Understanding Islamic Finance - Doha Academy of Tertiary Studies

440 Understanding Islamic Financebanks who charge higher credit prices than the spot prices of the goods are not Islamic orthe present-day bank interest is not prohibited. Both views are based on misconception. Wehave discussed this issue in detail in Chapter 4. It was explained that time value is approvedby the Sharī´ah in trading/exchange of real goods but not in Qard or Dayn, against whichone cannot derive any benefit. Pricing of goods and their usufruct is a major part of anybusiness transaction, and for the purpose of pricing, the place and the time of transaction arecrucial factors. A commodity might be cheaper in one part or market of a city than anotherpart or market of the same city. Similarly, a commodity might be cheaper at the peak of theseason than at its beginning. The Sharī‘ah does recognize differences in value due to placeand time elements, and does not prohibit realizing the time value of money in a genuinebusiness transaction based on exchange (sale and leasing). What is prohibited is any claimto the time value of money as a predetermined quantity calculable at a predetermined ratenot related to any real sector business.There is almost a consensus among the Sharī´ah scholars that the credit price of acommodity can genuinely be more than its cash price, provided one price is agreed at thetime of execution of the contract (discussed in detail in Chapter 6; Sections 6.5.3 and 6.8).Similarly, it is quite natural that in forward contracts like Salam, the future delivery priceis less than the price at the time of delivery of goods. This is tantamount to the acceptanceof time value of money in the pricing of goods. What is prohibited is any addition to theprice once agreed because of any delay in its payment. This is so because the commodity,once sold (on credit), generates debt and belongs to the purchaser on a permanent basisand the seller has no right to re-price a commodity that he has sold and which no longerbelongs to him. The concept of time value of money in the context of Sharī´ah is alsoestablished from the disapproval of Riba Al-Fadl, which involved gold and silver in additionto some other commodities that perhaps were used as media of exchange. Exchange ofthese commodities on a deferred basis is banned as a rule. Only hand-to-hand exchange isallowed, on the condition that the quantity on both sides is the same. This implies that theSharī´ah prohibits mutual exchange of gold, silver or monetary values except when it isdone simultaneously. This is so because a person can take benefit by a medium of exchangewhich he has received while he has not given its counter value from which the other partycould take the benefit.Valuation of a credit period for pricing the goods or their usufruct is different from theconventional concepts of “opportunity cost” or the “time value”. As such, “mark-up” intrade is permissible, provided the Sharī´ah rules relating to sale of goods are adhered to, butinterest is prohibited, as this is an increase over any loan or debt. Therefore, no time valuecan be added to the principal of a loan or a debt after it is created or the liability of thepurchaser fixed.Islamic economics has the genuine provision of converting money into assets, on thebasis of which one can measure its utility. While most of the jurists uphold the conceptand practice of a higher credit price than the cash market price of goods, none of themallows generating rent on the principal amount of loans and debts. Hence, there is nojustification to assume a zero rate of time preference in an Islamic economy. Similarly, onecannot add value to loans and debts on account of time. Economic agents can have positivetime preferences and there will be indicators available in the economy to approximatethe rates of their time preferences, generally determined by the forces of demand andsupply.