WHAT IS MONEY?

Linguistically, naqd (money or cash) is to distinguish

something or determine its reality and meaning. Hence,

the definition of money (naqd) is, “Anything that gains

general acceptance as a medium of exchange, whenever or

wherever that occurs and in any way that it occurs.”

Thus, this excludes promissory notes and cheques, etc.

“Anything” refers to whether it is intrinsically

valuable, e.g. gold and silver, or whether its value is

due to external factors imposed in order to avoid

chaos, as is the case with paper money.1

Money has been defined as a “thing that serves as a

commudity accepted medium of exchange or means of

payment.”2 Another famous and comprehensive definition

of money is that “Money is any generally acceptable

means of payment in exchange for goods and services and

in selling debts.”3money performs four major functions.

It is;

i. A medium of exchange or means of payment,1 PAPER MONEY – by ‘Abdullah b. Sulayman b. Mani’2 Paul A. Samuelson and William, Economics (New York: McGraw-Hill Book Company, 1993) , 2263 Fischer and Dornbusch, Economics (Singapore/; Mc Graw-Hill Book Company, 1993), 623

ii. A measure of value or a unit of account,

iii. A standard of deferred payment, and

iv. A store of value

The question ‘what is money?’ can only be answered by

the government. This illustrates the essentially

political character of money. Notes and coins usually

carry images of the sovereign and the authority and the

authority of the government and nothing else guarantees

their value (though this guarantee itself loses value

in inflationary situations). 4

Money is classified under two categories:

i. Commodity money and

ii. Token money

The former functions as a medium of exchange and is

bought and sold as ordinary goods. Token money,

however, is considered to be a means of payments whose

value or purchasing power as money exceeds the cost of

its production and its value in alternative uses.

Modern monies are accepted because the law requires

them to be accepted. These are fiat monies or legal

4 Money and banking in Pakistan by S.A. Meenai

tender. Legal tender is the money that a government has

declared acceptable in exchange and as a lawful way of

paying debts. 5

THE ORIGIN AND DEVELOPMENT OF MONEY:

With barter and the division of labor, there were

difficulties due to the complexities of life.

Therefore, money was needed. In coastal areas, they

used shells, in temperate lands: beautiful items such

as ivory and fishbones,in Japan: rice, in Central

Asia:tea and in Central Africa: salt.

Commodities turned out not to be good enough for money,

with problems such as: (i) fluctuating value due to

supply and demand; (ii) perishability and (iii)

difficulty in transporting. Therefore, gold, silver and

copper were used. These were vulnerable to abuse, since

not everyone knows their weight and value. Hence the

government intervention of minting coins in order to

guarantee quality and weight.

5Indexation of loans; A Shari’ah prespective by Muhammad Tahir Mansoori

The first to mint money was King Cryosof Lyddia,

Southern Asia Minor, and 7th century BC; there are

examples in the British Museum. In the Greek

civilization, the coin was called drachma meaning “a

handful,” and the word dirham derives from this. This

was fine, except for the problems of (i) transportation

in large quantities and (ii) the risk of loss or theft.6

STATUS OF PAPER MONEY:

This was not something new, for Marco Polo brought

paper money from China in the 14th century CE. The first

issuer of paper money was Sun Tung in the 9th century,

and this was continued by the kings of China and

Mongolia.

There were four stages in the development of paper

money:

1. Merchants issued paper receipts, rather than

carrying gold and silver in long journeys.

6 PAPER MONEY – by ‘Abdullah b. Sulayman b. Mani’

2. Goldsmiths and money-changers issued receipts for

deposits, and these receipts began to be exchanged.

This practice was limited at first but it later

increased until it led to the issue of receipts that

exceeded the deposits, i.e. the extra receipts were not

backed by gold or silver.

3. This was now a significant change in the history of

paper money: it had Properties 1-3 plus absolute buying

power. The only problem was anarchy and abuse, since

all goldsmiths could issue receipts. E.g. in 18th-

century France, Jean-Louis & co. issued too many

receipts, and this led to a loss of confidence. This

led to state involvement, imposing paper money as legal

tender.

Thus, paper money was not just based on custom and

‘urf, but fully supported by state enforcement of it as

legal tender.

Paper money or the currency notes in vogue are a kind

of thaman unit of account to serve as price of

anything). They are wanted only for exchange and

payments and not for themselves. Accordingly, the

present fiat or fiduciary money in the form of currency

notes represents monetary value for all purposes of

making payments and currencies of all countries are

unlimited legal tenders as the creditors are obliged to

accept them for the recovery of debts. Therefore, paper

money is subject to all tenets of shariah relating to

Riba, debts, zakat, etc. notes of any particular

currency can be exchanged equal to equal. Currency

notes of different species and therefore, can be

exchanged without the condition of equalibility but

subject to the conditions of Bai al Sarf i.e. hand to

hand.7

Justice khalil ur Rehman in the Supreme Court;s

judgment on Riba says:

“the consensus, which appears now to have been made, is

that the fiat money is money for all particular

purposes and will have to be taken as a substitute for

Gold and silver, the real and natural money.” (SAB. P.

269)

7 Islamic banking and finance by Muhammad ayub, p.28

ISLAMIC LEGAL RULINGS ON THE REALITY OF PAPER

MONEY:

Paper money was not known to the early jurists of Islam

since it was not in circulation at their time, neither

in Islamic nor in neighboring lands, except that it is

said that paper money was known and widespread in China

– this would explain the view that the jurists of India

were the first to discuss paper money.

For later jurists, their rulings on zakat, trade and

exchange of paper money were based on their conception

of its nature. This led to four different views.

VIEWPOINT 1: paper money is an IOU from the issuer,

i.e. a receipt of debt:-

The basis for this position is:

1. The promise to pay the value to the bearer on

demand, printed on paper money.

2. The necessity of backing the paper money with gold

and/or silver in the issuer’s reserves.

3. Paper money has no intrinsic value, e.g. currency

notes denoting five and ten units are similar in size

but very different in value.

4. The issuing authority guarantees the value of paper

money when it is abolished and ceases to be legal

tender.

Critical analysis of this viewpoint

1. It relies on the promise to pay, which is no longer

valid and has no reality, being only meaningless words.

2. Backing by gold and/or silver is not required in

full. Most issuing authorities who have prior

experience or are pioneers, operate in this way. Other

issuing authorities, including the entire Islamic

world, are following them in this. It is not necessary

for paper money to be backed fully by wealth, for

government guarantee plays a part, too.

3. The “no intrinsic value” argument: money is

whatever is generally accepted as the medium of

exchange, whether its value is intrinsic or extrinsic

(or a mixture).

This is supported by the fact that economic thought

requires mints to make the value of mineral money

greater than its intrinsic value, in order to safeguard

its life and help avoid forgeries. E.g. one Saudi pound

is worth 40 Saudi riyals by government decree, whereas

a piece of gold weighing one Saudi pound is worth 35

Saudi riyals. The difference is enforced by government.

We do not say that the difference is a state debt, so

we cannot say that paper money is state debt, although

the government must take careto stabilise its value,

etc.

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/orsilver.

The IOU viewpoint leads to hardships and constriction

upon the public, whereas a general principle in the

Shari’a is that in a matter lacking an unequivocaltext,

there should be ease upon the people rather than a

burden.

VIEWPOINT 2: Paper money is a commodity, and therefore

carries the same characteristics and legal rulings as

trade communities:-

The basis for this position is:

1. Sheikh ‘Abd al-Rahman b. Nasir al-Sa’di, in his

treatise on the Ruling on Paper Money (publ. 1378 H),

in the form of a trialogue amongst proponents of the

IOU, Commodity and Value viewpoints, puts the Commodity

viewpoint in the following way:

The paper money is experientially the price and the

commodity, but not equivalent to gold and silver.

Transactions are based on the banknotes. They are not

the same as gold and silver in substance and source, so

the ruling on riba in exchange does not apply to them,

even though they are equivalent in value to gold and

silver, exactly as is the case with precious jewels and

pearls, etc. The basic principle in trade is that

transactionsare halal; we cannot state that they are

haram without decisive proof. The view that paper money

is a debt leads to harm and difficulty: the Shari’ah

makes matters easy for people, and is applicable to

every time and place. People are in the situation of

necessity, for most of the world uses paper money.

Another piece of evidence that paper money is not like

gold and silver is that the former’s value is based on

governmental authority, and this value can vanish if

the government is replaced or if it changes its policy.

Thus, paper money is equivalent to gold and silver in

trade and matters of monetary worship such as zakat and

nisab, but not the same as gold and silver in the

ruling on riba in exchange since the mashhur in our

madhhab is that the ‘illah for the riba ruling on

exchanging gold and silver is that they are weighed,

and a banknote denoting 1,000 units may weigh the same

as one denoting 100 units.

2. Sheikh Yahya Aman, a proponent of the “commodity

viewpoint” said in treatises published in 1378 that

paper money is valuable wealth, which people store for

their needs. This isthe meaning of wealth (mal): human

nature inclines towards it, and it can bestored for

occasions of need. The possessor of paper money takes

ownership of it by giving dirhams or riyals. The paper

money is regardedas wealth and treasured (like gold,

silver and fulus), stored, gifted, bequeathed in wills

and given in charity.

Summary of this viewpoint :

1. Paper money is desirable, valuable wealth. It is

treasured and used for buying and selling. It is not

similar to gold and silver in substance and source.

2. Paper money is not measured by volume or weight,

and therefore does not fall under any of the six

categories of items on which the ruling of riba applies

in exchange.

3. The names of the currencies are metaphorical: the

reality is that the paper money is valuable wealth.

4. Paper money is not equivalent to gold and silver in

type and measure: paper is not a precious mineral;

paper money is not weighed, unlike gold and silver.

Corollaries of this viewpoint

a) Bay’ salam is not allowed using paper money,

according to the viewpoint that one counter-value in

bay’ salam must be gold or silver.

b) Riba of both types does not apply to paper money:

one is allowed to exchange

different quantities of it with gold and silver, on-

the-spot or with deferred payment.

c) Zakat is not payable on paper money unless it is

set aside for sale.

Critical analysis of this viewpoint :

The IOU and commodity viewpoints represent two extremes

that open the door to riba and nullify most forms of

zakat. E.g. A million pounds deposited upon a return of

8% interest would neither fall under riba nor be liable

for zakat! People need to be deterred from the

corruption and materialism of our time, not encouraged!

Paper money is not the same as paper that is used for

writing and packaging, etc. Sound qiyas is binding in

Shari’ah: the correct ‘illah of riba in the exchange of

gold and silver is that they are a measure of value,

not their substance, source or weighability.

VIEWPOINT 3: Paper money is the same as Fulus:-

This viewpoint is a moderate one between the IOU and

commodity viewpoints. Fulus does not necessarily have

to be made of copper, although it has been ever since

the Arabs took the idea from the Byzantines. The

Byzantine value and coinage of fulus was unstable, and

the Arabs stabilised it: the copper coin weighed

0.194g, and 48 coins equalled one dirham in value.

Proponents of this view and their arguments include:

1. Sheikh Ahmad al-Khatib: No zakat is to be paid on

paper money unless it is set aside for sale, since

paper money is the same as fulus. No riba applies on

paper money: one can exchange it in equal or unequal

quantities, on-the-spot or with deferred payment.

2. Sheikh Abdurrahman al-Sa’di: This viewpoint is a

moderate one between the commodity view and the view

that “paper money is equivalent to gold and silver,”

and is the best way to reconcile the various legal

evidence. Thus, paper money is equivalent to gold and

silver in deferred transactions, so one cannot exchange

10 units for 12 units later, but equivalent to fulus in

spot-transactions, so one can exchange whatever

quantity one likes on the spot. This is the best view

in the situation of need (hajah), for paper money is

not the same as gold and silver in reality, and this

view is based on the objectives of the Shari’ah without

opposing its texts.

Difference between paper money and Fulus:

There are important differences between paper money and

fulus, illustrating that the former should be given the

same ruling as gold and silver:

1. Paper money is used for no other purpose than as a

measure of value, unlike fulus that can be traded as a

commodity in view of its substance.

2. When ordinary paper is converted into paper money,

it loses its original nature, unlike the case of fulus.

3. In value, fulus is much less than gold and silver

whereas paper money reaches the same value as gold and

silver. In fact, some banknotes are worth far more than

any gold or silver coin.

4. Fulus is generally used in pricing low-value items,

and this is partly why some ‘ulama have allowed riba

al-fadl in the case of fulus.

5. Fulus cannot be used in pricing high-value items:

only gold, silver or paper money are used for this.

Riba usually occurs in high-value transactions.

These differences justify treating paper money on a

higher level than fulus, with the corresponding extra

rulings and effects.

VIEWPOINT 4: The :substitute” view:-

According to this view, paper money is a substitute for

gold and silver, and the substitute has the same ruling

as the substituted. It has the same moneyness as the

gold and silver on which it is based and by which it is

backed. The Shari’ah is based on objectives and

meanings, not mere words and labels. This view is

supported by the fact that if the paper money loses its

status as money, it reverts to being worthless paper.

THE PREFERRED VIEW ON THE REALITY OF PAPER MONEY:

Paper money has no intrinsic value, but has an

extrinsic value that is based on the following factors,

amongst others:

1. The economic situation of the state.

2. Public confidence in paper money as a trustworthy

store of value and in its unrestricted buying power.

3. State enforcement of paper money as legal tender.

The preferred view is:

Paper money is an independent type of money (thaman),

similar to gold, silver and other mineral money. Paper

currencies from differentissuing authorities are

different types of money.

Corollaries:

Some of the corollaries of this view are:

a) Both types of riba, fadl and nasi’ah, apply to paper

money as they do to gold and silver, and to other forms

of money such as fulus, according to the correct view

amongst the ‘ulama. This implies that:

(i) Paper currencies cannot be exchanged for each other

with deferred payment, under any circumstances.

(ii) Unequal amounts of the same currency may not be

exchanged, whether on the spot or with deferred

payment.

(iii) Different paper currencies may be exchanged in

any agreed ratio, as long as this is done on the spot.

b) Zakat is obligatory on paper money if it reaches the

lower nisab of gold or silver. This applies if the

nisab is reached in one currency only or in a mixture

of different currencies, or a mixture of paper money

and trade goods.

c) It is allowed to use paper money ascapital in bay’

salam and partnership (musharakah).

THE BIG GAME OF PAPER MONEY:

When paper money was introduced into the world

economy to replace gold & silver money, the

Muslim jurists were faced with a new problem

that caused a considerable amount of debates &

different opinions.

The jurist abdullah ibn abdullrahman aal bassam

said in his book8 that is quoted as;

" Recently banknotes were introduced into the

markets to be used as money instead of gold &

silver coins. They made for each coin a

corresponding piece of paper that carries its

8 tayseer al-allam - sharhi umdat al-ahkam

name & value. The different opinions of jurists

may be summarized as follows:

1) Some jurists said it is absolutely unlawful

to deal with paper money because it resembles

the selling of debts or receipts of debts. (On

the issuing bank)

2) Some other jurists said we should deal with

it as we deal in trade commodities & therefore

there is no riba in dealing in them with

increase either hand to hand or increase for the

deferred payment.

3) Some other jurists said we should deal with

it as we deal in gold & silver, because the

paper money is replaceable with gold & silver

(on demand from the issuing bank)

4) Some other jurists said we should deal with

it as we deal with floos. 9

NOTE:9 https://www.lariba.com/knowledge-center/articles/pdf/Riba-and-Paper-Money.pdf

All these rulings were based on the premise that

the paper money would be backed and covered by

gold or silver & would be exchangeable with gold

or silver on demand for the amount prescribed on

them. facing the realities of that time &

because of the weak situation of the Muslims in

the face of other world powers, Muslims had no

choice but to accept the change to the new

monetary system and as long as paper money was

backed & covered with an amount of gold

equivalent to the amount prescribed on them, the

system continued to work fairly well. That was

the start of the game. Paper money gave the

different governments the freedom to spend more

than they took in. this power was exploited and

Still is by many governments, especially in

times of war and corruption. by printing, more

money &flood the markets with it. And the

purchasing power of money goes down, and

governments have to reduce the percentage of

gold covering to the paper money. This happened

in many countries including the United States.

Congress man Dr. Ron Paul said in his book

(gold, peace and prosperity- the birth of a new

currency) i quote,

" to finance our revolutionary war, the

continental congress issued paper money in great

quantities. over a period of about four and a

half years, the continental currency fell from a

value of one paper dollar per one gold dollar to

about 1000 to one...the phrase --not worth a

continental -- records the fate of this paper

money." in 1913, the gold cover for federal

reserve notes was set by 1913 law to be 40% in

1945, the gold reserves against federal reserve

notes was reduced to 25%. forty-four nations

agreed to the establishment of a world bank & an

international monetary fund, which began its

operations in 1946 under a "new" gold exchange

std. this permitted dollars -(said to be as good

as gold)-to be substituted for gold as the

international reserve currency. The dollar

valued at 1/35thof an ounce of gold was to be

honored in payment of international debts. to

continue the inflation fraud, this figure (the

25%) had to be reduced to zero. in 1965 gold

reserve system requirements for federal reserve

deposit liabilities were removed, and on august

15, 1971, president nixon closed the gold

window, and refused to redeem overseas dollars

for gold. the road to rampant inflation was

opened, to the delight of the bureaucrats,

politicians, international bankers,

multinational corporations, and some labor

leaders. the age of the managed fiat currency

was born. the British empire was even ahead of

the U.S.A. in this respect. Britain abandoned

the gold standard in 1931(40 yrs. before U.S.)

going back to the hadeeth of the prophet

(P.B.U.H.) that emphasized the dealing in

tangible commodities with defined measurable

weights or volumes that keep their intrinsic

values through time ... if not gold& silver, it

may be wheat & barley or by analogy oil, corn,

rubber, steel ...etc. ron paul in his book said,

for ten centuries the byzantine coins were

accepted all over the world.the byzantine empire

only declined when it debased its gold coin (the

byzant) by adding cheap alloys to the gold.

paper money gave the opportunity to stronger

industrial countries to buy their raw materials

from weaker developing countries with paper

money that may be devaluated at any time at the

will of the stronger countries and the weaker

ones loose the value of their wealth. the same

game was played within each country where the

rich get richer by keeping their wealth in real

estates & investments that can benefit from

inflation & the poor get poorer by losing the

purchasing power of their wages & salaries that

never catch up with inflation. with this game of

paper money, Muslims went out of the track of

their Islamic monetary system as set by the

prophet (P.B.U.H) the world powers changed the

track & the direction of the Muslims while they

were asleep. Muslims at large including their

jurists still debate in the minute details of

riba, interest, and what is halal and what is

haram while their whole Islamic system & track

direction was diverted for them. my conclusion

is, no matter what is done nowadays with good

intentions to abide with the Islamic monetary

system and to avoid riba, Muslims are not

escaping the fact that they are not in the

driver's seat, but they are riders in a train

that is taking them away from the pure Islamic

system into an area that is polluted with the

dust & the vapour of riba. as the prophet

(P.B.U.H) said (a time will certainly come over

people when none will remain who will not devour

riba. if not devour it, its vapour will overtake

him (another narrated its dust). reported by

ahmed, abu daud, and ibn majah. the only remedy

is by going back to the Islamic monetary system

of a gold & silver std. or by analogy using

other tangible commodities such as wheat, oil,

corn, or other essential commodities to cover

the value of paper money & give it a stable

intrinsic value. Many politicians & economists

as Dr. Ron Paul are calling for a return to the

gold std. of course there is a lot of opposition

from governments, bankers, and multinational

corporations...etc to such change that will

deprive them from the powers they enjoy. Muslims

everywhere should support this movement of going

back to the gold std. or equivalent substitute

commodity such as oil, steel, etc.

TRADING IN CURRENCIES:Paper currencies cannot be sold or bought like goods

having intrinsic value. The shariah has treated money

differently from commudities, especially on two scores:

first, money (of the same denomination) is not held to

be the subject matter of trade, like other commudities.

Its use has been restricted to its basic purpose: i.e.

to act as a medium of exchange and a measure of value.

Second, if for exceptional reasons, money has to be

exchanged for money or it is borrowed, the payment on

both sides must be equal, so that it is not used for

the purpose it is meant for, i.e. trade in money

itself. In the context of trading in goods, as distinct

from exchange of various currencies, Shaikh M. Taqi

Usmani in SAB judgement says: “the commudities can be

of different qualities. Therefore, transactions of sale

and purchase rae effected on an identified particular

commodity. Money has no quality except that is a

measure of value or medium of exchange. All units of

money of the same denomination are one hundered per

cent eqal to each other. 10

10 Understanding Islamic finance by Muhammad Ayub, John Wiley&sons, Ltd, p.91

Professor John Gray (of Oxford university), in his

recent work False Dawn, has remarked:

“Most significantly perhaps, transactions on foreign

exchange markets have now reached the astonishing sum

of around $1.2 trillion a day, over fifty times the

level of the world trade. Around 95 percent of these

transactions are speculative in nature, many using

complex new derivatives, financial instruments based on

future and options……This virtual financial economy has

a terrible potential for disrupting the underlying real

economy, as seen in the collapse in 1995 of Barings,

Britain’s oldest bank.”

The evil results of such an unnatural trade were

pointed by Imam Al-Ghazali 900 years ago in the

following words:

“Riba (interest) is prohibited because it prevents

people from undertaking real economic activities. This

is because when a person having money is allowed to

earn more money on the basis of interest, either in

spot or in deferred transactions, it becomes easy for

him to earn without bothering himself to take pains in

real economic activities. This leads to hampering the

real interests of humanity, because the interests of

humanity cannot be safeguarded without real trade

skills, industrt and construction.”11

BIBLIOGRAPHY

The concept of Riba and Islamic banking BY Imran

Ahsan Khan Nyazee (December 8, 2000)

An article on “paper money” BY Abdullah b. Sulayman b. Mani

Indexation of loans; A Shari’ah prespective BY Muhammad Tahir Mansoori

Financing in Islam BY Muhammad Hafeez Arshad Malik,Malik publications.

Money and banking in Pakistan ( third edition) BY S.A. Meenai, Oxford

11 Shariat Appellate Bench,2000, Taqi Usmani’s part of judgement, paras 135-152.

university press.

Money and banking in Pakistan BY Javed A. Ansari, Oxford university press.

Understanding Islamic Finance BY Muhammad Ayub, John Wiley&sons, Ltd.

Islamic banking and finance- Theory and practice BYMuhammad Ayub, State Bank of Pakistan.

https://www.lariba.com/knowledge-center/articles/ pdf/Riba-and-Paper-Money.pdf

CONTENTS

What is money? ----- A brief

introduction

The origin and development of

money

Paper money

Islamic legal rulings on the

reality of paper money

The big game of paper money

Trading in currencies

“THE POSITION OF PAPER

CURRENCY IN ISLAMIC LAW”

Submitted to: Sir, Muhammad

Tahir Mansoori

Submitted by: Sahrish Aman

LLM Corporate Law

2nd Semester

Date; 28 May, 2014