All praise is due
to Allah, may peace, salutation and the blessing be upon the prophet Muhammad (ﷺ), his entire family, his
companions and those that follow their footsteps with righteous until the last
day. Indeed Time value of money (TVM)
can be define as the idea that money that is offered today
[Present day] is more worth than to be
received in future of ; due to its potential earning capacity. Moreover, Time value of money is
the core principle of economics or finance that provided money and
can earn interest, any amount of money is worth more the sooner
it is received afterward.
First of all I
will like to discuss how time value of money (TVM) work in our daily like life
activities. This concept time value of money is used in choosing among other
investment suggestions. Furthermore, two element are vital in valuation of our
cash flows these are: The interest rate (discount rate, opportunity rate and
required rate of return) and what time do we need these cash flows to be
evaluated…
Time line consideration
This shows the timing of each cash flows at a particular period,
relatively today be zero but future being one is usually at the end 1st
or 2nd period (month, year etc.).
The Future value of single cash flows
The Present value of single cash flows
The Future value of annuities
The Present value of annuities
The Uneven cash flows
The Amortized loans etc.
v Future value of single cash flows
Produces
to solve any FV, you need:
o
The present value
o
No. of years
o
The interest rate Example
The Camara
Business communication and engineering technologist deposited GMD 100,000 today
in a saving account at Guaranty Trust bank first that pays you 4% interest per
annum. How much they get after one year..?
FV = PV *
(1+I) ^n FV= GMD
100,000*(1+0.04) FV=100000*1.04 = GMD
104,000
As PV
increase, FV increase. As I increase, FV increase and No. of year increase, FV
increase.
v The Present value of
single cash flows example
Produces
to solve any FV, you need:
o
The Future value
o
No. of years
o The interest rate
Example
Smart technologist need GMD 12,000 IC3 tuition
expenses in two year. How will you need today in your saving account, with interest
of 4% per annum?
FV= GMD
12000 N=2 and I=4%
1 2 3 4
FV2
PV=
FV* [1/ (1+i)] PV= 12000* [1/ (1+0.04)]
PV= 12000* 0.9615 = GMD 11538.46
The Future value of annuities
The series of equal cash flows of payments in a particular period,
with fixed interval. This consist of two types of payment methods.
o
Annuity Due: Occur at the beginning
of period.
o
Ordinary Annuity: occurs at end of
period.
Annuity Due
FVn= PMT [(1+i) ^n -1) /1] (1+i)
Ordinary Annuity
FVn= PMT *[(1+i) ^n-1]
The Present value of annuities is little bit different
Annuity Due
PVn= PMT [1- 1/ (1+i) ^n) / int.] (1+i)
Ordinary Annuity
PVn= PMT *[1-1/ (1+i) ^n/ Int.]
Produces to solve any FV and PV of
Annuity, you need:
o
The Annuity amount (PMT)
o
The number of period (n)
o
The interest rate charge (I )
The
Uneven cash flows
These
type of cash flows contain unequal, how to fine the PV and FV..?
Preset Value
0 1 2 3 4 |
|||
 |
|||
96.15
110.95
160.02
170.96
GMD 538.08
ET.C
The
compound and simple interest used in time value of money
The Simple Interest: in finding the time value of money,
simple interest play a vital role in the finding the only the principal amount.
Moreover, it can be calculated by using the formula: Principal * interest [r%]*
time [t] ‘
The Compound Interest: combined both the principal amount and
any other interest earned but is yet to withdrawn from the system. Moreover
compound interest typically applied in the most often used in time value of
money applications. Example of this application can be :
o The Future Value of GMD 50: to deposit 50 GMD today and allow to
continue accumulating for specific
period in future date.
o
The Present Value of GMD 50: an amount
that Muhammad can deposit day to yield GMD 50 at a particular
future date.
o The Future Value of an ordinary annuity of GMD 50: this type
annuity normally deposited at the end of each
period continue
accumulating for specific period in future date.
o Present Value of an annuity due of GMD 50: This is type of annuity
Normally deposited at the beginning of each period for specific period
in future date. Please GMD is Gambian
currency
|
INTEREST , TIME AND FREQUENCY
OF COMPOUNDING
|
|||
|
Chosen
rate very year: 12%
|
|||
|
Freq. of the Compounding
|
No. of year every period.
|
Interest Rate for every Compound
|
Formula rate per compounding
|
|
Monthly
|
1%
|
12
|
12\1
|
|
Quarterly
|
3%
|
4
|
12\4
|
|
Semi-annual
|
6%
|
2
|
12\2
|
|
Annual
|
12%
|
1
|
12\12
|
Let me give some example of
single sum calculation of future value.
1. Smart technologist has deposited an amount of GMD 200000 today with
us, moreover the interest rate offered is 8% and its frequency of compounding
is Annual. Furthermore, the number of period is 6 years. Calculate the future
value of this single sum.
Solution
Amount deposit= 200000, interest offered= 8%, frequency comp... Annual and no. of years= 5
FV= PV * (1+R %) ^Y FV = 200000*(1+0.11) ^5 FV = 200000*(1.11) ^5 FV= 200000*(1.58687) = GMD 317374
Secondly valuation of time in Islamic
perspective, as we all know Islamic application of time value of money prohibit
interest (Riba) from our economy and is not a new concept in Islamic
jurisprudent. Moreover all the scholars of classical jurist have a talk on it
indirectly in numerous areas financial transactions such as:
Murabaha
Bilateral Ibra ( da’ wa ta’ajjal )
Stipulation of deferred period in loan
(al-qard halam mu’ajjal)
The Zakat al-dayn
Moreover,
the reasons of deferred payment makes the deferred sale price of commodity to
be higher than the spot price (thaman hal). Moreover the classical
jurists justified the economic value of deferment by acknowledgment that the
spot price of an assets is lesser than its deferred price. Islam didn’t
recognized any loan for deferral based on TVM designed to benefit the lender, while
it recognizing only qard hasan loan.
Economic value of time Shariah admits the concept time value of
money prolong pricing sale of a credit, but it doesn’t approve “rental”
on money loans. Furthermore time value is permissible in the
circumstance of pricing an assets and Usufruct but it is not
permissible any circumstance of an increment to the principle debt’s or
loans.
Conclusion, It is evident that Islam recognized time
value of money in it totality, both in practice and theory but different from
the conventional perspective of finance. From theory base on predetermined
increment and fixed in deferred sale as compensation, is permitted
in Islam in a condition it is associated with the price of the subject matter
of the contract. This means that deferment (ajal) will not be
remunerated with a stipulated and fixed increment quantity in quarantine
of price of the transacted commodity furthermore is it better for us to used economic
value of time instead of the time of money.
Bibliography
Dawood. 2015. There are concept of time value of
money in islam. june 30, . Accessed December 12, 2018. http://www.TVOM\Is
There A Concept of 'Time Value of Money' (TVM) in Islam.htm.
Else Fernanda, SE.Ak., M.Sc. 2015. "The Time
Value of Money Concept in Islamic Finance." icfi-sesi 17-25.
Khir, Mohamed Fairooz Abdul. 2016. "The Concept
Of The Time Value Of Money: A Shari‘Ah Viewpoint." International
Journal of Islamic Banking & Finance 2-15.
Robert. 2014 . What You Should Know About The
Time Value of Money. June 17. Accessed Novembebr 10, 2018.
http://www.What You Should Know About The Time Value of Money.htm.
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