CONCEPTS OF PAPER MONEY IN ISLAMIC LEGAL THOUGHT
Nikolaus A Siegfried
Courtesy: Arab Law Quarterly
April 2001, pp. 319-332
INTRODUCTION
Islamic economies have become increasingly complex over the last centuries. From early on,
barter proved to be insufficient for business transactions, and money was being used to facilitate
trade. An important topic in Islamic legal thought has therefore been how money affects economic
interaction. While this discussion focused on coins at first, it now focuses on paper money and
the related question of inflation. This article deals with the conceptions of these phenomena in
Islamic legal thought.
The rest of the article is divided into five parts. I will start with a brief introduction to the monetary
history of the Arab world. Since the evolution of the monetary system and Islamic legal thought
have influenced one another a look into the historic developments will help to understand the
legal considerations. A second part shall explore concepts of money in classical Islamic law as
expressed in the classical texts of fiqh from the four main Sunni schools of law. 1 I The classical
texts highlight three questions: is there a difference between raw metal as a good and struck
coins as a medium of exchange? What is the exchange rate between gold and silver? And what
is the basis for using conventional (or fiat) money, which has an exchange value that exceeds the
intrinsic value? Since the classical legal scholars do not develop a concise theory of money, I will
compile the legal characteristics of money from various texts about contracts and religious taxes
(zakat). It will become evident throughout the article that the conceptions of riba (usury or
interest) and gharar (insecurity), which are prohibited by Islamic law, are pivotal for the concepts
of money expressed in the texts. A third part of the article will present the approaches to paper
money in contemporary Islamic legal thought. Modern scholars of law (ulama') draw heavily on
the classic opinions discussed in the previous part. However, contemporary ulama' explicitly draw
on sources from various schools [end p. 319] of law, as the Memorandum for the Jordanian Civil
Code makes clear.2 Hence, the theories by modem 'ulama' do not always fit into the categories of
the legal schools.3 The fourth part discusses inflation. This issue has been addressed recently not
only by legal scholars but also by Islamic economists. Although their approach to inflation differs
from a legal approach, it appears that the two fields interact even more than in the past. Legal
conceptions about inflation influence ongoing debates about Islamic banking, indexing and
reserve requirements, which are vivid among Islamic economists. A final part shall draw
conclusions from the study.
HISTORY
At me time of the Prophet, Muslims used raw metal or Byzantine coins as money. Three sorts of
metal were used for economic transactions: gold (Dinar), silver (Dirham), and copper (fals, pl.:
fulus). The Muslim Government struck its own Dirhams as early as 18H although gold and silver

University of Hamburg.
It is beyond the scope of this article to go into much detail about the diverse movements
within each school.
2 Vogel, Frank, Readings Comparative Law: Islamic Contract Law, mimeo, Cambridge,
1994, p. 246
3 Cf. the use of Malik and Ibn Taymiyya by Bin Mani', Abdullah Bin Suliman, al- Waraq alnaqdi, Riradh, 1984, p. 20.
1
coins from me Byzantine Empire were still accepted throughout Islamic society. 4 However, gold
coins were not struck before the Government of Mu’awiya Ben Abi Sufyan (41-60H), and
Byzantine coins were accepted until the monetary reform of ‘Abd aI-Malik Ibn Marwan in 75 or
76H.5 Initially, me quality of coin striking was poor, and weight varied. Therefore, coins were
treated like raw metal: people continued to weigh rather man count them.6 Another reason that
weighing remained the most important way of measuring the value of money was that wear and
tear afflicted coins so that they would lose weight over time.7 Finally, even the official weight of
the Dirham varied between 2.8 and 3.1 gram.8 In general, coins were still objects of trade with
respect to their silver or gold content rather than simply an exchange medium, and were weighed
rather than counted.9 However, silver and copper coins were frequently exchanged in counting
because they were less valuable.10 This indicates that the idea of money as a numeraire was
already present in early times. Where the intrinsic value was of lesser importance, moneys were
'traded according to their conventional value. This is noteworthy because today's debate is
concerned with the question whether money with little intrinsic value like paper [end p. 320]
money is legally acceptable. The earliest written document that views gold and silver as media for
exchange with a conventional value stems from the fourth century AH. 11 In the following
centuries, counting superseded weighing as a legally valid method, and money became a
numeraire.
The exchange rate between gold and silver was to become another important topic in fiqh. Most
historians agree that gold and silver coins coexisted until the late Ayyubid period12 even though
gold dominated in Persia and Spain, and silver in North Africa and the Arabian Peninsula. 13 From
the hadith, legal scholars calculated an exchange rate between gold and silver coins of at most
one to twelve. 14 However, in business transactions, the exchange rate was as high as fifteen
Dirham per Dinar until 225H.15 It even felt to 1:26 after the famous monetary crisis provoked by
aI-Hakim in 395H when he reduced the silver content of the Dirham,16 and finally reached 295
Dirham per Dinar at the beginning of the fifteenth century. 17 Since these rates do not coincide
4 Grohmann, A, Einfihrung und Chrestomathie zuu, arabischen Papyruskunde, Prague,
1955, p. 203
5 5 Ibid., p. 185-5.
Balog, Paul, "History of me Dirham in Egypt from the Fatimid Conquest until the
Collapse of the Mamluk Empire 358/968~922/1517," in Revue Numismatique, ser.VI,
3,1961, pp. 109-146, p. 116
6
7
Miskimin, Harry A, Cash, Credit and Crisis in Europe, 1300-1600, London, 1989, p. II 40.
Grohrnann, pp. 143-145
9 Udovitch, A, "Reflections on the Institutions of Credit and Banking in me Medieval Islamic
Middle East" in Studia lslamica, 41, 1975, pp. 5-21, p. 14.
10 Balog, Paul, "History of the Dirham in Egypt from the Fatimjd Conquest until the Collapse
of the Mamluk Empire 358/968-922/1517" in Revue Numismatique, ser.VI, 3,1961, pp. 136 and
140.
11 Ritter, Helmur, "Ein arabisches Buch der Handelswissenschafr" in Der Islam, 7, 1917, pp.
1-91, p.50.
12 Goitein, SD, "The Exchange Rare of Gold and Silver in Farimid and Ayyubid Times" in
Journal of Economic and Social History of the Orient, Vol. viii, 1965, pp. 1-46, p. 42.
13 De Bouard, Michel, "sur L 'Evolurton Monetaire de l'Egypte Medievale" in L' Egypte
Comemporaine, 30, 1939, pp. 427-459, p. 431.
14 Cf. text under the heading "Thc Conception of Money in Classical Fiqh" of the present
article. The exchange rates for raw metal can be derived from the numbers given above. The
Dinar weighed circa 4.45 grams until 77H, and 4.25 grams thereafter. Grohmann, pp. 185-186.
15 According to Ibn Qudama. Sauvaire, M H, "Numismarique et Merrologie Musulmancs" in
Journal Asiatique, Vol. 19, 1882, p. 114.
16 Balog, p. 122.
17 Ashtor, E, "L 'Evolution des Prix", in Journal of the Economic and Social History of the
Orient, Vol. 4, 1, 1961, pp. 15-46, p. 21.
8
with the readings of hadith, determining the exchange rate was a controversial issue for legal
scholars from early on.
Furthermore, since not only counterfeiters but also rulers frequently melted the coins to change
their alloy, the share of precious metal in a coin reduced over time. Money with a low content of
gold or silver, maghshush money, was continually used, forcing the legal scholars to deal with the
question whether these coins were acceptable. Even at the time of the Prophet copper money,
whose intrinsic value was below face value, \vas being used. During the first years, the Muslim
Government imitated Byzantine coins, but no later than 80AH it struck authentic Islamic coins
with passages from the Koran.18 The precious metal content of these coins was also continually
reduced. Therefore, Islamic legal scholars discussed the use of conventional money by the
Islamic Government.
In contrast, fulus were being used in local context only at this time. The value of conventional
money was based on the close social ties between the trading partners. 19 Therefore, the classical
approach to conventional money cannot be applied directly to paper money. It was not before
809H/1405 AD that copper money with little intrinsic value, struck by the Mamluk Government,
superseded silver coins in long-distance trade. In this year, both currencies were decreed to be
[end p. 321] of equal value. However, the actual exchange rate remained at five Dirham fals per
silver Dirham proving that value cannot be established by a decree but must be based on either
intrinsic value or mutual trust.20
Instead, for long-distance trade tbe suftaja was being used, a letter of credit made out by a
money changer which a co-operating money changer at the destination of the journey would
convert into coins. The suftaja is most probably tbe precursor of the bill of exchange. 21 It is
apparent that the suftaja has several characteristics of paper money. Both are easy to carryover
long distances, and both developed from promissory notes. Like paper money, the sujtaja
became a medium of exchange that was widely accepted, and sometimes even preferred to
coins. Therefore, some modem scholars see this form of currency as the paradigm for paper
money. An attempt by the Mongols in 1294 to introduce paper money from above failed after two
months because the population resisted constantly. Neither backed by intrinsic value nor by trust
based on personal links, this currency was bound to fail.22 Later, paper money was introduced
officially. This happened during the nineteenth century in two steps. It was backed by gold in a
first step, and became conventional money only after it had acquired a traditional role in the
economy. As long-distance trade increased in importance, social ties loosened and new forms of
conventional money were required. To remove the threat of risk (gharar) when accepting money,
certainty about exchange has to be established. Only if general acceptance of money is secured
conventional money can acquire a value for its holders. Social ties lacking, certainty can only be
established through a coW1terbalance, i.e. 100 per cent gold reserves with the central bank, or a
traditional agreement to accept money.
THE CONCEPTION OF MONEY IN CLASSICAL FIQH
Money in the classical texts of fiqh refers to coins. As in the previous part, the first point of interest
is the relation between raw metal and struck money. I will analyse how the legal position of gold
18
Grohmann, pp. 214-215.
Udovirch, p. 20,
20 Grohmann, p. 217.
21 De Roover, R, "New Interpretations of the History of Banking" in Cahiers d' Histoire
Mondiale, 2, 1954, pp. 38-76, p. 53; Imamudin, S M, "Bayt aI-Mal and Banks in the Islamic World"
in: Islamic Culture, 34, 1960, pp. 22-30; Schacht, Joseph, Introduction co Islamic Law, Oxford,
1964, p. 148.
22 Avery, Peter et al (eds), Cambridge History of Iran, Cambridge, 1968-1991, Vol. 5, p, 375
19
and silver coins differs from the role of raw metal. Copper money has different characteristics,
and so it is assessed separately in the classical texts. The way of handling raw gold and silver is
unambiguously determined in the Shari'a. A forward sale (bay’ aI-salam) is indisputably prohibited
through the hadith for these metals: "Gold for gold} silver for silver, wheat for wheat, barley for
barley, dates for dates} salt for salt, like for like, equal for equal, hand co hand. If these types
[asnaf] differ, then sell them as you wish, if it is hand to hand".23 [end p. 322]
This hadith prohibits two forn1s of riba. First, exchange in unequal amounts (riba al-fad!) is
prohibited for goods of me same type (Jins). Second, the exchange with delay within a type
constitutes riba al-nasi'a, and is haram24. Most scholars agree that every single item named in me
hadl.ch stands for a jins. Therefore, an unequal exchange of gold for silver for instance is
permitted. All four schools agree that the six named items are but examples for types of goods.
The question now arises how a type is defined, and here the disagreement starts. All schools
extract the types from this hadith through argument by analogy (qiyas). However, with respect to
money their results differ.
In the Hanafis' interpretation of the hadith, the six goods stand for two characteristics: goods
measured in weight and goods measured in volume (makilat)25. Gold and silver are weighables
(mawzunat), and hence26 they belong to the same type. Note that similar to raw metal, money is
treated as a weighable good. Therefore, they prohibit the forward sale of money for any other
goods that are usually weighed.
The Hanbalis, generally share the Hanafis' view in this respect. However, in their opinion7
currencies occupy a special position. According to Ibn Qayyim, a student of Ibn Taymiyya, there
is a "rational concept peculiar to money not extending to the rest of weighed objects". 27
Therefore, the salam is permitted in the Hanbali school. Still, in this school money may be only
the item that is given at once. Since it is not a good at all, it may not be the part that is given on
time (al-musallam fih).28
Shafi'is and Malikis interpret the hadith in question differently: in their opinion the last four items
relate to food, the first two to representations of prices (athman).29 Hence, every sale of goods for
money is legally sound. In the Shafi'i interpretation, money cannot be attributed to either makilat
or mawzunat. Instead, it is separate from all other goods by the consent of people who use
money as such. A rather sophisticated argument against this special role of money is given by Ibn
Hazm, a Zahirite. According to him, everything can be used as money because everything can be
evaluated against anything else.30 Since anything may have the property of thamaniya, al-Shafi'i's
interpretation leaves many degrees of freedom. In fact, al-Shafi'i's interpretation appears rather
pragmatic. and it is interesting to note that his reasoning is corroborated with a practical
argument: the sale of food must be permitted because the Prophet stated it to be a "useful way to
earn one's [end p. 323]
23
Al-'Asqa!ani, Ibn Hajar, Bulug al-maram min adillat al-ahkam, Cairo, 1933,784.
Schacht, pp. 145-146, Saleh, Nabil A, Unlawful Gain and Legitimate: Profit in lslamic Law,
Cambridge, 1986, p. 74.
25 Ibid., p. 73, cj. Ell: "riba".
26 AI-Kasani, Iia al~Din, Kitab badai’ al-sana'i tartib al-shara'", Cairo, 1327-1328 H, 7 Vols.,
Vol. V, p. 183, but cf. infra for the Hanafis' opinion about fals.
27 Ibn Qayyim al-Jawziyya, I'lam al-muwaqqa'in 'ala rabb al-'alamin, Cairo, 1955. But cf. alMasri, Rafic Y, al-Islam, wa al-nuqud, Jeddah, 1981, pp. 95-6, who discards this approach with
reference to Ibn Rushd. This is interesting since aI-Masri criticises a Hanafi with reference to a
Maliki.
28 Brunschvig, Robert, "Conceptions Monetaires chez les Juristes Musulmans" in Arabica,
14, 1967, pp. J 13-143, p. 127. This also correlates with the question of ra'yin, which I will
address below.
29 AI-Shirazi, Yusuf al-Fayruzabadi, al-Muhaddhab, Cairo, s. d., 2 Vols., Vol. I, p. 270.
30 Cf. Brunschvig, p. 118.
24
living" (tahir munfi’)31 He continues: "Since an exchange between gold and silver on one hand],
and weighables, and things measured in volume (makilat), an other goods (on the other hand] is
allowed, this hints to an 'ilIa they have in common which implies that they do not belong to the
[goods]. And this [‘illa] is that they fall into the category of prices (athman)".32
AI-Shafi'is concept of thamaniya introduces a new concept of money. Money itself is not a good
any more. As opposed to raw gold, money is not acquired for the sake of its usability. Instead,
people hold cash because it is easily convertible into the goods that they ultimately want to buy.
The face value is something agreed on rather than a label for the intrinsic value of the metal
content. In contrast, the other schools remain in the realm of barter regarding money as a
weighable good. However, even in Shafi'is writing, the notion of measuring money in weight
rather than in numbers remains. In his time, the tradition of weighing money was obviously so
pervasive that he had to take this into account. Therefore, he permits a difference in number
during an exchange of money if this helps to establish an equal measure in weight.33 In contrast,
imbalance in weight is not permitted at all.
Malik carries the notion of money as currency one step further. He permits even imbalance in
weight. But if there is inequality in weight, this is seen as generosity (tafaddul), and the disparity
in weight may not be compensated in number. Two inequalities would really constitute inequality
(tafadul) and hence, riba al-fadl. Alternatively, Malik permits the counting of money, whereas a
combination of the two ways is not approved (Ia khair bi-dhalik).34 When counting money,
unequal numbers must not be compensated in weight because weight is the superior way of
measurement.35 Finally, Malik proclaims a connection between money as a numeraire and as a
good with respect to zakat. No zakat has to be paid for those coins that do not represent a weight
(the 200 Dirham and the 20 Dinar coins),36 whereas other coins as well as raw gold and silver are
subject to zakat. Malik perceives those coins that are counted as different. Historically, the
distinction between weighing and counting is an important step towards the conceptualisation of
money. Even those legal scholars who do not perceive the goods named in the hadith as
mawzunat as opposed to makilat, but as prices versus food, see the necessity to draw a
distinction between dealing in numbers and dealing in weights.
The question of counting versus weighing is also important when dealing with struck coins during
the exchange in undetermined quantities (juzaf)37 Obviously this was a widely used practice since
all major books of fiqh deal with it. In this sale, goods are not measured or counted but estimated,
which involves the danger of gharar. This is the reason why Malik rejects it for counted goods.
According to him, Dinars and Dirhams belong to the counted goods in this context and are [end p.
324] therefore excluded from the bay’ juzaf.38 To determine whether Dinars count as a weighable
or a countable good, the Malikis concern themselves with the Sura that says: "They sold him for a
low price of counted (ma’duda) Dirhams".39
One interpretation of this verse is that in general, Dirhams have to be counted rather than
weighed.40 Another reading is that only small prices are to be counted, 41 and higher prices, where
31
Ibid., p. 262.
AI-Shirazi, Vol. I, p. 270
33 Ibid., p. 273.
34 AI-Tanukhi, Sahnun Ibn Sa'id, al-Mudawwana aI-kubra, Cairo, 1323-4H, 16 Vols., Vol.
VIII, p. 133
35 AI-Haji, Abi al-Walid Suleyman, Kitab al-muntaqa, Cairo, 1332H, 7 Vols., Vol. IV, p. 259
36 Abd al-Wahab, Kitab al-ishraf, Tunis, s. d., Vol. I, p. 174.
37 Schacht, p. 147.
38
Al-Tanukhi, Vol. VIII, p. 131.
39
AI-Qur'an al-karim, Sura Yusuf (XII), 20
40
Brunschvig, p. 124
41
Al-Masri, p. 88. He gives also reference to al-Tabari in support of Brunschvig's view.
32
me weight of a single coin matters more, have to be measured in weight. The first interpretation
would exclude Dinars from the countable goods, whereas the second one would regard Dinars as
co1.Jntable goods depending on the price. In conclusion, the classical jurists do not distinguish
clearly between counting and weighing, and the frontier between coins and raw metal is still
unsettled.
The second major topic is the rate of exchange between Dinar and Dirham. As noted above,
areas where gold prevailed as a currency, and areas where silver was predominant cannot be
distinguished for even the first years of Islam. Although gold was predominant in the East, and
silver in the Western provinces, the two currencies interfered with each other. 42 Therefore, the
jurists were interested in the determination of the exchange rate from early on. This issue
surfaced mainly in the context of theft, where according to the Koran amputation is obligatory. 43
However, most jurists hold the opinion that amputation is dependent on the amount stolen.
Accordingly, the minimum amount (nisab) for the corporal punishment is disputed in the classical
texts. The Hanafi scholar al-Kasani mentions the following haduh related from Ibn Mas'ud Reda:
"Do not cut the hand except if (the theft is} a Dinar or ten Dirham".44
In contrast, Malik defines three Dirham, OF a quarter of a Dinar as the minimum for amputation.
This would reflect an exchange rate of one to 12. The most interesting view is held by Al-Shafi'i:
after a lengthy discussion why the nisab has to be at least a quarter Dinar, he gives several
contradictory ahadilh concerning the equivalent amount of Dirhams. He is indifferent between
three Dirhams and more than eight.45 This reflects an exchange rate between 12 and 24 Dirhams
per Dinar. The reason is that al-Shafi'i is based in Egypt, where silver was not used as a medium
of exchange. Accordingly, al-Shafi'i perceives only gold as a currency, whereas silver is a good in
his view. Since the price of this good changes, al-Shafi'i allows for floating exchange rates
between the two currencies. This view is also apparent with respect to zakat. AI-Shafi'i is the only
one among the considered scholars who favours that the minimal zakdt is calculated separately
for gold and silver.46 The other schools consider gold cum silver as money, and hence the zakat
is only levied once. Al-Shafi'i considers the two metals so different that they may [end p. 325] not
even be combined to form the capital of a partnership (‘inan).47 However, all of the jurists agree
that in the partnership one metal may be exchanged for the other only if both parties agree. In this
case there is no fixed rate of conversion.48 Admitting floating exchange rates in the partnership
paves the way for floating exchange rates between currencies. The free determination of
exchange rates is an important pillar of modem monetary economics.
The third major topic is the difference between the intrinsic value and the face value of coins. Fals
and maghshush money both have an intrinsic value below the face value. Historically, fals is the
first example of conventional money. All legal scholars discuss the permissibility of fals
extensively, and they disagree whether it is mal ribawi or not. Since the copper coins' intrinsic
value is far below their exchange value, holding money in cash implies a strong danger of
uncertainty (gharar). Similarly, maghshush money is intrinsically worth less than its exchange
value, and therefore the rate of conversion is insecure. In the classical context, the convertibility
of money can be secured in two ways. Either money can be traded like any good based on
intrinsic value - this applies for gold and silver49 - or because social control ensures the
convertibility of money; this applies for the locally restricted use of fulus. This control in turn may
be built upon a sufficiently small circle of traders, or on a traditional agreement to accept money.
42
Udovitch in L'Occidente e l'lslam nell'alto Medioevo, Spoleto, 1965, p. 488.
AI-Qur'an al-karim, Sura al-Ma'ida (V), 38
44
AI-Kasani, Vol.VII, p. 77.
45
AI-Shafi'i, Muhammad Ben Idris, al-Urnm, Azhar, 1961,7 Vols., Vol. VI, pp. 130f.
43
46
47
Brunschvig, p. 130.
Al-Shirazi, p. 245
48 Brunschvig, p. 133.
49 The same is true for central bank backed paper money
The jurists' concern here is whether fals is mal ribawi, that is whether it can attract riba. Since fals
is neither weighed nor measured in volume, Abu Hanifa and his student Abu Yusuf deny this, and
permit its use as the musallam fih in the salam contract. Al-Shaybani, another student of Abu
Hanifa, however, rejects this reasoning. He argues that, like Dirham and Dinar, fulus are an
expression of prices, and hence capable of riba.50 In contrast, Shafi'i denies that fals is money at
all since it is not accepted by everyone.51 This leads to divergent opinions about the salam within
his school. However, most scholars do not allow the salam with copper money. Ahmad lbn
Hanbal prohibits the use of faIs as the musallam fih. Malik is not clear about this case but
expresses disapproval (kariha).52
The same problem emerges with respect to maghshush money where the precious metal is
mixed with a less valuable metal like copper or brass. This raises the question whether these
coins have to be traded as if they were a combination of the metals, i.e. in weight, or if they can
be used at face value. The Hanafites deal with this as was suggested above: if the coins are used
habitually at face value they permit counting. The danger of gharar, of not knowing the value of
the coin, is reduced since it can be assumed that others will accept the money. 53 The other
schools are subject to a legal problem: in principle, they tend to prohibit counting [end p. 326] if
the value is not known since this constitutes gharar. At the same time, the habit of the people
restricts the applicability of the legal findings. Therefore, the jurists do permit some deals with
maghshush money.54 The next part of this article will demonstrate that habits in the economic
sphere continue to have a lasting effect on legal reasoning in modern times.
THE MODERN APPROACH
Only the introduction of paper money changes the situation fundamentally. As soon as paper
money assumes the prominent role in economic transactions, a new legal concept has to be
developed, which incorporates this new form of money. Even in the nineteenth century paper
money could still be regarded as a credit for gold reserves with the central bank. However, in the
twentieth century this approach is less convincing since it does not reflect reality any more. The
full coverage of currency in gold was given up in Britain in 1931, and in the US in 1971. 55 Today,
no currency is based on the gold standard. Therefore, other concepts from classical Islamic legal
thought have to be employed to embed paper money in the theories of fiqh.
I suggest that conceptions are favoured not because they are historically or legally prefereable.
Instead, the conditions imposed by modern economics call for a solution that is not only legally
permissible but at the same time permits transactions which are vital for contemporary Islamic
economies. While retreating to legal loopholes (hiyal) raises legal concerns, transactions like
foreign exchange or forward sales have to be permitted since they are pivotal for modern
economies. Furthermore, politics (siyasa) strongly influences the decisions of the ‘ulama.
The findings from the previous parts suggest five approaches within the framework of classical
Islamic legal thought. First, paper money can be viewed as a bond on the deposit of gold or
silver. This view is held by several ‘ulama as expressed by fatawa from the Azhar mosque in
Cairo.56 Historically the connection between gold and paper money via a debt relation between
the central bank and the money holders is convincing. In the Middle East as well as in Europe
50
Al-Kasani, Vol.V, p. 185
AI-Shirazi, Vol. I, p. 385
52 Brunschvig, p. 140.
53 AI-Kasani, Vol. V, p. 198.
54 Brunschvig, p. 137
55 Pearce, David W., The MIT Dictionary of Modern Economics, Cambridge, 1992,
“banknote” and “gold standard”.
56 Bin Mani’, p. 46.
51
and the US, paper money actually developed this way. However, this view does not adequately
represent current conditions any more. However, since in this view money is treated as a fungible
good (dayn) the rules for exchange of debts apply. Therefore, this view implies strong obstacles
to free transactions from a practical angle. Money cannot be exchanged for money because that
would be dayn bi-l-dayn, which is forbidden due to the immanent riba.57 Also, forward sales
(salam) are prohibited because in the classical fiqh the thaman for a salam has to be paid on [end
p. 327] the spot. Paper money would not be adequate for this exchange since it is only a debt. 58
Furthermore, the exchange of money for gold or silver is not permitted since money in this
concept is just a bond that represents a debt. Following the hadith quoted in the first part of the
article, the exchange of gold for gold, or silver for silver may only be done hand to hand.
Therefore, a bond is not acceptable. Moreover, depending on the legal school, the sale on time of
either currencies, since they are athman,59 or things measured in weight (mawzunat)f60 is
prohibited. Finally, the central banks would have to hold huge reserves of precious metals. Even
wealthy countries like Saudi Arabia do not store enough gold to back all the currency issued by
the central bank. Although legally sound, this alternative is problematic because if it is applied
strictly, it restricts foreign exchange and the salam, and can damage the economies considerably.
The second approach goes back to the suftaja. But in contrast to bonds, paper money is
regarded here as a replacement for the athman silver and gold. Thereby, paper money itself
attracts the characteristics of the respective precious metal.61 The currency of any given country
is seen as if it were the metal it once was based on. This opinion is favoured by the research
department of the Islamic Development Bank.62 From a historical point of view, this theory is
reasonable. Paper money plays a role comparable to that of the precious metals in the classical
context. Like these, it forms the largest part of the countries' monetary reserves, and developed
historically on the basis of gold and silver. At the same time, the difficulties from dayn bi-I-dayn
can be circumvented. However, also this legal construction involves some difficulties. Equating
paper money with gold and silver, respectively, can only be justified if it is completely backed by a
precious metal. This can only be secured if the central bank holds a 100 per cent reserve. The
ri'ba al-nasi'a does apply, and hence no interest is permitted. Although this view permits the
exchange of different currencies, currency exchange in unequal amount may only take place if
the currencies are based on different metals.63 This may necessitate rather difficult combined
transactions in order to avoid riba. In actual economic practice, it may pose serious obstacles to
currency exchange and international transactions more generally. However, the IDE is not
affected by this caveat since it holds large amounts of currency reserves.
Third, paper money may be given the same legal position as fulus in classical legal thought.
Historically, this view is convincing: fals used to be a locally restricted currency for small
transactions. Also today, only relatively small sums over short distances are paid in cash. Long
distance trade and larger transactions are being done via checks, money orders, or credit cards.
Their legitimacy is beyond the scope of this article. Also from a legal point of view, this
interpretation [end p. 328] seems appealing. Paper money is not weighed nor measured in
volume but counted. Like copper money it is a standard for prices (thaman). Furthermore, its
value changes like that of copper coins did. This is due to the fact that the face value of paper
money exceeds the intrinsic value. Hence, it is conventional money like fulus. It is therefore
plausible to treat it according to the same legal roles. However. the use of paper money is not
restricted to small networks of people. Therefore, the potential users of a bill do not know each
other. and as a result, social control cannot guarantee the exchange value of paper money as it
did for copper coins. The direct analogy between fulus and paper money is therefore not wholly
57
Schacht, p. 146
Bin Mani', p. 46.
59 Hanafis, but also Hanbalis as the statement of Bin Mani', an Hanbali scholar,
60 Shaft'is and Malikis
61 Bin Mani', p. 79
62 AI-Masri. p. 83
63 Bin Mani’, p. 80.
58
convincing. Furthermore. this approach has two shortcomings from a legal viewpoint: most
scholars would agree that the forward sale (salam) is prohibited or at least disapproved when
paper money functions as the musallam fih. Second, for fulus an exchange in unequal numbers is
not prohibited. This implies that even unequal numbers within the same currency. and hence any
amount of interest are permissible in this interpretation. 64 Therefore, most ‘ulama' do not approve
of this interpretation. This approach, although legally and historically acceptable, is rejected
because the 'ulama are concerned mat it may open the door for riba in the economies.
The fourth opinion presents money as a simple good. The paper bills themselves are seen as
goods. whose value is determined by supply and demand. Since money is printed on paper) me
consideration is that it is neither mawzun nor makil, it is neither thaman nor ta’am. Therefore. a
free exchange for any oilier good is perfectly suitable. The only restriction is the forward sale in
the opinion of the Hanbalis. In their view, the forward sale is only permitted for money,which in
this conception paper money is not. Besides, this concept is a poorly disguised hila. Obviously.
using paper bills for payment is not a sale of paper. The face value is not based on the market for
paper. Therefore, this approach has to be rejected by serious legal scholars.
Finally, paper money can be seen as one thaman among many. In this conception, different
currencies as well as gold, silver and fals are regarded as different types. This is a direct analogy
with the classification of gold and silver in the classical context. This approach is propagated by
the Board of Senior ‘ulama' in Saudi Arabia.65 It is, however, not acceptable from a Hanafi point of
view which does not accept the concept of athman. But from the Hanbali background of the Saudi
"ulama this is legally convincing. The practical impact is that no exchange can be done within one
currency in unequal measure, i.e. riba and interest in general is prohibited. At the same time,
exchange among different currencies is permitted if it is hand to hand. Finally, money can be
invested as capital in a ‘inan contract. This is an important function of money in contemporary
Islamic economies. Requirements for important transactions such as foreign exchange and bay’
al-salam are secured, and transactions which are undesirable in me eyes of the Saudi ‘ulama like
interest are excluded.
However, this approach involves a strong danger of gharar. Since the money is [end p. 329] not
backed by real assets, only the strength of the economy serves as a guarantor for the money. In
a highly integrated world economy, a local economy cannot rely completely on the work of the
residents. Especially the oil-based economies of the Gulf depend heavily on imports from world
markets. Hence) the currency's value is heavily determined by the world price for crude oil) which
induces a vast danger of gharar - This is an important difference to gold and silver) which are
negotiable as goods beyond their monetary function. Devaluation of currency therefore becomes
a central aspect in the modem legal discussion about money. The constant decline of the value of
paper money leads to a reassessment of riba. Some jurists have already permitted "normal"
interest rates.66 Since central banks are unable to back currencies by gold or silver reserves,
inflation has to be addressed by jurists on a more generallcvcl.
INFLATION
Islamic legal scholars react in two ways to inflationary trends. Either inflation is accepted as a
general symptom and rules for contracts under inflation are developed, or jurists challenge that
inflation is permissible in itself.
The former solution is analogous to the classical response to volatility in the value of fulus and
64 For example: A sells B 100 Rials for 200. Afterwards he gives him 120 Rials as qard
hassan
65 Bin Mani', pp. 132-137.
66 Siegfried, Nikolaus; Muhammad Baqir as-Sadr: al-bank al la ribawi, mimeo, Berlin, 1993,
pp. 7-8.
maghshush money. The Hanafi scholar Ibn Abidin (d. 1252) writes about delayed repayment that
gold and silver have to be repaid in mithli since their value is assumed to be stable. However, the
value of fulus is unstable) and hence a debt of fulus has to be rcpaid in the same value (qima).67
The lender cannot be encumbered with the decrease in the value of the currency. 68 Modem
scholars like the Indian Ziauddin Ahmed suggest that loans in general should be pegged to the
price level.69 This raises the economic problem of indexation, which has been addressed only
recently by Islamic scholars.70 The main difficulty here lies in the diverging interests of the
borrower and the lender. A firm that borrows money will want the loan to be pegged to its
products since this is its source of income. However, the lending bank is more likely to prefer a
consumer price index because it refinances credits by private deposits. A possible solution is a
peg to other currencies or even to a basket of currencies.71 However, this is unacceptable to
other scholars who argue that a connection with goods or other currencies involves riba. The
argument runs that pegging to gold or gold based currencies makes money similar to gold.
Borrowing money is then like exchanging gold on time72 However, all these are suggested
solutions for the symptoms of inflation only. [end p. 330]
The second solution is proposed mostly by economists who are also concerned with Islamic legal
issues. Their argumentation is based on the prohibition of riba and gharar. They regard inflation
itself as an unwelcome effect.73 Following Keynes' argument that the lack of carrying costs for
money leads to money hoarding,74 they suggest negative interest rates through the collection of
zakat.75 Following this approach, abolishing interest payments for bank deposits would induce
people to invest in commodities. Money would be restricted to the role of a medium of exchange
rather than a store of value. Some modern scholars suggest to prevent banks from creating credit
at all since it impedes controlling the amount of money. A steadily growing monetary aggregate in
turn leads inflation. Therefore, they call for a 100 per cent reserve requirement for all banks.76
Obviously, a full reserve requirement would reduce we danger of gharar in money-holding. Also
some Western economists calls for 100 per cent reserve requirement to guarantee the stability of
the banking sector.77 However, Islamic economists with a strong background in Western
economics favour controlled money growth.78 In a highly interdependent world economy, a full
reserve requirement is impossible to implement since the central bank cannot react adequately to
contractive shocks from the world markers, and the national economy may easily run into a
deflation.
CONCLUSION
In the controversy between economic and legal considerations, practicable solutions have to be
found. The foundations for money have changed considerably: paper money is issued without a
real countervalue and the social background for trade has changed. Due to me increasing
integration of the Arab countries into the world market, economies in me Middle East and the
67
Ibn Abidin, Hashiya radd al-mukhrar, 8 Vols., Cairo 1966, Vol. 5, pp. 162-164
Ibn Abidin, Tanbih al-ruqud 'ala masa’il al-nuqud, s. I. s. d., p. 10.
69 Ahme, Ziauddin, "Currency Notes and Loan Indexation" in Islamic Studits, Vol. 28,1,1989,
pp. 39-53, p. 44.
70 Chapra M Umer, "Money and Banking in an Islamic Approach" in Monetary and Fiscal
Economics of Islam, Ariff, M (cd.), Jeddah, 1982, pp. 145-176, p. 148.
71 AI-Masri, p. 86.
72 Ibid., p. 90.
73 Chapra, p. 149.
74 Keynes, pp. 233-4.
75 Siddiqi, M N, "Islamic Approach to Money, Banking and Monetary Policy - A Review" in
Monetary and Fiscal Economics of Islam, Ariff, M (ed.), Jeddah 1982, pp. 25-38, p. 26.
76 Siegfried, p. 21
77 Cf. Simons, Henry C, A Positive Program for Laissez-Faire, Chicago, 1934.
78 Chapra, p. 172.
68
value of their currencies have become determined by outside conditions. New aspects of using
money, especially continuous inflation, call for new directions in Islamic legal thought. As the
previous parts demonstrate, Islamic legal thinkers come to different conclusions in their attempt to
embed paper money into Islamic legal theories. To discriminate among the legally acceptable
alternatives for interpreting the role of paper money in an Islamic economy, legal scholars have
combined historical developments with practical economic aspects. Political considerations
strongly determine which result from analogy (qiyas) is preferred.
From an economic point of view, inflation is a necessary phenomenon if governments want to
avoid that external shocks damage the national economies [end p. 331]
directly. However, this implies that holding money without a constant value in real assets
involves a danger of gharar. This problem will remain a constant topic among Islamic
legal scholars for some time. [end p. 332]