriyyah), fundamental (aÎliyyah) and comprehensive (kulliyyah). Hence,
if the application of time-value-based contracts gives rise to preponderant
harm (mafsadah rÉjiÍah) or comprises any element that is strongly believed
to jeopardize a greater objective, then it should be declared invalid and its
application should cease immediately. For example, some scholars consider
the time-value-based contract of ÑÊnah legally valid but religiously invalid if
it does not yield any preponderant benefit (maÎlaÍah rÉjiÍah). On the other
hand, it becomes legally and religiously valid (ÎaÍÊÍ qaÌÉ’an wa diyÉnatan)
if a preponderant benefit is realized through its application without causing
any definite harm.
4. Time-value-based contracts must be free from excessive uncertainty
(gharar fÉÍish)
Gharar arises when the end result of a contract is unknown (mastËr alÑÉqibah) to the contracting parties.86 It is defined as uncertainty concerning
the attributes (of the subject matter) as well as uncertainty that something
will occur, either of which may affect a commodity’s price.87 Gharar is
prohibited because of its resemblance to gambling (maysir). It is categorized
as a way of consuming property wrongly since one party gains profit at the
expense of the other party.88
Gharar in time-value-based contracts most often occurs as uncertainty about
the period of deferment or the deliverability of the contracted subject matter,
which amounts to the occurrence of an increment in the price over the course
of time. For example, deferment (ajal) has a significant effect on the price of
the manufactured commodity in an istiÎnÉÑ contract in two cases:
(i) When the manufactured commodity is not delivered on the date agreed
upon in the contract. Its delivery may be delayed to a time in the future
that is unknown to the mustaÎniÑ (buyer).
Al-SarakhsÊ, al-MabsËÏ, 13:194.
This definition is derived from the MÉliki view on gharar. See AbË al-Walid Sulayman Ibn Khalaf alBajÊ al-AndalËsÊ, al-MuntaqÉ, Sharh MuwaÏÏa’ al-ImÉm MÉlik, KitÉb al-BuyËÑ, (Beirut: DÉr al-Kutub alÑIlmiyyah, 1999), 6:401, ÍadÊth no. 1346.
88
Ibn Qayyim al-Jawziyyah, IÑlÉm al-MuwaqqiÑÊn, 1:62.
86
87
37
38
ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
(ii)When the manufacturer is unable to deliver the subject matter at all due
to some reason such as an unforeseen event. In this case, the customer
may stipulate a condition in the contract that the manufacturer is bound
to construct an additional physical part of the house on account of
deferment in the delivery of the subject matter. In fact, the additional
part is exchanged for deferment in delivery of the manufactured subject
matter. However, the additional physical part of the house must be nonfungible (qÊmÊ) such as a room or a kitchen. It should not be fungible
(mithlÊ) such as a debt of money or other ribawÊ items to avoid ribÉ.
This stricture is deduced by analogy (qiyÉs) on the permissibility of
increasing the price on account of deferment in payment as elucidated in
the previous discussion.
In a salam contract, there are conditions attached to the subject matter that
the seller has promised to hand over to the buyer in exchange for the salam
capital. One of the conditions is that the date of delivery should be specified
and known (ajal maÑlËm) to the parties. The reason being that the ajal
(deferment) earns a portion of the price, and the price must be clearly known
to the contracting parties. Al-NafrÉwÊ of the MÉlikÊ School mentioned this
as follows:
ِ ‫وا ْش ِت َط َكونُه معلُوما لِ�يعلَم ِمْنه وقْت الْ َق‬
،‫صةٌ ِم ْن الث ََّم ِن‬
َّ ‫َج ُل لَهُ ِح‬
َ ُ َ ُ َ ُْ ً ْ َ ُ ْ ُ‫َ ر‬
َ ْ‫ َوالأ‬،‫ضاء‬
.ُ‫َوالث ََّم ُن يُ ْش�تََر ُط ِع ْل ُمه‬
“It is condition [of validity] that the deferment period be specified so that
the delivery time is known, for deferment earns a portion of the price, and
it is required that the price be known (specified).”89
AÍmad ibn Ghunaym al-NafrÉwÊ al-MÉlikÊ, al-FawÉkih al-DawÉnÊ ÑalÉ RisÉlat Ibn AbÊ Zayd al-QayrawÉnÊ,
(DÉr al-Fikr, 1995), 2:99.
89
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
5. The application of TVM should realize the value of justice (Ñadl) 90 in sale
contracts and the value of benevolence (iÍsÉn) 91 in loan contracts
The supreme principles that govern time-value-based contracts such as
sales and loans are justice (ÑadÉlah) and benevolence (iÍsÉn), respectively.
Justice in a sale contract is realized when both contracting parties fulfill
their contractual obligations at the minimum required level. For example,
the buyer gets his need satisfied when the seller delivers the purchased asset
to him. The seller’s need is satisfied when the payment is made to him at
the pre-agreed time. Hence, deferment which takes a portion of price must
be fairly and justly managed, especially if both counter-values are ribawi
items of the same genus. For example, the exchange of gold worth RM100
for silver worth RM500 must be on a spot basis to ensure that justice is
upheld. For example, if delivery of the silver is delayed, the price of the
gold should be reasonably increased so as to uphold justice because what is
deferred is of lower value than what is delivered on the spot. However, this
is not permitted by the SharÊÑah because it leads to producing money out of
money, in which case money is treated as a commodity, and this corrupts the
traditional function of money as a medium of exchange. Being commodities
in this case, the silver and gold are intended for their own sake; however,
according to the SharÊÑah, the nature of media of exchange is that they are
not intended for their own sake; they are only desired for what they can be
used to acquire. This is clearly expounded by Ibn Qayyim al-Jawziyyah as
follows:
ِ‫بهِ له‬
ِ ِ
ِ ِ ‫والدَّر ِاهم والدَّنَانِري ال �ت ْق‬
‫ت‬
ْ َ‫ص ُد ل�نَْفس َها بَ ْل ه َي َوسيلَةٌ إلىَ ال�تََّع ُام ِل َا َو ََذا َكان‬
َ ُ ُ
َُ َ َ
ِ
ِ‫به‬
ِ
ِ
ِ
ِِ‫خ‬
ِ
ِ
ِ
َّ
.‫ود االنْت َفاعُ َا �نَْفس َها‬
َ‫ص‬
ُ ‫أ مَْثَانًا ؛ بالف َسائر األ َْم َوال فَإن الْ َم ْق‬
“Dirhams (silver) and dinars (gold) are not intended for themselves; rather,
they are media of exchange. It is on this basis that they comprise the prices
[of other things]. [They are] unlike all other forms of wealth, which are
[bought with] the intention of acquiring benefit from [their corpus].”92
Ibn Qayyim al-Jawziyyah, IÑlÉm al-MuwaqqiÑÊn, 1:62.
IÍsÉn in this regard means doing good to someone beyond the minimum required level. Therefore, the virtue
of iÍsÉn is superior to the virtue of Ñadl. According to al-GhazÉlÊ, Ñadl in financial transactions is the cause
of safety (sabab al-najÉh) whereas iÍsÉn is the cause of success and attainment of bliss (sabab al-fawz wa
nayl al-saÑÉdah). See al-GhazÉlÊ, IhyÉ’ ÑUlËm al-DÊn, 1:348-349.
92
Ibn Taymiyyah, MajmËÑ al-FatÉwÉ, 10:136.
90
91
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40
ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
Al-KÉsÉnÊ mentions justice as the supreme principle of sale contracts:
ِ ْ‫ والْمساو ِاة يِف الْبَ َدلَين‬، ‫َن الْ�بَْي َع َع ْق ُد ُمبَ َادلٍَة َعلَى طَ ِر ِيق الْم َقا�بَلَ ِة‬
َّ ‫أل‬
ََُ َ
ُ
“…because a sale contract is a quid-pro-quo exchange contract with
comparability between the two counter-values.”93
On the other hand, financial contracts such as loans (qarÌ), mortgages (rahn) and
guarantees (kafÉlah) are based on the principle of benevolence (iÍsÉn). Hence, their legal
effects and rulings vary from those of exchange contracts. For instance, in exchange
contracts, both transacting parties receive the transacted counter-values whereas, in
a loan contract, the creditor does not get anything in return for the sum loaned to the
debtor. Similarly, in a guarantee contract, it is not allowed for the guarantor to charge
the debtor more than the actual expenses in return for the guarantee facility that he
renders, and the mortgagee (murtahin) is not permitted to take any benefit from the
pledged item (marhËn) in exchange for the sum loaned to the mortgagor (rÉhin). In
all cases, if a certain charge is imposed on the debtor, ribÉ may occur because the
principle of iÍsÉn upon which the contracts are built has been breached. Therefore,
any contractual increment or excess arising from these contracts should not negate the
principle of iÍsÉn that constitutes their basis. This is because, if the basis of a contract
is nullified, the purpose for which it was made lawful cannot be realized. Hence, the
following maxims can be formed out of the preceding discussion:
.‫الزيادة يف املعاوضات جائزة ما مل تفوت العدالة‬
“Increment in exchange contracts is permissible as long as justice is not
violated.” 94
.‫الزيادة يف القروض جائزة ما مل تفوت اإلحسان‬
“Increment in loan contracts is permissible as long as benevolence is not
violated.”95
Ibid.
All jurists agreed that the principle of Ñadl forms the basis for exchange contracts. Therefore, any act that
violates this principle in a sale contract is condemned and renders the contract null and void.
95
All jurists agreed that the principle of iÍsÉn constitutes the basis for loan contracts. Hence, any act that
violates this principle in a loan contract is condemned and renders the contract null and void.
93
94
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
The second maxim indicates that an increment in the loan contract that is in favor of the
debtor or benefits him alone is deemed permissible. On the other hand, if the benefit
is stipulated for the creditor in the contractual agreement, it is prohibited because the
lender has exploited the needy borrower. In essence, exploitation is a clear transgression
of the principle of benevolence that serves as the basis of the Islamic loan contract.
5. EXAMPLES OF CONTEMPORARY APPLICATIONS OF TVM IN
ISLAMIC FINANCE
1. Net present value
TVM is used in determining the net present value of an asset; discounting is
calculated with reference to interest rates.96 This appears to conflict with the
prohibition of interest in the SharÊÑah. Discounting future value and cost is
important in capital and investment theories; however, it becomes a debatable
issue when it is based on, or linked to, the interest rate. Hence, the following
questions arise from this issue: Shall we apply the method of discounting to
arrive at the present value of resources utilized in the productive process?
Does this method violate any fundamental principles of Islamic economics?
From the perspective of TVM, there is nothing wrong in applying discounting
in project evaluation by determining the net present value of an investment
or the fair value of an asset. This issue is related to the concept of Positive
Time Preference (PTP) that has been highlighted in the forgoing discussion.
In fact, PTP is acceptable in Islam because it is a part of man’s pristine nature
(fiÏrah) that needs to be taken into account, and hence, scholars argue that
deferment takes a portion of the price in consideration of humans’ natural
preference for present consumption of their assets. Therefore, it can be said
that Islam recognizes discounting future cash flows at a certain rate in order
to make the present and future values comparable. This argument led them
to arrive at the conclusion that an increment in a murÉbaÍah contract is
permissible on the ground that deferment earns a portion of price. Therefore,
the value of a deferred thing should be discounted to strike a balance of
justice in exchange contracts. Similarly, in the case of discounting in project
Pricewaterhousecoopers, Open to Comparison: Islamic and IFRS, p. 8.
96
41
42
ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
evaluation or decision making, the future value of an investment is to be
discounted at the TVM rate to determine the present value of the investment.
A precedent for this can be found in the following classical juristic views
discussed by the MÉlikÊ jurist al-DasËqÊ:
ِ ُ‫�قولُه ( هذا على ما هو الْمعتَم ُد ) فيه نَظَر بل الْمعتَم ُد أَنَّه �بع َد انْتِه ِاء الْبط‬
‫ون‬
ُ َْ
ُ َ َْ ُ َ ْ ُ ْ َ ٌ
َ ُْ
ِ
ِ
ِ
ِ
ِ
ِ
‫ض يف أ َْوقَاته؛ فَالأْ َْولىَ للشَّارِِح‬
ْ‫يمةُ كل بَطْ ٍن َزَم َن ج‬
َ َ‫الَائ َحة على أَ ْن �يُْقب‬
َ ‫�يُْنظَُر ما ق‬
ِ
ِ ُ ‫ ثمَُّ �ي َق‬:‫ول‬
‫ت َك َذا؟‬
َ ْ‫ض َوق‬
ُ َ‫يمةُ كل بَطْ ٍن على �تَْقدي ِر أهنا تجَُ ُّذ َو�تُْقب‬
ُ َ ‫أَ ْن �يَُق‬
َ ‫ ما ق‬:‫ال‬
ِ َّ ‫ك أ‬
ِ ‫ات وج‬
ِ
‫ود ِه إ َذا كانت �تَُع َّج ُل آْال َن أَقَ ُّل من‬
َّ ‫َولاَ َش‬
ُ َ‫يمةَ ما �يُْقب‬
ُ ُ َ‫ض يف أ َْوق‬
َ ‫َن ق‬
ِ ِ‫ق‬
َّ ِ‫الَائِ َح ِة لأ‬
‫صةٌ من الث ََّم ِن‬
ْ‫ودهُ آْال َن أ َْع يِن يوم ج‬
َّ ‫َج َل له ِح‬
ُ ‫يمة ما اُ ْعتُرِ َب ُو ُج‬
َ ْ‫َن الأ‬
َ
.
His statement that this is based on the accepted and reliable opinion is
questionable; rather, the established opinion is that after the lands (buÏËn)
have produced their yields, it is necessary to know the value of [the produce
of] each tract of land at the time of the calamity (jÉ’iÍah) as compared to
[its value] if it had been possessed when it became ripe. It would have
been better for the commentator to have said: Then the value of each tract
if it had been harvested and possessed at a certain time should be stated.
Undoubtedly, if something is possessed at the time of its existence, but paid
for now in advance, the value would be lower than the price of something
[paid for and possessed] when it exists now, by which I mean at the time of
the calamity. That is because deferment has a portion of the price.97
After establishing that discounting in project evaluation does not contradict
any fundamental principle of Islamic economics, it is instructive to note that
some scholars argue it is allowed to use the interest rate as a benchmark for
determining the discount rate of the time value of money. They have based
their argument on the fact that interest is just a benchmarking rate. All the
discounting techniques that are currently applied in conventional banking
are, in fact, human innovations that are not contrary to Islamic teachings.
However, some scholars; for example, Anas al-ZarqÉ’ and Fahim Khan,
argue against using the interest rate as a benchmark and have suggested
alternatives to it.
97
Al-DasËqÊ, ×Éshiyat al-DasËqÊ, 3:184.
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
2. Bilateral rebate
Bilateral rebate is another example of the application of TVM in contemporary
Islamic finance. Rebate, called ibrÉ’ in Arabic, is unilateral in nature, and
hence, no Islamic financier is bound to give a rebate to their customers.
This rebate is known as a unilateral rebate, which is purely based on charity
and free from any element of bilateral exchange. This means that Islamic
financier A, for example, may grant ibrÉ’ to its customer B in the case of
default at its sole discretion. Therefore, if the bank does not want to give a
rebate, the customer is obliged to pay the whole selling price of the purchased
asset as pre-agreed in the contract. This is also based on the opinion that debt
becomes due if the customer defaulted because the majority of jurists hold
the view that a debt which is not yet due (dayn mu’ajjal) can be claimed by
the creditor at any time. However, this situation seems unfair to the customer
who has no longer enjoyed the benefit of deferment in murÉbaÍah contract
because all the debt (the full selling price) becomes due when he defaults.
The bank in this case still wants to claim unearned profit despite obliging
the customer to pay the whole debt on the spot. In a murÉbaÍah contract,
the price is allowed by the SharÊÑah to be higher than the spot price due to
deferment, which takes a portion of the price, as previously elucidated. If the
customer defaults and hence must pay the whole profit counted in the selling
price of the purchased asset throughout the whole tenure of the financing
facility, the principle of justice is clearly violated, as there is no bilateral
rebate given to the customer. The bank sold the asset at a higher price in its
murÉbaÍah arrangement with the customer while if it had negotiated a spot
price, the price should have been lower due to the lack of deferment. Hence,
the customer should not pay unearned profit that is originally the price of
deferment because he can no longer benefit from the deferment since he
has to pay the debt before the end of the tenure. In this case, bilateral rebate
which binds the bank to give a rebate in the case of early settlement or
default is, in fact, in line with one of the maqÉÎid al-SharÊÑah: justice. AlKÉsÉnÊ established this principle as follows:
43
44
ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
ِ ْ‫ والْمساو ِاة يِف الْبَ َدلَين‬، ‫َن الْ�بَْي َع َع ْق ُد ُمبَ َادلٍَة َعلَى طَ ِر ِيق الْم َقا�بَلَ ِة‬
َّ ‫أل‬
ََُ َ
ُ
“…because a sale contract is a quid-pro-quo exchange contract with
comparability between the two counter-values.”98
Justice is the basic principle of every exchange-based contract, including murÉbaÍah.
This bilateral rebate is known in classical jurisprudence as ÌaÑ wa taÑajjal (reduce
the debt and hasten the payment). Al-KÉsÉnÊ says that deferment in murÉbaÍah is an
implicit excess that must be taken into account to uphold justice in a sale contract:
ِ ‫فَِإ َّن اْألَجل يِف أ‬
ٍ ‫ض ٌل ُح ْك ِم ٌّي بِالَ ِع َو‬
‫َج ُل‬
ْ َ‫َحد الْعِ َوضَينْ ِ ف‬
َ ْ ََ
َ ‫ َولَ َّما َكا َن اْأل‬،‫ض‬
ِ
ِ
ِ
ِ
ٍ‫ضل مال‬
ِ ْ ‫ص َّح و‬
ِ‫ي‬
ِ ‫ص ُد لَهُ ِزيَ َادةُ الْع َو‬
َ ‫�يُْق‬
َ َ ْ َ‫ص ُفهُ ب َك ْونه ف‬
َ َ ،‫ َك َما َمَّر ْف الْ ُمَر حَابَة‬،‫ض‬
‫ُح ْك ًما تَأ ََّم ْل‬
“Indeed, deferment in one of the two counter-values is considered an
implicit excess without counter-value, and since an increment of the
counter-value is intended from deferment, as explained in murÉbaÍah, it is
valid to describe [deferment] as an implicit proprietary increment.”99
In fact, it is important to note that making rebate bilaterally binding removes ribÉ alfaÌl from a murÉbaÍah contract, as put forward by Ibn ‘ÓbidÊn in Takmilat al-Durr
al-MukhtÉr:
‫ (قضى املديون اخل) أفاد أن الدين إذا كان مؤجال فقضاه املديون قبل‬:‫قوله‬
)‫ (ال يأخذ من املراحبة اخل‬:‫ قوله‬.‫حلول جيرب الدائن على القبول كما يف اخلانية‬
‫ اشرتى شيئا بعشرة نقدا وباعه آلخر بعشرين إىل أجل هو عشرة‬:‫صورته‬
....‫ ويرتك مخسة‬،‫ فإذا قضاه بعد متام مخسة أو مات بعدها يأخذ مخسة‬،‫أشهر‬
‫ ألهنا يف باب الربا‬،‫ (وعلله اخل) علله احلانويت بالتباعد عن شبهة الربا‬:‫قوله‬
‫ ألن األجل وإن مل يكن‬،‫ ووجهه أن الربح يف مقابلة االجل‬،‫ملحقة باحلقيقة‬
‫ لكن اعتربوه ماال يف املراحبة إذا ذكر األجل‬،‫ وال يقابله شئ من الثمن‬،‫ماال‬
. ‫ فلو أخذ كل الثمن قبل احللول كان أخذه بال عوض‬،‫مبقابلة زيادة الثمن‬
. ‫واهلل سبحانه وتعاىل أعلم‬
Ibid.
Ibn ÑÓbidÊn, al-×Éshiyah, (Beirut: DÉr al-Fikr, 2000), 5:168.
98
99
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
If the debt is not yet due, and the debtor settles it before its due time, the
creditor should be compelled to accept the payment, as is stated in alKhÉniyyah. [Regarding] his statement: “He should not take [the profit]
from a murÉbaÍah contract,” the scenario is: A person purchased something
for ten on a cash basis and then sold it to someone else for twenty on a
deferred payment basis, the deferral period being ten months. If [the buyer]
settles the debt or dies after five months, [the seller] shall take five [as
profit] and leave [the other] five. Al-×ÉnËtÊ argues that this is justified to
avoid the suspicion of ribÉ, as the suspicion of ribÉ in the matter of ribÉ
is treated like the real thing. The angle of argument is that the profit arises
on account of the deferment because, although deferment is not property
and hence cannot be equivalent to any price, they considered it property
in the murÉbaÍah contract when the deferment is mentioned in terms of a
compensatory increment in the price. Thus, if he takes the full price before
its due time, then what he took is, in fact, without counter-value [which is
deemed ribÉ].” 100
Ibn ‘ÓbidÊn’s view above can be best illustrated in the following example of
contemporary bilateral ibrÉ’ in the Islamic financing facility of BBA:
The customer sells his asset to the bank at RM200,000 through a spot contract and the
bank resells it to the customer through a BBA contract for RM400,000 with a tenure
of 20 years. If the customer defaults in year 10 after paying RM200,000, the bank
will claim RM400,000 – RM200,000 = RM200,000. In this case, the customer usually
requests the bank to give ibrÉ’ equivalent to the bank’s unearned profit. Since the
bank charges RM200,000 profit for 20 years of the financing tenor, its annual profit is
RM10,000. In this case, the customer expects the bank to give ibrÉ’ of RM10,000 x
10yr = RM100,000 for the unaccrued profit.
Ibid., 10:406.
100
45
46
ISRA RESEARCH PAPER (NO. 38/2012)
Mohamed Fairooz Abdul Khir
6. CONCLUSION
In conclusion, it is obvious that Islam recognizes TVM, but its recognition of TVM is
totally different from that of conventional finance in both theory and practice. In theory,
a fixed and predetermined increment in a deferred sale as compensation for time is
acceptable in Islam as long as it is associated with the price of the contracted subject
matter. This implies that deferment (ajal) cannot be compensated with a stipulated and
fixed incremental amount in isolation of the price of the transacted commodity, as in
the case of a loan contract in which deferment alone is given monetary value without
being associated with any commodity. In consequence, it leads to money begetting
money, which is the essence of interest (Ñayn al-ribÉ) or the reason for which ribÉ is
prohibited. In practice, the application of TVM in Islam is treated differently from its
application in conventional finance. TVM, in the sense of a fixed monetary increment,
is applied In Islam to sale contracts like deferred sales and mark-up sales. On the other
hand, in a loan contract the compensation is deferred to the hereafter, with a greater
reward, because it is established that the present is superior to the future unless there
is a higher return that can be expected from an investment in the future. Similarly, one
who has forgone his present consumption of money in this world will be compensated
with multiplied reward in the hereafter. This treatment is consistent with the fiÏrah of
human beings, which inclines them to prefer the present to the future. Conversely,
conventional finance recognizes TVM and its application in borrowing and lending
arrangements in the form of a predetermined increment on the loan principal, which
Islam does not because it can amount to the element of money producing money, which
is prohibited by Islam. Hence, it is undeniable that the Islamic viewpoint on TVM
is different from the conventional viewpoint as its application in Islam leads to the
establishment of justice in financial transactions while its application in conventional
finance leads to injustice and oppression.
THE CONCEPT OF THE TIME VALUE OF MONEY: A SHARÔÑAH VIEWPOINT
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RESEARCH PAPER (No: 38/2012)
THE CONCEPT OF
THE TIME VALUE OF MONEY:
A SHARÔÑAH VIEWPOINT
DR. MOHAMED FAIROOZ ABDUL KHIR
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International Shari’ah Research Academy for Islamic Finance
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