Role of Money in Islamic Economics

Role of Money in Islamic Economics
  • Money
  • the functions of Money
  • Behavioral Theory of money
  • The theory of Economic Value of Time vs. Time Value of Money

1. Money
The money in economy, define as "anything that is generally accepted as a medium of exchange" or anything that can be used as a tool in the Exchange. By law, money is something that is encapsulated by the act as money. So everything can be accepted as money if there are any rules or laws that indicate that something that can be used as a means of Exchange.

2. the functions of Money
Money essentially serves as a useful means of transactions as a reflection of the value of the goods or services. Here is a function of money based on the conventional view:
The primary function of the money in conventional economic theory is:
  1. as a means of Exchange (medium of exchange) money can be used as a tool to facilitate the Exchange.
  2. as a tool to calculate unit (the unit of Account) to specify the value/price of similar goods and as a price comparison with other items one good.
  3. as a means of storing wealth (Store of Value) can be in the form of money or goods.

3. Behavioral Theory of money
There are several theories used to describe the behavior of the money in conventional economics, among others:
  1. Monetary Theory Classic. Classical theory of demand for money is reflected in the quantity theory of money (MV = PT). The existence of the money is not affected by interest rates, but is determined by the speed of rotation of the money.
  2. Theory of Keynes. According to Keynes, the motives of a person to hold the money there are three objectives, namely: Transaction, what Precautionary (purposes in case) and Speculative what. The transaction motive and just in case is determined by the level of income, whereas the motive speculation is determined by the level of interest rates.
  3. The concept of Time Value of Money. Two things are the reason for the emergence of this concept is: presence of inflation and preference present consumption to future consumption. 

    4. The theory of Economic Value of Time vs. Time Value of Money

    Conventional theory believes that money is now more valuable than money in the future (time value of money). This theory departs from the notion that money is something very valuable and can thrive in any given moment. By holding the money people exposed to the risk of reduction in the value of money due to inflation. Whereas if saving money in the form of securities, the owner of the money will earn interest which is estimated to be above the inflation occurred. The theory of time value of money it seems inaccurate, because each investment is always has the possibility of positive, negative outcome doesn't even get anything. In financial theory it is known as the risk-return relation. While economic conditions did not always face the problem of inflation, the presence of deflation which should have been a reason for the emergence of negative time value of money is ignored by conventional theories. While in Islamic Economics looked at the time that has economic value (important). The importance of the time mentioned God in QS.Al Asr: 1-3, namely:
    By the declining day, (1) Lo! Man is a state of loss, (2) save those who believe and do good works, and exhort one another to truth and exhort one another to endurance. (3)

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