Moneyand the Law of Depreciation

Moneyand the Law of Depreciation

Thecentral aspect of Islamic financial system is the prohibition of thepayment and receipt of interests (Rosly, 2005). However, it isfurther supported by religious teachings such as those which advocatefor people’s rights, equitable wealth distribution, propertyrights, risk sharing, and honoring of contracts among others. Thefact that the system has equal emphasis on the moral, ethical, andsocial dimensions of the Islamic religious culture makes it appear asa form of ethical investing or lending.

However,this financial system approach does not refute time`s monetaryvaluation. This assertion can be authenticated by the fact that thelaw supports the increment in loan regarding the price of goods andservices which are scheduled for next payment in any contract.Rather, the Sharia teachings, which govern all the processes,prevents against making the time value of money an aspect which canbe used to establish lending or investment relationships betweenpeople (Rosly, 2005).

Throughthe analysis of the system, it is evident that the religious cultureperceives money differently from the conventional financial systems.Recently, money has been increasingly used as a commodity in themodern business environment.Therefore, this paper seeks to discussthe concept of money and the law of depreciation as one of thecritical issues in Islamic banking.

TheMeaning of Money According to Islamic Perspective

Therehave been a lot of controversies surrounding the definition of money.For a long time, a certain definition of money has eluded manyeconomic scholars. As a result, two economic approaches have beendeveloped to try to define the concept of money. The functionalapproach defines money as anything as long as people agree that it isvaluable. It also describes money as the principal medium of exchangeamong people.

Therefore,it defines money based on its core functions and the relatedperceptions that people develop. On the other hand, the empiricalapproach to money describes it as a tentative financial constructwaiting to be invented. This view portrays money as an increasingnumeric value. High-quality commodities attract greater monetaryvalues while low-quality products attract less monetary values.

Froma general perspective, arguably the conventional understanding, moneyis analogous to energy which enables engines to function properlyconsidering its economic functions. It implies that without money, aneconomy cannot operate at all. It can be defined as the means bywhich people can pay for goods and services they receive from others.Alternatively, it can mean a form of value for one`s goods andservices.

Moneyis not a modern concept as sometimes it may appear. For instance,people used precious stones, animal skins, and shells to representmoney in the ancient periods. During the duration of the Prophet,people used gold and silver coins to represent money. Currently,people use paper money to complete their financial transactions withothers. It is projected that people will use electronic systems tobuy goods and services in the future.

Thedefinition of money can deeply be understood within the context ofits three core functions, including a medium of exchanging value, astore of value, and a measure of the values of goods and services inthe contemporary business environment. Both the conventionalfinancial system and the Islamic banking acknowledge these functions.However, the latter does not recognize the emerging fourth functionof money.

Financialtheories such as loanable funds theory support the emergence of thisfourth aspect. This theory portrays loanable money as a commodity.The reason why people borrow money is because they do not have it,and thus cannot facilitate their ambitions. Similarly, people buygoods and services for other people because they do not have them.Therefore, the money they pay characterizes the value of suchcommodities. Correspondingly, the interests represent the prices forloans.

Othertheories also support the concept of interests by asserting thatmoney is capable of generating more profits when invested. Therefore,when a person is giving out loans to other people, he or she isforfeiting the opportunity of generating more revenues. In this case,it is only fair that the borrower pays back the interests for themoney which helped him or her in one way or the other. Additionally,everything that has demand must have a value. Thus, if money hasdemanded, then it must have value same as other commodities.

Thisis the area where Islamic views begin to differ with the traditionalfinancial systems. According to Sharia laws, money cannot be treatedas a commodity because it lacks intrinsic utility or value(Çizakça, 2011). An intrinsic value refers to the actual ratherthan perceived value of an item. It can also imply the value exudedby an item just because it exists. For instance, gold has anintrinsic value because it can be used to make beautiful jewelry.Similarly, diamond has intrinsic value because it can be used to makedrills and jewelry. In other words, anything that can be used tosatisfy the needs of human beings has an intrinsic value.

Therefore,they cause happiness, satisfaction, comfort, and inspiration inpeople. On the other hand, money is only valuable because people useit to store or evaluate the real values of goods and services. Thefact that people tend to be happy when they get a lot of money cannotbe used as evidence to assert that money has intrinsic value. Peopleare usually thrilled at the possibility of owning a lot of thingsbecause they have a lot of money.

Forinstance, they are happy because they can own cars, houses, anddecent clothes. This analysis explains why money has existed indifferent forms in the course of world`s history. Animal skins andshells which are now perceived to be low in value were once the mediaof exchange. In a simple term, it cannot be worn, eaten or engaged inany form of direct usage to satisfy the needs of human beings. Moneycan be anything as long as people agree to make it valuable. In thiscontext, it cannot be treated as a commodity, but rather as a meansfor achieving the real objective.

Secondly,the Islamic financial system does not recognize money as a commoditybecause quality does not matter regarding value determination(Çizakça, 2011). For instance, an old $100 note has the samepurchasing power as a new one. An old and new note of the same valuecan both buy a loaf of bread. On the other hand, a new car costsmore than an older version of the same car.

Qualityhas been a central factor in consideration when setting the prices ofgoods and services in the market. Depending on a person`s resources,he or she can get high quality, mid-level quality or low-qualityproducts or services. Any item whose quality does influence theperception of its value cannot be regarded as a commodity. Thisassessment further proves that the importance of money is tofacilitate the exchange of goods and services.

Thirdly,the specifications of the validity of transaction do not apply whenit comes to money (Rosly, 2005). Each country has a currency. Thesecurrencies can be equated to other currencies in the world through anintricate economic process. However, a commodity such as a phone hasspecifications which determine its quality and price. Aspects such ascolor, size, smell, and design come into play when making choices foritems to buy.

Peoplehave different needs and are likely to choose different productsdepending on their specifications. On the other hand, money is thesame in any given country. Correspondingly, money cannot beconsidered a commodity because it has an artificial demand. Peopleonly need money because it can help them get them the realcommodities. That demand cannot be used to justify money as acommodity. Also, money has no cost of production, carrying cost, andsubstitute.

Theabove assessment of the Islamic perception of money provides apreliminary basis for understanding how interests are unjustified.Within the context of Islamic financial system, interest is fixed,positive, and ex-ante. The amount depends on the size of the loantaken as well as the duration it takes before refund.

Thehigher the amount borrowed, the larger the interest rate. Similarly,a borrower is likely to pay more benefits if he or she stays with theloan for an extended period. The payment of interest is alsoguaranteed regardless of the outcome of the process where it wasused. The lender does not share in any risk incurred during theinvestment period. Its collection is enforced by state policies.

Therefore,an individual can be prosecuted and jailed for failing to payinterest. Alternatively, a financial organization can claim aperson’s property such as a car, a piece of land or a house if hefails to repay the loan and the interest. According to the Islamicfinancial system, people can claim properties in two different ways.Firstly, property rights can result from an individual`s effort andresources. Secondly, they can also result from the exchange,remittance, and grants or inheritance. Therefore, money is a means towhich these rights can be held or transferred from one person toanother.

Theseperceptions of money underline the reason for the difference inapproach taken by Islamic banks compared to other banks. Forinstance, the fact that money is not treated as a commodity limitsthe ways through which Islamic banks can make money. In fact, most ofthem generate profits by retailing or distributing goods and services(Omar, 2011). Others generate income by engaging in a joint businessventure with other people or projects.

Correspondingly,they also make money by purchasing items and renting them orreselling them to clients. Lastly, they can also make profits byparticipating in the processes which seek to increase the customers`share of ownership. During this time, they rent assets such as houseson behalf of clients. As customers` shares over assets increases,they pay the bank an amount that exceeds the original price of theproperty. This way, they both gain from one another.

Islamicbanks do not offer interests on the money that is saved. Instead,they can provide a target profit to customers. This approach involvesinvesting client`s savings in bigger business projects to generateprofits. The profits are then shared accordingly between the bank andcustomers. However, customers must understand that losses can be madeand that the same must also be shared adequately with the financialinstitution. In fact, these laws are poignantly portrayed before thebank enters a contract with a given client. According to sharia, thisapproach is legal because it involves the element of risk sharing.

Fromthis analysis, it can be seen that the primary approach to finance inIslamic banking is trading. The chief focus is on risk sharing.According to Sharia laws, justice is served when leaders of thefinancial institutions share risks with smaller companies orindividuals. The structure of Islamic banking aims at maintaining adifferentiated status regarding the capital of shareholders and theprofits of clients. This way, benefits can be shared appropriatelybetween the two groups of people. Therefore, the concept of Islamicbanking appeals to people who believe in equitable distribution ofwealth and resources, the judicious spending of wealth, and fairnessin trading.

TheTime Value of Money and Depreciation

TheIslamic perception of the time value of money can be understoodwithin three elements which define the legal authority of the concept(Ahmad &amp Hassan, 2006). Firstly, Muslims acknowledge the idea ofpositive time preference which states that the exchange values ofpresent goods are relatively higher compared to the future goods.This theory embodies the concept of depreciation as commonly used inthe contemporary business environment.

Commoditiessuch as houses and cars among others are expected to reduce value intime. As they increase in age, they become obsolete and unable tomeet the needs of people comprehensively. People`s needs are dynamicbecause they depend on elements such as technology and thedevelopment of new ideas. For instance, human beings have beenrevolutionizing systems with time.

A 20thCentury car cannot have the same value as the 21stCentury car because of its obsoleteness. Cars with manual gears werereplaced by automatic transmission cars. Currently, cars withself-drive functionalities are being designed and released into themarket. Therefore, a commodity can only be valuable when soldpresently as opposed to the future. The same commodity will be lessvaluable when sold in the future. Land, on the other hand, continuesto appreciate in value because it increases in demand as time passes.The population growth in most countries has facilitated the growth inthe value of land, thus making it one of the most preciouscommodities.

Thevalue can change with time depending on the nature of consumerism.Depreciation allows taxpayers to recover costs of particularproperties. Three conditions are defining a property that isdepreciable. Firstly, the property must be legally owned by ataxpayer. Secondly, the property must be in use in the incomegenerating exercise. Lastly, the property must be useful for at leastone year.

However,time value of money cannot be exclusively defined within the contextof depreciation of commodities (Ahmad &amp Hassan, 2006). It canalso be defined within the right of people to reasonably andadequately increase the future value of a particular good or service. This approach is essential for compensating traders for the timethey will deny themselves the opportunity to make profits from theirgoods and services. The Islamic financial perspective asserts thatmoney can also be considered as capital when it is adequatelyinvested.

Otherwise,money given to businesses in form as loans is regarded as a debtrather than capital. In this context, it cannot attract interest.Furthermore, Muslims are encouraged to spend money rather than keepit idle. It is also regarded as a purchasing power rather thanwealth. Therefore, one cannot get more purchasing power by simplylending money to other people or businesses.

However,Sharia allows for the increment of a loan given to cover the price ofa commodity to be paid in the future (Anwar, 2001). On the otherhand, when people have a mentality that a dollar would bring moredollars tomorrow then it becomes riba.Any gain that results from the exchange of two ribawicommodities in different amounts is also prohibited by the Sharialaws (Anwar, 2001).

Accordingto Hadith, the Prophet emphasized that the exchange of similar itemssuch as “gold for gold, salt for salt, silver for silver, wheat forwheat, and hand for hand” is disallowed. It also asserts thatpeople may sell their items as they wish if the types differ. Fromthe above assessment, it is clear that that the Islam allows theexchange of dissimilar commodities and amounts (Ahmad &amp Hassan,2006). In this context, any gain which may result in this case wouldbe allowed.

TheQuran teachings infer that Justice can only prevail when all people,including leaders, receive back the principal amounts they loaned toother individuals or businesses. The acceptance of the gainsresulting from the exchange of various commodities is based on Quranteachings which assert that Allah permitted trading but discouragedusury. Traders must exercise caution while engaging in this kind oftrade. Both parties must be willing to participate in the exchange tobe legal according to Sharia law.

Thejurists of the Sharia law are still divided regarding the increase ofcommodity prices in cases where payment has been deferred or in acontract sale (Omar, 2011). However, this opinion seems to differwith the conventional view of the time value of money. A closer lookat it reveals that it portrays time differently when it comes toloans and the sale of credits. Islamic religion concurs that theconcept of time value of money is legitimate, especially if itemanates from deferral and acceleration in the Islamic financialtransactions.

Conclusion

Thepaper has determined that Islamic culture defines the concept ofmoney differently from the conventional definitions. For instance,they perceive it as a means of exchanging goods and services. Unlikethe larger financial sector, the Islamic banking sector does notrecognize money as a means of storing value. Furthermore, it does notperceive it as a commodity. It does not have any intrinsic value.

Additionally,its worth cannot be increased by the quality of its appearance. Forinstance, money in the same denomination has the same purchasingpower regardless of the year they were developed or even how theyappear. In this case, it cannot attract any interest. Sharia lawsprohibit charging of interests regarding money that is borrowed orlent. It is for this that Islamic banks operate differently fromother banks.

References

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Anwar,M. (2001). Development Of Mudarabah Instruments: Understanding TheirProfitability, Securitization And Negotiability Aspects.InternationalJournal of Economics, Management, and Accounting,9(2).

Çizakça,M. (2011). Islamiccapitalism and finance: Origins, evolution, and the future.Cheltenham, UK: Edward Elgar Pub.

Khir,M. F. A., &amp Fairuz, M. (2013). The Concept of the Time Value ofMoney: A Shari „ah Viewpoint. InternationalJournal of Islamic Banking &amp Finance,3(2),1-15.

Omar,M. N. (2011). The Islamic view on money and its implication forfinancial instruments. ISRAInternational Journal of Islamic Finance,3(1),161-167.

Rosly,S. A. (2005). Criticalissues in Islamic banking and financial markets: Islamic economics,banking, and finance, investments, takaful, and financial planning.Bloomington, Ind: AuthorHouse.