Islamic finance has been criticized by some circles in using conventional benchmarks in pricing products, using more or less the same product structure and predominantly using debt based modes of financing. This research article takes an alternative approach and goes beyond practiced Islamic finance to suggest an alternative financial framework.
Application of Time Value of Money
Time value of money is the basis of interest. Interest is said to be the charge on the use of money for a particular time period. Islam prohibits interest that entails that no incremental amount can be charged for the use of money for a particular time period.
According to Islamic principles, any investment will have to go through the entire process of a business activity that involves risk taking at each stage and any compensation on investment will be strictly dependent upon the outcome of the business activity. Time value of money is the problem for the investor to avoid keeping his money idle and to avoid forgoing the use of money that may bring positive value to his investment. However, it does not mean that the investor can demand an arbitrary increase (or is given as the case may be) as the cost of using money without taking the risk.
Dealing with Scarcity of Capital
Business cycles are a reality. Infact, as per Islam, they must exist as this world is a place for test and this test requires some people to be privileged and some to be deprived. The deprived and privileged are both tested for patience and thankfulness to Allah and how they take care of society and its needs. But, interest