The Time value of Money in the Islamic Banking: A thorough Review

Abstract

Time value of money (TVM) is one of the most debatable and theoretically important concepts in Islamic banking and finance. This is a thorough review newspaper on how the Islamic financial institutions are able to reconcile the inherent economic rule that money is worth more at one time and worth less at another with the absolute Shariah rule of riba (interest). Based on 30 academic texts including theoretical discussions, juristic interpretations, and practical applications, this report has shown that Islamic finance does not dismiss TVM per se but it re-contextualizes it within the framework of Shariah-compliant context. The important point is that TVM is acceptable when associated with actual economic transactions in goods and services as in deferred sales contracts such as murabahah however a strict taboo on TVM occurs when applied to pure monetary lending relationships in which money begets money as mere lapse of time elapses. This difference allows the Islamic banks to perform capital budgeting, asset valuation and pricing without overstepping ethical limits or causing exploitation and encouraging the sharing of risks. The report combines various academic views, finds practical implementation across the instruments of Islamic finance, and notes the existence of debates to date that influence the development of modern Islamic finance.