Criticism to Time Value of Money and the Islamic Economic Solutions

<div dir="ltr" style="text-align: left;" trbidi="on"><span class="Apple-style-span" style="color: #333333; font-family: Verdana, Arial, Helvetica, sans-serif; font-size: 12px;"></span><br /> <div class="postcontent" style="font-size: 12px; line-height: 17px; padding-bottom: 10px; padding-top: 10px;"><div style="font-family: verdana; text-align: justify;"><span style="font-weight: bold;">Counter-concept of Time Value of Money</span><br /> Islamic economic principles which have come from both the legal sources of the Koran, Hadith and Muslim scholars thought. These fundamental values underlying the Muslim economists view the birth of thought, including reviewing the functions of money in economic life. In their opinion, the functions of money there are only two, namely: 1. as a measure of prices, and 2. means of payment. The function of money as a store of value is not recognized because it was considered something close to usury. The function of money is prohibited from actually gave birth to the theory that time value of money. Corollary, Muslim economists do not agree with this concept.<br /> <a href="" name="more"></a></div><div class="fullpost" style="font-family: verdana; text-align: justify;"><br /> As we all know, conventional financial theory based arguments justifying the existence of interest (interest) through the concept of time value of money (time value of money). In the Islamic economy, the validity of this concept has been disproved his argument with the prohibition of usury in Islam. Instead, the business activities of Islamic Economics always stressed to the mechanism for the system (profit and loss sharing). The concept of partnership is considered more appropriate and in accordance with the principles of justice are realistic.<br /> <br /> In conventional economics, the definition often used to describe the sense time value of money is "A dollar today is worth more than a dollar in the future because a dollar today can be Invested to get a return" This understanding is certainly not accurate because each investment is always have the possibility to obtain positive results, negative, or no return. That is why in financial theory, always known risk-return relationship (in the direction of the relationship between risk and outcome). The higher the level of risk faced / borne, the greater the results you want / get, and vice versa.<br /> According to the opinion of conventional economists, there are two things that became the foundation of the concept of time value of money, namely:<br /> <br /> <span style="font-weight: bold;">1. Presence of Inflation</span><br /> Can dimisalkan: inlasi level say 10% per year. One can buy 10 bananas fried today with pay 10,000 when he bought it, but next year, with the same amount of money he only 10,000 can buy fried bananas 9. Therefore, he will ask for compensation for the loss of purchasing power of money due to inflation.<br /> <br /> <span style="font-weight: bold;">2. Preference present consumption to future consumption</span><br /> Assumes zero inflation rate, so with 10,000 person can still buy 10 bananas fried today or next year. For most people, eating 10 fried bananas now more unpopular than consuming fried banana 10 next year. With this reason, although the zero inflation rate, preferably 10,000 and consumed today. Therefore, to postpone consumption, it requires compensation.<br /> <br /> The first argument be refuted because it is incomplete condition. In every economy there is always a state of inflation and deflation. It should state the reason for the deflation becomes a negative time value of money. Say deflation rate 10% per year. Fried banana 10 days worth 10,000, but when he bought it with money next year as it can be fried plantain 11. Therefore, it would give compensation for the rising purchasing power of money due to deflation. But in reality this does not apply, only one state are accommodated by the time value of money.<br /> <br /> Conventional Economics is also incorporated elements of uncertainty and call return as the discount rate of compensation which is more general than the term interest rate. The uncertainty of return is converted to a premium for certainty over uncertainty. Investment course there is always a possibility of getting positive returns, negative return, and no return. This is what caused uncertainty (uncertainty), but the probability of negative returns and no return is exchanged for something definite, premium for uncertainty.<br /> <br /> This situation is rejected in the Islamic Economy, a condition al-ghunmu bi la ghurmi (Gaining responsible for return without any risk) and al-kharaj bi la dhaman (without income Gaining responsible for any expense). Actually, this situation is also rejected by the financial theory that explains the direction of the relationship between risk and return.<br /> <br /> The same quantity of time for everybody, which is 24 hours a day, 7 days a week. But the value of time will vary from one person to than others. For example for a laborer working hour is worth 25.000, for financial managers to produce Rp.250.000, whereas for Islamic Economics expert Rp.2.500.000 appreciated.<br /> <br /> So the factors that determine the value of time is how someone used the time. The more effective (efficiency) and efficient (right way), the higher the value of time. Effective and efficient will be profitable in the world for those who carry it out. Therefore, whoever the perpetrator, the benefit sunnatullah action in the world.<br /> <br /> Moreover, in Islam you are looking for profits not only benefit the world but also in the hereafter. Therefore the use of time not only to effective and efficient, but he also must be based on the faith. Faith is what will bring benefits in the afterlife. Conversely, if the faith can not be profitable in the world, means that there are factors that have not obliged.<br /> <br /> <span style="font-weight: bold;">Risk of Economic and Business Fluctuations</span><br /> State of an economy would fluctuate from one period to another period. A business activity would also be affected by the macroeconomic situation, which inevitably have to take into account the risk factor in business. Referring to the time value of money, conventional economics use the scale to measure the interest rate and inflation uncertainty factor. This is to mensiasati to a smaller degree of risk and obtain the desired level of profit.<br /> <br /> Uncertainty in conventional economic thinking was based on two things. First, the uncertainty caused by several investment options with the level of risk and benefits of different expectations. Second, the uncertainty as a result of economic conditions uncertain and unpredictable. The situation is all this uncertainty is usually addressed by monetary policy through interest as the main instrument for controlling the money supply / tackle inflation.<br /> <br /> Instrument system in anticipation of interest rate uncertainty in economic studies of Islam itself does not want its existence. However, a business activity would be influenced by macroeconomic factors of inflation. This is what makes the reasons given in addition to the value of money paid in credit by taking into account inflation. This additional money allowed for the value of the fixed and does not include usury. The amount of additive is not allowed to be determined at the start / predictable for long-term but should be in accordance with the reality that has happened.<br /> <br /> Modern business finances are often filled with elements of speculation (gharar) and interest (usury). On the contrary, Islam was strictly prohibits these elements and using real analysis to calculate the level of benefits and risks of each business. Thus, possible benefits and disadvantages of different for the same loan amount. Islamic Economic Studies of the theory itself is still interest in micro-economic approach has not so deep and comprehensive in the areas of macroeconomic policy and monetary policy.<br /> <br /> <span style="font-weight: bold;">Sharing System as a Solution</span><br /> In response to a disagreement with the theory of interest (time value of money), Economics of Islam offers a system of cooperation with the mechanism for the results (profit and loss sharing). A fairer system departs from the assumption that every effort always is the risk of both profit and loss so that both parties must be prepared to share and accept whatever happens is not just one side only of profit or loss.<br /> <br /> In Islamic Financial Institutions, principles and mechanisms for the results applied to mudaraba and musharaka product. But unfortunately the main product of this proportion is still smaller than other products. This deficiency occurs because of socialization and understanding of public institutions has not run optimally. Public education is needed so that more information for the same perception of the institution and the community.<br /> <br /> The idea and concept for a just outcome will be successful if executed with a consistent and professional. However, difficult to apply in the real world, because the face the uncertainty and inflation. These obstacles can be overcome with modifications as long as still within the framework of sharia. Through the Islamic system is more equitable, Islamic Financial Institutions still have a chance for economic pemberdayakan primarily on small business.</div></div></div>

Criticism to Time Value of Money and the Islamic Economic Solutions

Counter-concept of Time Value of Money Islamic economic principles which have come from both the legal sources of the Koran, Hadith and Mu...

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Money's Meaning in Islamic View

<div dir="ltr" style="text-align: left;" trbidi="on"><span class="Apple-style-span" style="line-height: 17px;"><span class="Apple-style-span" style="color: red;"><b><span class="Apple-style-span" style="font-family: 'Courier New', Courier, monospace;">Money</span><span class="Apple-style-span" style="font-family: verdana; font-size: 12px;"> which is running an economy lubricants are always a hot topic for discussion. Like an engine without oil, the economy also will not work without the money. However, many of us who only understand the meaning</span></b></span><span class="Apple-style-span" style="font-family: verdana; font-size: 12px;"> of money in the context of its form as paper money and coins. In fact, the definition of money is anything that can be accepted as a means of payment for goods and services in an economic system. In fact, in ancient times people used stone, animal skins, salt, and shells as money. At the time of the Prophet (SAW), gold coins (dinars), which comes from the Roman and silver coins (dirhams), which comes from the Persian are the two precious metals are regarded as currency. In the current era, paper money (fiat money) has become a common means of payment used in all countries in the world.</span></span><br /> <div class="postcontent" style="line-height: 17px; padding-bottom: 10px; padding-top: 10px;"><div style="text-align: justify;"><span class="Apple-style-span" style="font-family: verdana; font-size: 12px;"><a href="http://www.blogger.com/post-edit.g?blogID=5326586353759569805&postID=2229202415862104977" name="more"></a></span></div><div class="fullpost" style="font-family: verdana; font-size: 12px; text-align: justify;"><br /> On the origin of money has three important functions, namely as a medium of exchange, store of value, and measuring the value of a commodity. However, with interest menyebarluasnya system in the current financial transaction, the function of money has grown into a commodity. The function of money as a commodity is supported by several contemporary financial theories such as the Loanable Funds Theory. In this theory of interest (interest) is considered as the price of the funds available for lending (loanable funds), which became one variable that affects the level of supply (supply of) and demand (demand for) of the loanable funds. Based on the above theory, it can be concluded that the supplier of loanable funds would be willing to lend money to the borrower if the borrower is only willing to pay back the loan in an amount greater than the principal. The difference between the amount due to the principal borrower and that is what is called interest. By contract, the price (interest) is to pay the borrower under any circumstances (the borrower's business profits or losses) to the lender, because the lender has considered selling a commodity called money.<br /> <br /> Here is clearly seen that in the current financial system right now, money is regarded as a tradable commodity. This is in contrast with Islamic views who do not accept the functions of money as a commodity. That's because money does not qualify as a commodity. According to Sheikh Muhammad Taqi Usmani, an expert in Islamic finance Shariah, there are at least 3 factors that distinguishes the money to commodities. Firstly, money has no utility instrinsk (intrinsic utility). In contrast to commodities, money can not be eaten, worn, or used directly. Money can be exchanged only with a commodity, and commodities that will be eaten, worn or used. In economic terms, money only has value in exchange as commodities having value in exchange and value in use at once.<br /> <br /> Second, money does not need the quality to determine its value, in terms of paper currency USD 100.000 an old issue of paper money in 2007 with a new Rp 100.000 published in 2009 has the same purchasing power. Another case with commodities, for example, output of the Honda Jazz Honda Jazz 2007 to January 2009 the output has a different price. This indicates a difference in quality between the two cars on top of which reflected the value and the price difference.<br /> <br /> Third, the money does not require specification of the validity of transactions, while commodities have specific properties when the validity of transactions. For example, if we want to buy the goods we will choose the things we want to taste us, like color, other complementary accessories. That is, if the seller offers the same goods but they were not in accordance with our tastes may be we will refuse. But it is different with the money that is not specific. For example, for the payment of monthly electricity bills amounting to Rp 300,000. we can pay these bills by using three pieces of money USD $ 100,000 or four pieces of money Rp 50,000 plus one sheet of Rp 100,000 and even we can pay these bills with three hundred pieces of Rp 1,000. For the recipient there will be no difference in the value of the three ways above payment.<br /> <br /> There is one additional difference between commodity money, especially with fiat money we use today. Paper money (fiat money) to current has no intrinsic value (intrinsic value). Paper money became legal tender by law issued by a country that declared the validity of the money. This shows that the acceptance of paper money as a means of payment is only due to the government trust factor that ensures the validity of these bills. That is, if the trust is lost or reduced the value of the money will be weakened (terdepresisasi) due to more people off, by selling money, than to have it. Because obviously, have no intrinsic value.<br /> <br /> However, it should be also stressed here that fiat money is a legitimate money on the side of the sharia. The author does not agree with the view that gold is only valid at the shari'a. Indeed, the true gold is the money the best and most stable in value, and if we can re-use gold as a standard of value for money, of course, the world's financial system would be much better. However, claims that only gold or silver are recognized Islam as the money and gold and silver but it is not legitimate, this is an excessive claim. The proof, the Caliph Umar never meant to make the camel as a currency, but then was advised not to do it, because eventually the camel will be vanished from life. So is Imam Malik once said that if people make the animal skin as a currency, he undoubtedly would prohibit selling such animal skins but with cash and may not be tertangguh. Although today we are eager to return to the gold as the standard currency value, we should not be excessive and extreme by saying that fiat money is forbidden. Proscribe the same kosher is bad in Islam to justify the unlawful. If unlawful fiat money, a dowry of course we become invalid, and our marriage is not valid, then our children are also to be a bastard. Is not that logical consequence of the said fiat money is forbidden? And Allaah knows best.</div></div></div>

Money's Meaning in Islamic View

Money which is running an economy lubricants are always a hot topic for discussion. Like an engine without oil, the economy also will not w...

+ Read more »