Professional Documents
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Islamic Finance
Learning Outcomes
After this lecture you will be able to
Understand the concept of time value of money
in conventional financial system
Understand the concept of time value of money in
Islamic financial system.
To compare the features of conventional and
Islamic concepts of time value of money
Simple Interest
Interest paid or earned on only the original principal
amount borrowed or lent.
Compound Interest
Interest paid or earned on the principal and any previous
interest earned.
SI = P0(i)(n)
Simple Interest
Amount Deposited today (t=0)
Interest Rate per Period
Number of Time Periods
= P0(i)(n)
= Rs.100(.08)(2)
= Rs.16
Compound Interest
An interest rate that applies both on the principal
amount and the interest earned on it during the
previous year or years.
7%
Rs.1,000
FV2
= P0 (1+i)1
= 1,000 (1.07)
= Rs.1,070
= FV1 (1+i)1
= P0 (1+i)(1+i) = 1,000(1.07)(1.07)
= P0 (1+i)2
= 1,000(1.07)2
= Rs.1,144.90
You earned an EXTRA Rs.4.90 in Year 2
with compound over simple interest.
FV2
Islamic system
1.Islam treats money as unit of account to determine the
relative worth of goods and services.
2.A medium of exchange, and not a store of value.
3.All units of money of the same denomination are 100%
equal to each other.
4.It becomes useful only when it is exchanged into a real
asset or used to buy services.
5.Money cannot be sold or bought on credit.
Lending Money
Like the capitalist financial system, Islam does not
recognize loans as income generating transactions.
Islamic
Money is a commodity
besides medium of
exchange and store of
value. Therefore, it can be
sold at a price higher than
its face value and it can also
be rented out.
Islamic
Islamic
Islamic
The execution of
agreements for the
exchange of goods &
services is necessary, while
disbursing funds under
Murabaha, Salam & Istisna
contracts.
Islamic