IslamicMarkets uses cookies.
About our cookie policy.

Paper Money: What Constitutes Currency in Shariah?

Paper Money: What Constitutes Currency in Shariah?

By Nizar Alshubaily | June 15, 2019

Recent debates in social media still point to a level of unease about what constitutes currency in Shariah and doubts remain about paper money.

Some claim that paper money is Haram, and insist that only gold and silver are legitimate currencies. Others demand that paper money must be backed by gold and silver. Some see paper money as a product of the interest-bearing international banking system, and therefore non-Shariah compliant. 

Some of the statements made concerning currencies in Shariah claim that Fiat currencies are Haram since they are based on debt and interest, while other statements claim that Shariah requires a currency to have intrinsic value. Yet others believe gold and silver are Sunnah, specifically Sunnah Taqririya, one of the three types of Sunnah, more related to tacit approval.

Nothing could be further from the truth. Shariah does not require a currency to have intrinsic value nor does it forbid Fiat currencies. Nor do scholars view gold and silver as Sunnah Taqririya. Paper money is Halal. This has been shown time and time again throughout the history of Islamic Jurisprudence including the modern era.

First, let’s review the currency situation in the early Islamic period before analyzing the permissibility of paper money.

During that period, gold and silver were the currencies, and they are mentioned in The Quran as Dinar (gold), and Dirham (silver). The word “Wariq” is also mentioned and the interpreters deemed it to refer to silver. There were also some coins made of copper that were called “Fuloos”, in small denominations. When someone only has a few Fuloos, he was considered bankrupt, from which the word “Taflees” originates.

Byzantine and Persian coins remained accepted for some time in the first Islamic century, although very early on, governments began striking their own coins, first silver and then gold. Because the quality of the first coins was poor and therefore variable, they were weighed instead of counted, indicating that their value was based on content rather than as a unitized medium of exchange. Some silver and copper were however counted, indicating that the idea of money as units was considered.  

The history of money and coinage in the Islamic world is far too long to recount, however suffice it to say that it took many shapes and varieties of different minting throughout the ages under different leaders. There has even been a brief but failed attempt at paper money by the Mongols in the 13th century. 

Of course, there have been throughout history some scholars who have argued for gold and silver only money, but without any convincing evidence from Shariah. I say not convincing since the main evidence of the proponents of gold and silver rely mainly on the custom of its usage during the early time period, as well as on its mention in the Quran as money, as opposed to a clear and unequivocal text either from The Quran or The Hadith. 

They also regard gold and silver to be money by nature, and refer to some scholars who have limited the characteristic or causation (Illah) of riba and zakat to only gold and silver, as they are a measure of value (Thamaniyyah).

The opponents of the exclusivity of gold and silver as money, in my opinion have a stronger case, as they rely on the basic principle that everything is permissible unless it is clearly forbidden in The Quran or The Sunnah. There is nothing unequivocal that limits money to only gold and silver. 

They also evaluate customs by their meanings and not their appearance. Whilst gold and silver were the main money items, it was due to custom and availability and not any Shariah sanction.

They reject the idea that the measure of value argument; that attracts riba and demands zakat is limited to only gold and silver. Other items can have those characteristics and thus the “Illah of Thamaniyyah” exists in them as well.

A very strong tool at the disposal of scholars is termed “Qiyas”, which is reasoning by analogy that aims to deduce laws. Qiyas has been considered one of the four main sources of law after The Quran, The Sunnah, and Consensus (Ijmaa). By performing Qiyas scholars attempt to discover the cause (Illah), which is the characteristic that attracts laws into action. The Illah therefore of gold and silver that triggers riba and zakat are their properties of measure of value and store of wealth (Thamaniyya). Paper money has the same characteristic.

The opponents of money as only gold and silver, it must be said, also have a very big arsenal to defend their view in the personalities that have ruled on this issue. I name and quote three of the most famous ones.

A well known story from very early on during the reign of the second Khalifah (Caliph), Umar Ibn Al-Khattab (584-644 A.D.) 

(رضي الله عنه) tells of him advocating the making of money out of “skins” of camels, but was advised against it due to the lack of enough animals. Both, his saying, as well as the answer of his companions, as many scholars state, clearly show that he didn’t view money as exclusively gold and silver, nor as part of any Sunnah.

Another great scholar, Imam Malik bin Anas (711-795 A.D.); for whom is attributed one of the four main schools of thought, Al-Maliki; states in his book (Al-Mudawwanah: Kitab Al-Sarf): 

“If the people were to agree amongst themselves on using “skins” (as money), such that these were made into coins and monetary units, I would dislike these to be sold for gold and silver with deferred payment.” 

This clearly shows Imam Malik’s view that “skins” as money would have acquired the same attributes, as gold and silver, and the rules of currencies forbidding deferred delivery must be maintained.

Our third personality is one of the most influential of scholars in the history of Islamic Jurisprudence, Ibn Taymiyyah (1263-1328 A.D.) himself who stated in his Fatawa:

“As for dirhams and dinars, there is no natural or Shariah definition for these; however, the matter returns to habit and terminology. This is because the basic principle is that the objective is not these coins in themselves; rather, the objective is that they should be a standard for mutual transactions. Dirhams and dinars are not sought for themselves. Rather, they are means by which mutual transactions are carried out, and this is why they serve as money … A pure means, the substance or form of which is not an objective in itself, achieves the objective, whatever it may be.” 

Ibn Taymiyyah’s student Ibn Al-Qayyim (1292-1350 A.D.) also stated in “A’alam Al-Muwaqi’in”: “Currency is not sought for itself but as a means to other goods.”

As many scholars have stated repeatedly, they see nothing that shows that a currency of gold and silver coins is part of any Sunnah. Especially when one considers that the coins used then were in fact minted by non-Muslim civilizations. The Gold Dinar was Byzantine in origin with a cross on it, whilst the Silver Dirham was of Persian origin with fire worshipping imagery on it. It is hardly the case that one would believe that either would be considered a Shariah Currency.

As for intrinsic value, countless are the quotes denoting currency as nothing but the value or meaning of other goods and services and not an object of its own. A very beautiful quote from a great scholar, Al-Ghazzali (AD 1058-1111) from his book “Ihya’ Uloom Al-Deen” on currency is very apt to mention:

“As if it is nothing and in its meaning as if it is everything. 

Like a Mirror that has no colour but speaks all colours. 

So is currency, no objective in it and it is a means to all objectives. 

Like a letter that has no meaning in itself and its meaning is revealed in others.”

Al-Ghazzali، The Book of Patience، Ihya’ Uloom Al-Deen

Although, of course, some may claim that Al-Ghazzali held the view that only gold and silver were currencies. But the situation in history is not actually very clear between the two camps. This is because of interpretation, and in that many cases were simply based on whether Copper was in fact a currency also.

In fact, other items such as foods were used as the price of buying other goods. Imam Al-Shafie (767-820 A.D.) reports in his book “Al-Um” that wheat was used as the price of goods in Hijaz, corn in Yemen, and in some villages even ceramic was used as currency.

Another story is by Al-Maqrizi (1364-1442 A.D.) an eminent historian, who reports in his book on currencies “Shuthoor Al-Uqood fi Thikr Al-Nuqood” that among many items, cooked bread, and even eggs were used as currency.

Discussions and disputes continued till our modern era, with the supporters of gold and silver claiming that paper money has no intrinsic value and therefore not permitted and that paper money is easily torn or destroyed and therefore not fit for currency, or even that it’s nothing but a debt instrument and therefore it’s not permitted to be traded. Or should paper money be considered as mere Fuloos.

None of these arguments hold a strong Shariah proof against paper money to the modern scholars.

There’s actually an excellent paper by Muhammad Haneef and Emad Barakat from 2006 entitled “Must Money Be Limited to Only Gold and Silver?” in which they discuss opposing views, and describe the difficulty of interpretation of the positions of former scholars by relating a story concerning Imam Abu Hanifa. A well-known dispute is in the Hanafi school concerning Imam Abu Hanifa and his student Abu Yousuf. It was reported that they disagreed that Riba is caused by Copper currency. As such, some scholars viewed this as a rejection of other forms of currency except gold and silver. Although Abu Hanifa never stated that currency was exclusively gold and silver. Another of his students, Al-Shaybani disagreed with his teacher and stated that Riba is caused in the trading of copper as it would be accepted as money.

One of the problems where historical interpretation errs is that in those days when some scholars considered gold and silver, they were considering them only in relation to Fuloos (copper). But unlike Fuloos then, paper money is very different. In his book “Fiqh Al-Riba” 2004, Dr. Abdulazeem Abu-Zaid, Associate Professor of Islamic Finance at HBKU in Qatar, makes very clear the differences: Paper money is a main currency today, and unlike Fuloos, paper money does not only buy the cheapest items as Fuloos used to do then, and paper money is in fact the only currency now. As such using analogy (Qiyas) of Fuloos against paper money is erroneous.

In his article on this specific and very complex issue, scholar and writer Ahmad Hasan Balh has a summary concerning the issue with paper currency versus Fuloos. The article written in 2007 details the views of the different schools on Fuloos and whether Zakat and Riba apply and whether it’s a commodity or currency. It also details the views on whether fuloos can be used as capital for Mudarabah. The same conclusion is reached, that Qiyas cannot be applied by comparing Fuloos and paper money as Qiyas is an analogy between a branch and its stem or basis and not with another branch. Fuloos were a minor item completely lacking in the power of paper money, which unlike Fuloos is a main currency, and merchants must accept it, versus Fuloos where any transaction would have to be negotiated of its use.

Sheikh Abdulrahman Al-Saadi, an eminent scholar from Saudi Arabia, who passed away in 1958, in his compilation of Fatawa published after his death, discusses the issue of paper money in a long discussion and makes very important points: “the meaning for which Riba has been forbidden is present in paper money and the Maqasid of Shariah is in its meaning and not its shape and words, otherwise this would be a path to the forbidden Riba and its detriments since paper money has its meaning in its usage otherwise known as Thamaniyya (value).” He also makes a very beautiful statement: “the issue is not in shapes and ghosts but in meanings and souls, as the Legislator (Allah) does not separate between two things that are alike just as he does not combine two things that are different.”

In 1971, Shaikh Abdullah bin Sulayman bin Manie, of the Council of Senior Scholars of Saudi Arabia issued a paper arguing for the permissibility of paper money, a long document detailing some of the above history and arguments on both sides. A few quotes would be sufficient to give the type of conclusions made:

“Money is thus whatever is agreed to be such, whether by government authority or public practice. Regarding gold and silver as having been created for money thus lacks support from a legal, theoretical, or historical perspective.”

And as for those who assert that paper money is debt, Shaikh Abdullah states: 

“This is precisely the secret of the validity of paper money, since its value is not intrinsic but guaranteed by government. This does not imply that it is an IOU or debt since it cannot be redeemed in gold and/or silver.”

Many scholars make this very important point against the claim that paper money is a debt instrument. They make the point that merchants when accepting paper money as payment for merchandise sold do not consider it a debt they have to collect from someone else, but accept it as the price itself which they can use to pay for other goods and services.

Sheikh Yousef Al-Qaradawi, a prominent scholar also weighed in on the matter in a long eight-page discussion in his book “Fiqh Al-Zakat” published in 1973. He approves of paper money and quotes other scholars in their interpretation of paper money: “Currency is whatever is used as a measure of wealth, a medium of exchange, and a store of value. Anything that leads to this function is considered currency, regardless of which material it’s made, or how it came to be circulated. As long as there is a material that all the producers in a society accept as a medium of exchange against what they sell, it’s a currency.”

In September 1973, the Council of Senior Scholars of Saudi Arabia reviewed the characteristics of paper money and the history of gold and silver, and the backing of such currencies by gold and silver. They also discussed the issue of whether paper money is in fact a debt instrument. They re-iterated the sayings of both Imam Malik and Ibn Taymiyyah noting that currencies are not dependent on their nature and their usage is based on custom. They also came to the same conclusion concerning the riba and zakat aspect of paper money as well as the forbidden rule of forward sales of currencies against each other. Their view was that paper money is not Haram. 13 scholars signed the Fatwa of the Council with 2 abstentions, one of which later approved the ruling.

In 1978, The Islamic Development Bank (IDB) in Jeddah, held a session whose subject was ‘The Attachment of Deferred Obligations with Price Fluctuations.” This was organized by The Islamic Research and Training Institute (IRTI), that belongs to IDB, and the International Institute of Islamic Economics (IIIE), of Islamabad, Pakistan. Among the many issues discussed was also Paper Money, and the pronouncement was confirmed that: “Paper Money assumes the role of Gold Dinars and Silver Dirhams, in the obligations of Riba and Zakat; and it is considered Capital for Bai’ Salam purposes, in Mudarabah, and Musharakah.”

In 1982, the Islamic Fiqh Academy in its 5th session held in the city of Makkah Al-Mukarramah issued a ruling on paper money:

  1. The origin of money is gold and silver. The characteristic (Illah) of riba that occurs within them is due to their measure of wealth and store of value (Thamaniyyah), based on the strongest views amongst the scholars. The characteristic of a store of value is not limited to only gold and silver even though originally it was so.
  2. The paper currency that exists today has become a store of value and has replaced gold and silver as a means of payment, because the community has accepted it as a store of value and as a means of payment even if its value is not the paper but the trust that is placed in it in commercial dealings.  

Therefore, members of the Council of Islamic Fiqh Academy have decided that the paper currency is a stand-alone currency, which takes all the laws of gold and silver. That includes the legal prohibition of the riba al-fadl and riba al-naseea, the compulsory zakat and other laws. This is based on qiyas (analogy) of the existing currency against gold and silver. The Ruling was signed by 18 members with no abstention.

In 1987, the first Fiqh Session of Kuwait Finance House was held, and there was an approval and confirmation of the ruling made by the Islamic Fiqh Academy concerning paper money and its nature.

The conclusion is clear. Paper money has replaced gold and silver and serves as a store of value and a medium of exchange in the market. The rules of riba, zakat, and sarf (currency exchange) apply to it equally. There is no absolute text in Shariah making gold and/or silver the exclusive currencies. Very important scholars have throughout history asserted the same view.

I believe the unease with paper money is a product of a lack of knowledge of Shariah, history of jurisprudence, and how rules are formulated. It is perhaps also a product of a level of discomfort with the interest based international banking system of which paper money is seen as a symptom.

Finally, these discussions and analyses are important because they have a lot to offer in terms of whether crypto currencies such as Bitcoin can be acceptable. Of course that is a different and very thorny discussion.

 

 


Create FREE account or Login to add your comment
13 Comments

Researcher , ISRA

A wonderfully written article.

A question related to this article: With inflation and devaluation of currency, does the view that paper currency is a "store a value" still remains valid?

Additional questions (not related to this article): How inflation and devaluation of money impacts Islamic finance contracts? What will be rule for riba taking these into account? (edited)


N/A

You are probably aware that every central bank which issues paper currency attempts to maintain its value and eliminate inflation (except Zimbabwe and Venezuela). In developed economies paper currency is now only a small and declining part of the money supply.


Banker, Writer

Thank you for the kind words.

It's a store of value, definitely, but you may not like the value when it fluctuates against you. But if you have paper money, you must pay Zakat on it, and if it's stolen, it's theft.And of course in Shariah it's "Mal".

But your second point is more interesting Mezbah. In fact just a few days ago I was reading about loans (Qard0 in Shariah. The issue was that it's a rule that you pay back exactly what you borrowed. Even if you pay in another currency, you pay the value of what you borrowed on the day of repayment a per AAOIFI and OIC Fiqh Academy.

Regardless of inflation or other causes. However, the recent literature I've read talks about the severe depreciation of a currency and how value could be used to pay back. For example a civil war takes place where the $ 100 you borrowed from a friend now only buys $ 10 worth of items. Is it fair to give back $ 100 or should you give back the former value?

a few scholars have actually written on this and it's a very interesting area.


Robert Hannah 4 months ago
N/A

A useful and well reasoned article. (edited)


Banker, Writer

Thank you so much Robert.


Harris Irfan 4 months ago
Partner, Gateway Islamic Advisory LLP

A superb article, as always, Nizar! And an excellent introduction for anyone researching the Shari'a validity of cryptocurrencies, or investigating whether the only valid type of crypto is one backed by gold. Regarding the latter, I am bemused by how many gold-backed cryptos are out there claiming to be Shari'a-based.

May I make one observation: you mention that Shaikh Abdullah bin Sulayman bin Manie asserted that the value of paper money is guaranteed by government. This is not in fact the case. Paper money, or more specifically fiat money (that happens to be printed on paper), has value through confidence in the stability of that currency. Governments can manipulate fiat money to influence its vale, but they cannot (and do not) guarantee it. (edited)


Banker, Writer

Thank you my brother, you are very kind.

Yes that's an actual quote and I will send you you the English translation on whatsapp.

I think what he means by Guaranteed is that it can be accepted as payment for debts. So if you owe someone $100, and you give them back a $100 bill, they can't say it's worth less, pay us more. This he views as the power of the Government. Regardless of its purchasing power or value against other currencies. Legal Tender, although it's a very complex subject to tell you the truth.


Partner, Gateway Islamic Advisory LLP

Thank you for the paper. I skimmed it quickly, and indeed I concur with you. He appears to be referencing its function as legal tender. I think his use of the word "guarantee" is unfortunate as at first glance it makes the reader assume some form of legal enforcement of its acceptance (which the Bank of England explicitly denies for example). This word has also caused some contemporary scholars to misunderstand the definition of legal tender.


Banker, Writer

Well I also have the Arabic version, I’ll take a look and compare


Axmed Esse 3 months ago
C.E.O, Tayo gade online market

The role of gold and silver for combating inflation, as it is evidenced by
examples from early Muslim societies?


Jaafar El-Murad 3 months ago
Principal Lecturer, University of Westminster

Nizar,
Assalamu alaikum wa rahmat Allahi wa barakatuhu.
I was delighted and almost incredulous to see the title of your article listed in my Islamic Markets email, and almost stunned when I read it. I have been struggling with those social media debates intermittently for several years, and had recently concluded that I had to do my own research on the subject, starting with the basics - the few ahadith on the subject of riba. I found several of these to be incomprehensible, such as those stating that it is riba to exchange "gold for gold or silver for silver unless it is hand to hand and like for like". I could not (cannot) envisage a situation when anyone might want to do that, and realised that I needed to find someone who could explain it to me.
I joined IM for that very reason, hoping to find at least some of the information I would need, but you have done it all!
Have you published this anywhere? Do you have a version complete with references?
Please contact me at jelmurad@gmail.com to discuss further.
Best wishes,
Jaafar (edited)


Banker, Writer

Dear Jaafar

Wa Alaikum Assalam Wa Rahmat Allahi Wa Barakatuh

Thank you for your comments.

I have sent you an email already, please see and let me know what specifics issues you need so I can prepare some documents to send you.

Regards
Nizar


Tarique Hamid 3 months ago
TECHNICAL RESEARCHER, KFUPM

Excellent article. I would really appreciate if a finite definition on "store of value" be given with a time-frame.

"It is perhaps also a product of a level of discomfort with the interest based international banking system of which paper money is seen as a symptom"- It's the one which causes much discomfort.