Future Value of Money – Time price of money originates from the concept of interest (riba) and has a sizeable global impact on consumers, corporations in addition to governments. In Islam, time price of money is viewed very differently to the mainstream financial gadget.
There are some critical variations among the conventional financial valuation of time and the Islamic monetary valuation of time:
According to the conventional perspective, time fee of money is the reason for charging interest on capital. However, in Islam, profit on the exchange of products or providing offerings bureaucracy the basis of earning a profit.
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Future Value of Money – Time value of money beneath the traditional perspective is not primarily based on profit and loss sharing due to the fact hobby is charged on funds borrowed even in instances where the business suffers losses.
However, Islamic banks operate primarily based on earnings and loss sharing. If the enterprise person has suffered losses, the financial institution will proportion these losses based totally at the mode of finance used (e.G Mudharaba, Musharakah).
From a traditional perspective, except being a medium of change and keep of cost, cash is seemed as a commodity.
It can consequently be sold for a charge better than its nominal fee and also can be rented out. In Islam, money is used each as a medium of alternate and shop of value although it is not appeared as a commodity. It cannot therefore be sold at a price higher than its nominal fee and also can’t be rented out.
The practice of money as being a commodity in the long run leads to inflation. Contrastingly, with Islamic banking, through the usage of sports associated with change, a link is formed among sectors inside the monetary gadget.
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This manner that when you consider that money is related to bodily property, it contributes directly to the development of the financial system.
Money itself has no intrinsic price (has no cost within itself) whereas a commodity has an intrinsic characteristic and hence may be utilised at once. Commodities have exclusive traits however the main high-quality of cash is that it is a measure of price or medium of exchange. It should now not be allowed to give rise to more money (through fixed interest payments).
According to Shariah law, money isn’t accepted to be the problem of change like other commodities. If cash has to be exchanged for cash, or if it must be loaned (for super motives), the price on both facets need to be same. This is to ensure that the money isn’t always used for the wrong goal (i.E usury or trading in cash itself).
Money is treated as capital only when it’s far used along different assets to undertake efficient sports. Islam recognises money’s time price only while it acts as capital and not when it’s far in a kingdom of prospective capital.
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With regards to the permissibly of sale on credit score, Allah (ﷻ) says within the Holy Quran,
“Allah has approved alternate and forbidden riba” [Al-Baqarah, 275]
“O you who trust, whilst you address every different in transactions, related to destiny obligations in a hard and fast time frame, report them in writing. [Al-Baqarah, 282]
Ayesha said that the Prophet (ﷺ) bought a few foodstuff on credit from a Jewish trader and mortgaged his armor to him [Bukhari and Muslim].
There is agreement among pupils on the permissibility of selling on credit score if the due date is thought and there’s also unanimous agreement almost about the permissibility of growing the costs of a sale on credit score:
“The rate can be increased based on deferment”. Al Kasani [Hanafi]
“Time has been given a proportion within the price” Ibne Rush [Maliki]
“Deferment earns a part of the price” Al Nawawi [Shafi’i]
“Deferment takes percentage of the fee” Ibne Taymiyah [Hanbali]
Shariah acknowledges the idea of cash’s time price to the extent of the pricing in a credit sale. It does now not approve of placing “lease” on cash loans as is done via hobby in credit score and loans.
In a sale transaction, the economic valuation of time is consequently regular as being valid beneath conventional jurisprudence.
These are interpreted as rate differentials that atone for the postpone in pleasurable a celebration’s contractual duty or for the possibility cost of the cash used by a contractual birthday celebration in providing items.
In a lending transaction, the economic valuation of time isn’t known in Islam as it’s miles a mortgage for deferral constructed on money’s time fee. It is meant to benefit the moneylender. Islam most effective lets in a Qard e Hassan mortgage (benevolent / hobby-unfastened loan).
Therefore time fee is possible simplest upon the change of commodities and now not when exchanging monetary values and loans or debts.
This implies that at the same time as time value is acceptable within the case of pricing assets and their usufruct, it isn’t desirable inside the case of any extra fee to the important of loans or money owed.
Questions & Answers about Present & Future Value of Money
Q: What is the present value of money?
A: The present value of money refers to the current worth of a future sum of money, taking into account the time value of money. It represents the amount of money that would need to be invested today at a specified interest rate to equal the future sum.
Q: How is the present value of money calculated?
A: The present value of money is calculated using a formula known as the present value formula. The formula takes into account the future value of money, the time period, and the interest rate. The general formula is: PV = FV / (1 + r)^n, where PV is the present value, FV is the future value, r is the interest rate, and n is the number of periods.
Q: What is the future value of money?
A: The future value of money represents the value that a sum of money will grow to over a given time period when compounded at a specific interest rate. It indicates the total worth of an investment or an amount of money at a future point in time.
Q: How is the future value of money calculated?
A: The future value of money can be calculated using the future value formula. The formula is: FV = PV * (1 + r)^n, where FV is the future value, PV is the present value, r is the interest rate, and n is the number of periods.
Q: What factors affect the present value of money?
A: Several factors affect the present value of money, including the future value, interest rate, and the time period. A higher future value, a higher interest rate, or a longer time period will typically result in a lower present value.
Q: What factors influence the future value of money?
A: The future value of money is influenced by factors such as the present value, interest rate, and the time period. A higher present value, a higher interest rate, or a longer time period will generally lead to a higher future value.
Q: How does the time value of money impact present and future values?
A: The time value of money is the concept that money available today is worth more than the same amount of money in the future due to its potential to earn interest or be invested. The time value of money affects present and future values by considering the opportunity cost of money and the effects of compounding over time.
Q: What role does the interest rate play in present and future values?
A: The interest rate plays a crucial role in determining both the present and future values of money. A higher interest rate will decrease the present value and increase the future value, while a lower interest rate will have the opposite effect. The interest rate reflects the cost of borrowing or the return on investment and influences the time value of money.
Q: How can the present value and future value of money be used in financial decision-making?
A: The present value and future value of money are essential concepts in financial decision-making. They help individuals and businesses evaluate the profitability and feasibility of investments, compare different options, assess the cost of borrowing or lending, and make informed decisions regarding saving, investing, or borrowing money.
Q: How might changes in inflation impact the present and future values of money?
A: Changes in inflation can have a significant impact on the present and future values of money. Inflation erodes the purchasing power of money over time, so it reduces the future value of money and can increase the present value. Higher inflation rates tend to decrease the value of future cash flows and require a larger present value to compensate for the loss in purchasing power.
Conclusion about Future Value of Money
Future Value of Money – In conclusion, understanding the concept of future value of money is crucial for making informed financial decisions. The future value represents the worth of an investment or amount of money at a future point in time, considering the effects of compounding and the time value of money.
By using the future value formula, which takes into account the present value, interest rate, and time period, individuals and businesses can assess the growth potential of their investments and evaluate different financial options.
The future value of money is influenced by several factors, including the present value, interest rate, and time period. A higher present value, a higher interest rate, or a longer time period generally lead to a higher future value. On the other hand, changes in inflation can impact the future value by eroding the purchasing power of money over time.
By considering the future value of money, individuals can plan for long-term financial goals, such as retirement savings or education funds. It also helps businesses evaluate the profitability of investments and determine the viability of projects.
In a dynamic economic environment, where interest rates and inflation can fluctuate, understanding the future value of money provides valuable insights into the potential growth or decline of financial resources.
By utilizing this concept, individuals and businesses can make more informed decisions, manage risk, and optimize their financial strategies for a prosperous future.
