Humans have known of money in different forms throughout their history. They first dealt with barter when they exchanged goods, commodities and services.
They then appointed certain commodities of value such as gold and silver as intermediaries in trade.
By the time of the Prophet (saw), people were dealing with Roman gold coins and Persian silver coins. He (saw) allowed people to use these coins as well as permitting other ways such as barter. He himself dealt with the same currencies and approved them.
The Prophet (saw) said:
الوزن وزن أهل مكة والمكيال مكيال أهل المدينة
"The measure -to be used- is the measure of the people of Al-Madinah, and the weight -to be used- is the weight of the people of Makkah." (Sunan an-Nasa'i 2520)
So He (saw) approved their weight as a standard value according to which people's efforts and works are measured.
In the year 20 AH, Umar ibn al-Khattab (ra) introduced new Darahim based upon the Sassanian style, keeping the same weight and form but adding some Islamic wording in Arabic such as بسم الله "In the name of Allah." It was narrated Umar (ra) said:
هممت أن أجعل الدراهم من جلود الإبل، فقيل له: إذًا لا بعير، فأمسك ذلك.
"I was about to coin Darahim from camels' leather, but people told him: 'therefore, camels will disappear,' -for that reason- he turned his decision down." (Futuh al-Buldan, pp. 452)
Umar (ra) did not use camel leather because people were using camels in their life. However this suggests the companions believed it permissible to use whatever currency we agree to use.
Whilst commodity based currency have been recorded as being freely used without controvery, Malik ibn Anas records during Marwan ibn al-Hakam's caliphate, receipts were given to people for the produce of the market at al-Jar. These receipts began being traded by people before they took delivery of the goods. The companion of prophet Zayd bin Thabit reminded Marwan about the prohibition of riba' and Marwan immediately ordered the receipts to be returned to the owners.
Scholars throughout Muslim history had no concerns with currencies based on commodities like gold or silver - with jurists from the seventh to the nineteenth century including the likes of al-Ghazali, Ibn Taymiyyah and Ibn Khaldoon writing about them.
Imam Malik, the founder of the Maliki legal school of thought wrote:
لو أن الناس أجازوا بينهم الجلود حتى تكون لها سكة وعين لكرهتها أن تباع بالذهب أو الفضة نظيرة.
"If the people allowed leather -as a currency- among them till it became coined and have certain value, I would dislike it to be used in Riba that is used in Gold and silver." (Al-Mudawanah al-Kubra lil Imam Malik, Vol. 3, pp. 90.)
Imam Ahmed ibn Hanbal, founder of the Hanbali legal school of thought, said:
إن كل شيء اصطلحوا عليه فيما بينهم مثل الفلوس التي اصطلح الناس عليها، أرجو ألا يكون به بأس.
"Everything that people agreed among themselves -to use as currency- such as our money that we agreed to used it among us, I see no problem with it." (Ibid.)
Imam Ibn Taymiyyah of the Hanbali legal school of thought said:
وأما الدرهم والدينار فما يعرف له حد طبعي ولا شرعي بل مرجعه إلى العادة والاصطلاح ... لا تقصد لنفسها بل هي وسيلة إلى التعامل
"Dirhams and Dinars have no certain natural or legal 'Shar'i' attribute, this matter is up to custom and the agreement -among people- … because money itself is not the purpose, rather a means of trade." (Ibn Taymyah, Majmu' al-Fatawa, Vol. 19, pp. 252.)
Regarding contemporary fiat money, it is paper or electronic money/coins which have no intrinsic value in and of themselves and are not convertible into gold or silver, nor can they be redeemed for specie or any commodity. It is made legal tender by fiat, an order of the government.
This came about from historically currency generally comprised gold or silver coins. This was over time replaced by paper money representing the gold held in store - each note could be converted back to gold. The Bretton Woods system following World War 2 saw the US Dollar anchor world currencies, every currency having to go through the dollar to be converted to gold. The disastrous Vietnam war saw the US overspend her entire hoard of gold store and unable to convert its currency to gold as agreed at Bretton Woods. This then saw it come off the gold standard and become fiat and all other currencies followed suit.
Research by the International Islamic University Malaysia however seems to suggest that most Shariah scholars are unaware of and confused about the mechanics underpinning the creation of fiat money, especially with respect to FRB as it is practiced by the conventional and Islamic banking systems. Worryingly it found many Shariah scholars are also Shariah advisory boards of the current banking system introducing conflicts of interest.
Islam does not restrain people from developing their way of life, providing conformity and non-contradiction with Shari'ah.
Commodity based currencies are permitted as they simply extend notions of bartering whereby things of inherent value are exchanged for other things -or services- of inherent value. Commodity based money as an intermediary transaction maintains the exchange of value for value. Fiat money however is more controversial given it has no inherent value from any underlying commodity but gains its alleged value via fiat, the order of an authority. This then introduces doubt about the fairness of the transaction.
Syammon Jaffar, Adam Abdullah, Ahamed Kameel Mydin Meera, (2017) "Fiat money: from the current Islamic finance scholars' perspective", Humanomics, Vol. 33 Issue: 3, pp.274-299, https://doi.org/10.1108/H-01-2017-0013
Anowar Zahid, (2014) Fiat Money from Islamic Perspective, US-China Law Review, Vol. 2, No 2, pp. 182-202
Great answers start with great insights. Content becomes intriguing when it is voted up or down - ensuring the best answers are always at the top.
Questions are answered by people with a deep interest in the subject. People from around the world review questions, post answers and add comments.
Be part of and influence the most important global discussion that is defining our generation and generations to come