Norms Relating to Riba, Gharar, Tawun

Conventional finance conveniently uses the rate of

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Conventional finance conveniently uses the “rate of interest” as this “rate of return”. 18 Islamic Banking
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Norms relating to Riba: TVM Rate of Interest vs Rate of Return Time value of money indeed has a place in Islamic finance. The return available to the individual saver, need not relate to an interest or riba-based transaction. The return available on the next best “permissible” investment (from trade or otherwise) constitutes time value of money in Islamic finance. 19 Islamic Banking
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Norms relating to Riba: TVM Spot Price vs Deferred Payment Price An implication of “zero time value of money” is that the spot price in a trade must be same as the deferred price. This is wrong. A trade (with or without deferment of payment of price) is a risky and permissible investment. It is different from pure riba-based risk-free debt. A seller in a trade, whether on spot or deferred payment basis, is free to charge any price and the profit that accrues to him is legitimate. There is thus, a possibility that his “spot” price may be lower than his “deferred” price. 20 Islamic Banking
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Norms relating to Riba: TVM Spot Price vs Deferred Payment Price What is not permissible is the time value of money in the context of debt. Needless to say, when the buyer in the above deferred-payment sale decides to defer his payment beyond the due date for payment, neither he nor the seller is allowed to increase the price. In the eyes of the Shariah the buyer and seller are now the borrower and lender respectively. The price, therefore, cannot be increased since it is now in the nature of debt and a debt cannot be replaced by a higher or lower debt. A higher debt replacing a lower debt results in riba on the old debt. 21 Islamic Banking
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Norms relating to Riba: TVM Indexation It is argued that a debt when repaid at a later date has lower purchasing power due to persistent increases in the general prices of commodities. Hence, the creditor in a debt loses while the debtor gains. Arguably, it would be unfair, if the debtor is not compensated for the loss of purchasing power. Should the commodity prices increase resulting in decrease in real value of money, an offsetting increase in the nominal value of debt would follow. Such indexation has found little favor on the ground that rules of riba or any other divine rule cannot be relaxed for man-made problems like inflation. 22 Islamic Banking
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Norms relating to Riba: Risk & Return "Al-Kharaj bid Daman” - “revenue goes with liability” No positive returns are to accompany conditions of zero risk. Murabaha - the seller must “own” the asset (even if this is for a fleeting moment) before he sells it to the buyer. Musharaka - inadmissibility of contract where either partner agrees to share in profits only, and not in losses.
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