Time Value of Money and the Choice of an Appropriate Instrument for Allocation of Investment القيمة الزمنية للنقود واختيار أداة مناسبة لتخصيص الاستثمار

Volker Nienhaus ()
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Volker Nienhaus: Former President University of Marburg Germany and Visiting Professor University of Reading, UK.

Journal of King Abdulaziz University: Islamic Economics, 2017, vol. 30, issue 1, 75-81

Abstract: Zarqa (2017) has clarified – from an economist’s perspective – some important issues on mechanisms for the allocation of investment in an Islamic zero-interest-rate economy (ZIRE). He did it in plain English that can also be understood (mostly) by people who have not been trained in the mathematical jargon of modern economics. His aim is to show that the observance of the Qur’?nic prohibition of interest( ) does not impede an efficient allocation of resources. The paper discusses in some detail criteria for investment decisions that do not require a market rate of interest and hence are applicable in an Islamic ZIRE. It may come as a surprise for non-expert readers that these criteria are the same as those which are widely applied for investment decisions and project evaluations in conventional finance, such as the calculation of the net asset value (NAV) of a project or the internal rate of return (IRR). Neither NAV nor IRR is explicitly covered in Zarqa’s text( ), but both can be seen as special configurations of the comprehensive concept of a rate of return which is at the core of Zarqa’s approach to the issue of an efficient resource allocation in a ZIRE. However, a decision maker does not only need a measure of the expected returns of alternative investment projects but also information on the costs of their funding. The market rate of interest provides such information for loanable funds (debt financing) in conventional finance. What is the alternative in an Islamic ZIRE? The paper is brief on this point, but it provides the major ingredients for a more elaborate answer.

Date: 2017
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Persistent link: https://EconPapers.repec.org/RePEc:abd:kauiea:v:30:y:2017:i:1:no:6:p:75-81

DOI: 10.4197/Islec.30-1.6

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