INTRODUCTION

Time value of money is a

critical consideration in
financial and investment
decisions. For example,
compound interest
calculations are needed
to determine future sums
of money resulting from
an investment.
 FUTURE VALUE

Future value (FV) is the value of a current asset at a

future date based on an assumed rate of growth.
 1) Single Payment

Fn = future value / the amount of money at the end of year

Fn = P(1+r)n P = initial amount
r = interest rate or rate of return
n = number of years

Example:
Rahim placed RM 1,000 in a saving account earning 8% interest compounded annually.
How much money will he have in the account at the end of 4 years?
Fn = P(1+r)n
F4 = RM 1,000 (1 + 0.08)4
F4 = RM 1,000 (1.3605) = RM 1,360.50
 2) Multiple Payment

FV = Future Value

FV = P (1+r)n P = initial amount

r = interest rate
n = number of years

Examples:
Afiq plan to save in an account that pays 10% return per year. He put in RM 20,000 in the
first year, RM 30,000 in the second year and another RM50,000 in the third year. How much
will you have by the end of 10 years.

FV = RM20,000 (1+0.1)10+ RM30,000 (1+0.1)9 + RM50,000 (1+0.1)8

= RM20,000 (2.5937) + RM30,000 (2.358) + RM50,000 (2.144)
= RM51,874 + RM70,740 + RM107,200
= RM229,814
 3) Future Value of an Annuity
Sn = the future value of an n-year annuity
Sn = A ((1+r)n - 1)
A = the amount of an annuity
r r = interest rate
n = number of years

Example:
Jane wishes to determine the sum of money she will have in her savings account at the end
of 6 years by depositing RM1,000 at the end of each year for the next 6 years. The annual
interest rate is 8%.
Sn = A ((1+r)n - 1) = RM1,000 (7.336)
r = RM 7,336
S6 = RM1,000 ((1+0.08)6 – 1)
0.08
PRESENT VALUE

Present value is the value right now of some

amount of money in the future.
 1) Multiple Payment Present Value
P = present value
PMT = rm amount of each annuity payment
r = interest rate or rate of return
n = number of years

Example:
Assume that you plan to buy a real investment which is expected to give you an annual cash
inflow of RM10,000 in the first year, RM15,000 in the second year and RM8,000 in the third
year. If you wish to have a rate of return of 15%, what would be your purchase price?

P = RM10,000 (1/(1 + 0.15)^1) + RM15,000 (1/(1 + 0.15)^2) + RM8,000 (1/(1 + 0.15)^3)

= RM10,000 (0.8696) + RM15,000 (0.7561) + RM8,000 (0.6575)
= RM 25,297
 2) Present Value Annuity Factor
P = present value
PMT = rm amount of each annuity payment
r = interest rate or rate of return
n = number of years

Example:
You require a rate of return of 15% on your investment. You have identified an investment
which will give you a cash inflow of RM30,000 per annum for a period of five years. What is
the present value of you investment? (the present value is actually the price you would pay
for the investment)
p = RM30,000 (1-(1 + 0.15)^-5 / 0.15)
= RM30,000 (3.352)
= RM100,560
DEFINITION OF MONEY FROM CONVENTIONAL

1 Commodity and Widely marketable

2
used to purchased
goods

3 Relatively scarce 4 Imperishable

Easy to distinguish
5
and estimate the value
of money
 DEFINITION OF MONEY FROM
ISLAMIC PERSPECTIVE

1 2 3 4 5

Money has no According to Money has a All units of

ISLAM Medium of standard of money of the
intrinsic
= exchange value that same
value
Money can only measures the denominatio
be used to relative value n are 100%
purchase goods of various equal each
or services not a goods and other.
commodity services.
 THE CONCEPT TIME VALUE OF MONEY
IN ISLAMIC PERSPECTIVES

❖ Concept of money basically in Islamic perspective is not similar to

Conventional. Islam defines money as the medium of exchange and unit of
account and not store of value (Ahmad and Hassan, 2004).
❖ From the Shari‟ah scholars‟ view, money is considered as a capital when
it combines with other resources to carry out the productive activity like
Mudarabah and Musharakah that lenders do not share only profit but also
loss.
❖ Time is considered as a valuable economic resource that can be explain
into two main position (Batcha, 2009)
1. Opportunity cost of postponing current consumption current
consumption brings more satisfaction than future consumption. Thus,
compensation should be made for utility forgone today.
2. Opportunity cost of not being able to invest funds in productive activity.
Owner of funds gives up possibility of earning a positive return on funds.
❖ Nowadays the Application that offered by Islamic Bank has applied this

concept, for example, Profit loss sharing concept or Mudarabah transaction

that capital provider (Rabb-mal) has to a share of venture’s profits.

❖ Based on real sector that is business and trade of goods not in exchange

of monetary values and loans or debts and Shariah scholars allow any

incremental in a loan give to cover the price of a commodity in any sale

contract to be paid at the future date (Ahmad and Hassan, 2004).

ISLAMIC VIEW FOR TIME VALUE OF MONEY
TIME VALUE OF MONEY AND ITS PERSPECTIVE IN ISLAMIC FINANCE

i. This happens when all consumption and production activities take place within a given
time. As such, time is known to be a valuable economic resource and a point of reference.
ii. Another argument put forward which favors the time value of money concept is that it
holds greater merit. But an Islamic perspective, Time value of money does exist. The return
available to the individual saver does not always have to be related to riba-based
transaction.
iii. In the context of Shari‟ah is also established from the fact that Shariah prohibits mutual
exchanges of gold, silver or monetary values except when it is done simultaneously. Within
the context of Islamic finance, the Shari‟ah prohibits the mutual exchange of gold, silver, or
monetary values except when it is done simultaneously and equally.
 COMPARISON BETWWEN CONVENTIONAL AND
ISLAMIC PERSPECTIVE
CONVENTIONAL
Money is a commodity besides medium of
exchange and store of value. Therefore, it can be
sold at a price higher than its face value and it can Therefore, it CANNOT be sold at a price higher
also be rented out
Time value is the basis for charging interest on
capital.
Interest is charged even in case the organization
suffers losses by using bank’s funds. Therefore, it
is not based on profit and loss sharing.
ISLAMIC
Money is NOT a commodity though it is used as a
medium of exchange and store of value.
than its face value or rented out
Profit on trade of goods or charging on providing
service is the basis for earning profit
Islamic bank operates based on profit and loss
sharing. In case, the businessperson has suffered
losses, the bank will share these losses based on
the mode of finance used (Mudharaba,
Musharakah).
 COMPARISON BETWWEN CONVENTIONAL AND
ISLAMIC PERSPECTIVE
CONVENTIONAL
While disbursing cash finance, running finance or The execution of agreements for the exchange of
working capital finance, no agreement for
exchange of goods & services is made.
Conventional banks use money as a commodity,
which leads to inflation.
ISLAMIC
goods & services is necessary, while disbursing
funds under Murabaha, Salam & Istisnaa
contracts.
Islamic banking tends to create link with the real
sectors of the economic system by using trade
related activities.
 ADVANTAGES OF TIME VALUE OF
MONEY
 The concept of time valuation is only applicable in trade
and business of products, not in exchange of money
value and loans or debts
 Time value of money is allowed in Islam for the
purposes of valuing assets and their usufruct, but it is
not acceptable for the purposes of any increase in the
principal of loans or debts.
 Fulfill the human need directly

Time valuation of money in Islamic principle differs from

the conventional theory as money and commodities have
different characteristics.
Example:

1 i. MONEY has no intrinsic value, it is only unit of value or

medium of exchange. Can’t fulfil human needs on its own until
it is converted into a commodity.
ii. Money has no differential quality in the sense of the note of
RM100 is exactly the same as an old RM 100 note in terms of
value and quality.
 CONT…

iii. COMMODITY can fulfil human needs directly and can be

different quality.

1 iv. Commodities are traded or sold by describing the commodity

and giving specific details.
 The Islamic perspective, which is based in the concepts of real
commodity prices and usufruct, is able to fulfill human needs
according to the real situation in the practice.
 Improve the economic productivity

Since its concept based on the

real sector of the economic
activities, it encourages people
for working and trading
2
These economic activities increase
the system's level of real productivity
and advanced the national economy
in order to achieve rapid economic
growth and high living standards.
The stability of National Economy and society

Lead the stability to the

country’s economy since it
prevents the effects of
fluctuations and recessions.
3
It minimizes the socioeconomic
issues that occurred when the
traditional time value of money
was applied to the system
SAMPLE OF PRODUCT IN ISLAMIC
FINANCE

Represent the sample of products

in Islamic Banks that applied the
concept of “Time Value of money
in Islamic perspective.
 1: MURABAHAH FINANCING
INSTRUMENT

Originally signified only the price determination method, called a cost-plus-profit or markup sale, in which
the seller or trader revealed his or her cost and the two parties negotiated a profit margin to add to the cost
as compensation for the trader’s work. Murabahah has evolved to mean both a sale whose price is
determined on a cost -plus basis and that is financed on credit (bay’al-muajjil) or in modern times the
trader role as financier has been taken over the banks.

MARKUP PRICE CASH

ISLAMIC
CLIENT SELLER
BANKS
 2: ISTISNA FINANCING
INSTRUMENT

An Istisna contract is a sale in which the customers asks the seller to

manufacture a specific product for purpose, both parties agree on a price and
specifications for the product to be manufactured. If the product does not
conform to those specifications when it is delivered to the customer, he or she
may retract the contract. The two parties have flexibility when deciding
payment timing and mode: the price can be paid in a lump sum at the time of
the contract, in a lump sum in the future or over installment. (This mode
financing is usually used for aircraft manufacture, equipment installation at
factories, construction.etc)
 3: SALAM FINANCING
INSTRUMENT
Bai’ Salam involves advance payment to a party for delivery of a thing in future. It
applies to the case in which things comes into the possession of the seller due to his
being their producer towards discharging his occupational functions, for instance a
wholesaler acquiring goods from a manufacturer and supplying them to the retailers.
The purpose of salam is to aid the traders for import and export business.

CLIENT CLIENT CLIENT

 CONCLUSION

In conclusion, obviously TVM in Islamic and TVM in conventional finance is

totally different in both theory and practice. The fact that Islam forbids riba
does not mean that it is against the concept of positive-time preference
(PTP). Furthermore, time valuation is possible only when goods are traded,
not when exchanging monetary values and loans or debts (Hassan, 2004).
As the concept of time valuation is possible only in business and trade of
goods not in exchange of monetary values and loans or debts. Therefore, no
time value can be added to the principal of a loan, or a debt after it is
created or the liability of the purchaser stipulated. The important
conclusion view in Islam is time value of money is acceptable in respect of
the pricing of assets and their usufruct, it is not acceptable with regard to
any addition to the principal of loans or debts.
THANK YOU