Understanding Islamic Finance - Doha Academy of Tertiary Studies

The Philosophy and Features of Islamic Finance 89is delayed; this is forbidden. The second, that is permitted, involves the future exchange ofboth currencies at the previously agreed rate. Therefore, forward cover in currencies can betaken in the form of a promise only for fulfilling the real exchange needs of the traders andnot for making speculative gains. The client would enter into a promise with the bank tosell or purchase a certain amount of currency against the foreign currency at the agreed rate,but the actual exchange of both currencies would be simultaneous.Some scholars from the Indo-Pak subcontinent have suggested the use of Salam in Fulus(coins of inferior metals). 14 However, the forward sale or purchase of currencies in theform of Salam is not a valid contract. As described earlier, paper money can be used onlyas a price; it cannot serve as a commodity to be sold in Salam. The counter values to beexchanged in Salam include the price on the one hand and the commodity on the other. Thecommodity is to be deferred in Salam and if the price is also deferred, the Salam contractwill mean the exchange of debt against debt, which is prohibited. If the price in Salamis in US $, for example, and the commodity to be sold is Rupees, it will be a currencytransaction, which cannot be made through Salam because such an exchange of currenciesrequires simultaneous payment on both sides, while in Salam, delivery of the commodity isdeferred.4.6 TIME VALUE OF MONEY IN ISLAMIC FINANCEThere is almost a consensus among Sharī´ah scholars that the credit price of a commoditycan genuinely be more than its cash price, provided one price is settled before separation ofthe parties. 15 According to many jurists, the difference between the two prices is approvedby the Nass (clear text of the Sharī´ah). The Islamic Fiqh Academy of the OIC and Sharī´ahboards of all Islamic banks approve the legality of this difference. This is tantamount to theacceptance of time value of money in the pricing of goods. What is prohibited is any additionto the price once agreed because of any delay in its payment. This is because the commodity,once sold (on credit), generates debt and belongs to the purchaser on a permanent basis andthe seller has no right to re-price a commodity that he has sold and which does not belongto him.As this is an aspect of far-reaching implication for Islamic finance, we may discussit in detail. Jurists allow the difference between cash and credit prices of a commodity,considering it a genuine market practice. Both time and place have their impact on the price.A commodity sold for 100 dollars in a posh area might be available for 50 dollars in amiddle class residential area. Similarly, an object with a price of 100 dollars in the morningmight be available for 50 in the evening. This is all acceptable in Sharī´ah if caused bygenuine market forces. Similarly, it is quite natural that the credit price of a commodity ismore than its cash price at a point in time, while in forward contracts like Salam, the futuredelivery price is less than the spot price.The concept of time value of money in the context of Sharī´ah is also established fromthe fact that Sharī´ah prohibits mutual exchanges of gold, silver or monetary values exceptwhen it is done simultaneously. This is because a person can take benefit from use of a14 For detail see Usmani, 1994, pp. 38–42.15 Shariat Appellate Bench, 2000, pp. 476–477. Also see Thani, Ridza and Megat, 2003, p. 35.