Chapter 6: Riba, time value of money and discounting
The foundations of contemporary Islamic banking and finance are based on the prohibition of riba (usury or interest), gharar (avoidable uncertainty in business contracts) and maysir (gambling-like transactions). There are several controversies about the scope of riba and implications of its prohibition on modern banking and finance. The great majority of Islamic scholars treat bank interest as riba but also approve the deferred payment sale with higher than cash price as legal. This raises the question whether Islam recognizes the time value of money or not. Also, if interest is prohibited, would the discounting of future streams of income or benefits be appropriate in project selection? This chapter addresses these issues by critically analysing the arguments made by Islamic scholars.
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