The Interest and Usury based Fractional Reserve Banking is justified by most of the financial experts on the pretense of the Time Value of Money which is contrary to the objectives of Sustainable Economic Growth and the creation of virtuous channels for prevention and eradication of business cycles. Natalie Schoon in her book “Islamic Asset Management” considers Time Value of Money as a euphemism for Riba al Naseeyah that is the addition of a premium paid to the lender in return for waiting for their money (page-206). Another luminary, Zubair Hasan in his masterpiece “Islamic Banking and Finance – An Integrative Approach” shows that Islam does not allow a Time Value for money but grants Time a value in price. Therefore, Time Value of Money may enter price in the case of deferred payments. He further reveals on page 97 of his book that this is the basis of Cost-plus Sale or Murabahah transactions in Islamic Finance. Thus Riba (Interest), when it means addition, is not prohibited in all cases. Riba-al-Nasi’ah is implicit in transactions involving deferred obligation. In fact, Islamic banks operating in the USA are obliged to reveal such Implicit Interest Rates underlying this Musharakah or Ijarah (Leasing) contracts to their customers.
Sheikh Imran Hosein in his booklet “Islam and the Future of Money” has lambasted over Murabaha, Fixed Deposits and Back-Door Riba in the system of modern Islamic Banking. The concept of modern Islamic Banking among Islamic jurists and scholars evolved in the 20th century after acquainting with the operational procedures of Conventional/ Fractional Reserve Banking. Muslim scholars of Islamic Finance are still looming in conundrum situation to solve the quagmire of Time Value of Money and Interest. There are indeed some loopholes in modern Islamic Banking that must be solved by the brains and brawn of Islamic Finance for full conformity with Sharia.
The concept of Time Value of Money only arises in the modus operandi of Fractional Reserve Banking due to the command of interest return/rates. The system has affected the banking sector, humanity and Sovereign Governments in the following ways………………….
- Discount Rate: – the rate of interest which a Central Bank/ State bank charges on its loans and advances to a Commercial Bank.
- Interbank Rates: – like that of LIBOR (UK), EURIBOR (Euro zone) and KIBOR (Pakistan) etc.
- Deposit Interest Rates: – Interest on Deposits/ Saving accounts.
- Interest Payments on Debts/ Loans: – For example, Interest payments on Private Debt & Debt Service of National Debt (External Debt and Liabilities + Domestic Debt).
The servicing of the debts requires a Central Bank to always be in a posture of creating more money in order to stave off a collapse which in a real world scenario is Compound Interest in full operation. This Compound interest monopoly is also responsible for the evolution of Time Value of Money (TVM) that in my view is a byword for inflation. Thomas Greco in his book “Money: Understanding and Creating Alternatives to Legal Tender” has this to say on page 166…………………..
“The principle of the “time value of money” is now an unquestioned axiom of business and economics, & almost everyone supports the pretense that any rational economic man would prefer a sum of money now to the same sum of money later. But this applies only in situations where money can command an interest return, and an interest return is possible only when there is no free market for money. The matter becomes more clear if we look at real values rather than monetary values. E-g, a person can eat only so much at one time. Once your hunger is satisfied, would you prefer more food……….. (Page – 166).
In short, Time Value of Money is the product of the Interest and usury based Fractional Reserve Banking. The future of the world will witness more business cycles and gory details of economic slumps. Until and unless, the banking sector is reformed, there are still dark times ahead. Hence, it is concluded that without Interest, there is no Time Value of Money.
The writer is post graduate in Community Child health from Khyber Medical University (KMU) and currently serves as medical officer at Type-D Hospital, Tehsil Banda Daud Shah, District Karak. Can be reached at [email protected].