Understand Inflation to Retain Value of your Money
Dr. Musa R Khaiser, June 1, 2007

The Inflation Conundrum

What happens with every passing second, minute, hour and day? Well, we all
get older! Now that was obvious wasn't it? Now, what about our wealth? Do
you know that as you become older, you also become poorer? Do you know that
just like you can do many things to stay young and health, you can also do
many things to stay rich and wealthy? Surprised? Well read on. In this
article, we examine what Inflation is, how it impacts us personally and what
one needs to do about it.

The Effect of Inflation

As Inflation happens, various items become more expensive. It is important
to note that one reason for this is that the value of cash keeps falling.

For those of you who say that prices also fall, as in the case of cars,
computers, etc, you are right, prices do fall, but they fall more because of
more efficient ways to make the same product so that it costs less to make
and sell. Due to competition, manufacturers are always looking at ways of
making the same goods at cheaper prices. That way, they can sell more and
make more profit!

The point to note is that Inflation, like time, cannot be felt, seen or
heard. Just like one grows older due to the passage of time, Inflation
causes the value of one's possessions to fall - and therefore makes one
poorer.

That is Inflation and it affects everything, whether you are buying a house,
dress, food etc - anything; i.e: it reduces the value of the rupees you
hold. An important point is that this happens to not just the rupees in
cash, but also the rupees in any investment that you may hold. The effect is
that Inflation reduces the value of anything that you hold and therefore
makes you poorer! You cannot escape from it.

To illustrate, let us take the Inflation rate to be 10% and the chart below
will give you the value of that 1 lac in the future.

As you can see, one looses a lot of value very quickly and if one does not
take care of this aspect, then even though one can count the same 1 lakh,
the value of it is substantially reduced over time - and remember, to
compensate for this fall, one has to create wealth elsewhere, by working and
investing wisely.

Islamic Finance and Inflation

It is a sad truth that a very crucial point that has not yet been
successfuly settled by Islamic Scholars, is how one should deal with
Inflation in Islam? The answer to this issue will resolve a lot of
misunderstan-ding and unnecessary confusion in the minds of the Muslim Ummah
and allow individuals and organisations to make proper investment decisions
that meet the requirement of creating and preserving wealth in a Halal
manner.

What is to be done?

The only way to retain value, (i.e, your ability to buy those 100 chocolates
without having to work extra) is to make sure that the value of your cash
and investments also grow. In other words, the rate at which the value of
your investments grow should at least be the same as the rate at which it
falls; the inflation rate. This will result in you having a higher price but
same value.

If you want to grow money then one has to invest which means take risk. If
the investments go wrong, then once again one can loose money; but if the
investments are right, then one can have a lot more value and therefore
become wealthier - not just in number terms, but also in actual value terms!

Investment Options

The easiest way to try and beat Inflation "safely" is though the Fixed
Deposit in banks - the interest rate is usually close to the inflation rate.
In FDs, it appears that one is getting more rupees, but in actual fact, one
is just about able to retain the value of the original money invested.
However, most people consider bank interest to be Riba and therefore Haram.

The next option becomes actual investing: in some business, trading, real
estate, stock markets etc. The common issue however is risk and ones ability
to deal with it. One also has to ask: If one looses money in the investment,
is it ok?

Just like regular exercise and nutritious food are necessary to stay young
and healthy, one should acquire and apply relevant knowledge and
understanding to ensure that that one's wealth grows in value at a rate
higher than the inflation rate in a Shariah compliant manner.


Disclaimer

The writer is a financial educator, investment advisor and stock broker
based in Bangalore. Readers are invited to send their views to:
ivfinance @gmail.com

The writer is not an expert in Islamic Finance and is not responsible for
the outcomes of any decisions based on this article. This article is for
information purposes only and should not been seen to recommend or advise
and particular type of investment.


http://www.islamicvoice.com/June2007/Muslims&Money/