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The Money Value of Time

Posted on 13th June 2012 by Camille Paldi,

 

 

 

“It has been argued by some Muslims that the rate at which installment sales are based is the same as the rate of interest.  This has become another source of confusion in some Islamic countries.  In order to make this clear, it has to be emphasized that the rate of interest is the ‘time value of money,’ which is forbidden.  The mark-up used in installment sales is the ‘money value of time,’ which is permitted.  In the former, the commodity (C) is not involved except as a deceptive device to circumvent the rule.  In the latter, the (C) is necessarily involved.  While the former is not channeled into investment expenditure unless the expected rate of return is higher than the going rate of interest, the latter is part of the effective demand, which works as a stimulant to production and further employment.

 

In installment sales, the seller has the right to add a percentage to the cash price of the commodity equivalent to that he could have had from selling in cash.  This amount is the product of two numbers: a percentage the seller adds each time to the cash price of the commodity, and the number of transactions that could have taken place otherwise (Toutounchian 1379 = 2000-2001: 368-371).  While it may be that the rate of interest is the same as the mark-up rate, their equivalence does not make them of equal nature and consequence.

 

Obviously, although the total installment payments exceed the cash price this is Shari’ah compliant on the grounds that the commodity (C) is exchanged with money (M) in the future, but the transaction is of the C – M type, rather than the M – M type which involves interest.”  (Iraj Toutounchian)


Posted on 13th June 2012 by Camille Paldi


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