Concepts of Paper Money in Islamic Legal Thought

Nikolaus A. Siegfried
Arab Law Quarterly, Vol. 16, No. 4. (2001), pp. 319-332.
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CONCEPTS OF PAPER MONEY IN ISLAMIC

LEGAL THOUGHT

Nikolaus A Siegfried*

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 the conceptions of these phenomena in Islamic
legal thought.
T h e 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 influehced 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. T h e 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 (zakbt). I t will become evident throughout
the article that the conceptions of riba (usury or interest) andgharar (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
(cuulama^')draw heavily on the classic opinions discussed in the previous part.
However, contemporary 'ulam6' explicitly draw on sources from various schools

* University of Hamburg.

'

I t is beyond the scope of this article to go into much detail about the diverse movements within each
school.
Arab Law Quarterly, [2001]
2001 Kluwer Law International. Printed in the Netherlands

320

ARAB LAW Q U A R T E R L Y

of law, as the Memorandum for the Jordanian Civil Code makes clear.2 Hence, the
theories by modern 'ulamd' do not always fit into the categories of the legal
school^.^ T h e 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 the 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 Cfals, pl.: fulu^s). T h e Muslim Government struck its own
Dirhams as early as 18H although gold and silver coins from the Byzantine Empire
gold coins were not
were still accepted throughout Islamic ~ o c i e t y .However,
~
struck before the Government of Mucawiya Ben Abi Sufyan (41-60H), and
Byzantine coins were accepted until the monetary reform of 'Abd al-Malik Ibn
Marwan in 75 or 76H.5 Initially, the quality of coin striking was poor, and weight
varied. Therefore, coins were treated like raw metal: people continued to weigh
rather than count them6 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
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
silver and copper
medium, and were weighed rather than c o ~ n t e d However,
.~
coins were frequently exchanged in counting because they were less ~ a l u a b l e . ' ~
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
Vogel, Frank, Readings Compararive Law: Islatnic Contract Law, mimeo, Cambridge, 1994, p. 246.
Cf. the use of Malik and Ibn Tayrniyya by Bin Mani', Abdullah Bin Suliman, al-Waraq al-naqdi,
Rivadh. 1984., D. 20.
~ r b h r n a n n A,
, Einfii.hrung tcnd Chresromarhie zur arabisrhen Papyruskunde, Prague, 1955, p. 203.
Ibid., p. 185-5.
~alog,-Paul,"History of the Dirham in Egypt from the Farimid Conquest until the Collapse of the
Mamluk Empire 358/968-922/1517," in Revue Numismatiq~re,ser.VI, 3, 1961, pp. 109-146, p. 116.
Miskimin, Harry A, Cash, Credit and Crisis in Europe, 130&1600, London, 1989, p. I1 40.
Grohrnann, pp. 14S145.
Udovitch, A, "Reflections on the Institutions of Credit and Banking in the Medieval Islamic
Middle East" in Srudia Islamica, 41, 1975, pp. 5-21, p. 14.
10
Balog, Paul, "History of the Dirham in Egypt from the Fatimid Conquest until the Collapse of the
Mamluk Empire 3581968-922/1517" in R h u e Numismarique, ser.VI, 3, 1961, pp. 136 and 140.

'
'

PAPER MONEY IN ISLAMIC LEGAL

THOUGHT

32 1

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." In the following centuries, counting superseded weighing as a
legally valid method, and money became a numeraire.
T h e 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 period1=even though gold dominated in Persia and Spain, and silver in
North Africa and the Arabian P e n i n ~ u l a . ' ~
F rom the hadith, legal scholars
calculated an exchange rate between gold and silver coins of at most one to
t\velve.l4 However, in business transactions, the exchange rate was as high as fifteen
Dirham per Dinar until 225H.15 It even fell to 1:26 after the famous monetary crisis
provoked by al-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 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, maghshtish 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, was being used. During the first years, the Muslim
Government imitated Byzantine coins, but no later than 80H it struck authentic
Islamic coins with passages from the Koran.I8 T h e 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, fzlltis 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
panners.19 Therefore, the classical approach to conventional money cannot be
applied directly to paper money. It was not before 809H11405 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
I1

Ritter, Helmut, "Ein arabisches Buch der Handelswissenschaft" in Der Islam, 7, 1917, pp. 1-91,
p. 50.
l 2 Goitein, SD, "The Exchange Rate of Gold and Silver in Fatimid and Ayyubid Times" inJournal
of Ecorzomic and Social History of the Orient, Voi. viii, 1965, pp. 1 4 6 , p. 42.
l 3 D e Bouard, Michel, "sur L'Evolution Monetaire d e 1'Egypte Medievale" in ~ ' ~ ~ ~ p r e
Conremporaine, 30, 1939, pp. -127459, p. 431.
I4
Cf. text under the heading "The Conception of Money in Classical Fiqh" of the present article.
T h e exchange rates for raw metal can be derived from the numbers given above. T h e Dinar weighed
circa 4.45 grams until 77H, and 1.25 grams thereafter. Grohmann, pp. 185-186.
According to Ibn Qudama. Sauvaire, M H , "Numisrnatique et iMetrologie Musulmanes" in
Journal Asiatique, Vol. 19, 1882, p. 114.
16
Balog, p. 122.
17
Ashtor, E, " ~ ' ~ v o l u t i odes
n Prix", inJotcrnal of the Economic and Social History ofthe Orient, Vol.
4, 1, 1961, pp. 15-46, p. 21.
18
Grohmann, pp. 214-215.
19
Udovitch, p. 20.

''

322

ARAB LAW QUARTERLY

of equal value. However, the actual exchange rate remained at five Dirhamfals 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 the 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 sufraja is most probably
the precursor of the bill of exchange.21 It is apparent that the sufraja has several
characteristics of paper money. Both are easy to carry over long distances, and both
developed from promissory notes. Like paper money, the sufraja became a medium
of exchange that was widely accepted, and sometimes even preferred to coins.
Therefore, some modern scholars see this form of currency as the paradigm for
paper money. An attempt by the iMongols 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
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. T o 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
counterbalance, i.e. 100 per cent gold reserves with the central bank, or a
traditional agreement to accept money.

THE CONCEPTION OF MONEY I N 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 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. T h e way of handling raw gold and silver is unambiguously
determined in the Sharica. A forward sale (bayc a/-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 ro hand. If these types [asndfl differ, then sell them as you wish, if it
is hand to hand".23
20

Grohrnann, p. 217.
De Roover, R, "New Interpretations of the History of Banking" in Cahierr #Histoire Mondiale, 2,
1954, pp. 38-76, p. 53; Imamudin, S M, "Bayt al-Ma1 and Banks in the Islamic World" in: Islamic
Culture, 34, 1960, pp. 22-30; Schacht, Joseph, Inrroduction to Islamic Law, Oxford, 1964, p. 148.
Avery, Peter rt a1 (eds), Cambridge History of Iran, Cambridge, 1968-1991, Vol. 5, p. 375.
23 Al-'Asqalani, Ibn Hajar, Bullig al-marcim min adillar al-ahkcim, Cairo, 1933, 784.

''

''

PAPER MONEY IN ISLAMIC LEGAL T H O U G H T

323

This hadith prohibits two forms of riba. First, exchange in unequal amounts
(riba al-fadl) is prohibited for goods of the same type Gins). Second, the exchange
with delay within a type constitutes riba al-nasi'a, and is h a r c i ~ zMost
. ~ ~ scholars
agree that every single item named in the hadith stands for a jinx. 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 (qlycis). 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
Gold and silver are weighables (mawzu^ncit), and hence they belong
(t~zakilcit).~~
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.26
The Hanbalis, generally share the Hanafis' view in this respect. However, in their
opinion, 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 object^".^' 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 f~l).~~
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
(athma^n).2gHence, every sale of goods for money is legally sound. In the Shafi'i
interpretation, money cannot be attributed to either makilcit or mawztincit. 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 Zahrite. 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

24 Schacht, pp. 145-146, Saleh, Nabil A, Unlawful Gain and Legitimate Profir in Islamic Law,
Cambridge, 1986, p. 74.
25 Ibid., p. 73, cf. E I l : "riba".
61-Kasani, Ila al-Din, Kitdb badd'i' al- sand'^' rarrib al-shard'i', Cairo, 1327-1328 H , 7 Vols.,
Vol.V, p. 183, but cf. infra for the Hanafis' opinion about fals.
Ibn Qayyim al-Jawziyya, I'ldm al-muwaqqa'in 'ald rabb al-'damin, Cairo, 1955. But cf. al-Masri,
Rafic Y , al-Isldm wa al-nuqzid, Jeddah, 1981, pp. 95-6, who discards this approach wirh reference to Ibn
Rushd. This is interesting since al-Masri criticises a Hanafi with reference to a klaliki.
Brunschvig, Robert, "Conceptions Monitaires chez les Juristes Musulmans" in Arabica, 14, 1967,
pp. 113-143, p. 127. This also correlates with the question of racyin, which I will address below.
29 Al-Shirazi, Yusuf al-Fayruzabadi, al-Muhaddhab, Cairo, s. d., 2 Vols., Vol. I, p. 270.
' O Cf. Brunschvig, p. 118.

"
''

324

ARAB LAW QUARTERLY

living" (rdhir rn~nfi').~'He continues: "Since an exchange between gold and silver
[on one hand], and weighables, and things measured in volume (rnakildt), and
other goods [on the other hand] is allowed, this hints to an 'illa 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 ( ~ r h r n d n ) " . ~ ~
Al-Shafi'is concept of thalrzaniya 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. T h e 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.33In 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 (rafddul) and hence, riba al-fadl.
Alternatively, Malik permits the counting of money, whereas a combination of the
two ways is not approved (16 klzair bi-dh~lik).~-'
When counting money, unequal
numbers must not be compensated in weight because weight is the superior way of
m e a ~ u r e m e n t .Finally,
~~
Malik proclaims a connection between money as a
numeraire and as a good with respect to zakdt. No zakdt 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 zakdt. 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
hadirh as mawzzindr as opposed to rnakildr, but as prices versus food, see the
necessity to draw a distinction between dealing in numbers and dealing in weights.
T h e question of counting versus weighing is also important when dealing with
struck coins during the exchange in undetermined quantities (j~zLifi.~'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
3'
32
33
34

35
36
3'

Ibid., p. 262.

Al-Shirazi, Vol. I, p. 250.

Ibid., p. 273.

Al-Tanukhi, Sahnun Ibn Sa'id, a l - M u d a m a n a al-kubra, Cairo, 1323-4H, 16 Vols., Vol.VII1, p. 133.

Al-Baji, Abi al-Walid Suleyman, Kirdb al-muntaqa, Cairo, 1332H, 7 Vols., Vol. IV, p. 259.

Abd al-Wahab, Kitdb al-ishrdf, Tunis, s. d., Vol. I, p. 174.

Schachr, p. 147.

PAPER MONEY IN I S L A M I C L E G A L T H O U G H T

325

excluded from the baycj u z ~ i f " " .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 (macdu^da) dirham^".^^
One interpretation of this verse is that in general, Dirhams have to be counted
rather than weighed.40Another reading is that only small prices are to be counted,4'
and higher prices, where the 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 countable 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.
T h e 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 ~ b l i g a t o r y . ~ ~
However, most jurists hold the opinion that amputation is dependent on the
amount stolen. Accordingly, the minimum amount (nisdb) for the corporal
punishment is disputed in the classical texts. T h e Hanafi scholar al-Kasani
mentions the following hadith related from Ibn Mas'ud Reda: "Do not cut the
hand except if [the theft is] a Dinar or ten Dirham".M
In contrast, Malik defines three Dirham, or a quarter of a Dinar as the minimum
for amputation. This would reflect an exchange rate of one to 12. T h e most
interesting view is held by Al-Shafi'i: after a lengthy discussion why the nisi6 has
to be at least a quarter Dinar, he gives several contradictory ahadith concerning the
equivalent amount of Dirhams. He is indifferent between three Dirhams and more
than eight.45This 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 zakdt. Al-Shafi'i is the only one among the considered
scholars who favours that the minimal zakit is calculated separately for gold and
silver.46T h e other schools consider gold cum silver as money, and hence the zakir
is only levied once. Al-Shafi'i considers the two metals so different that they may

39
10

II
42

43
j3

45
46

Al-Tanukhi, Vol.VII1, p. 131.

Al-Qtcr'cin al-karim, Sura Yusuf (XII), 20.

Brunschvig, p. 124.

Al-Masri, p. 88. H e gives also reference to al-Tabari in support of Brunschvig's view.

Udovitch in L'Occidenre e l'lslawt nell'alto ~Wedioevo,Spoleto, 1965, p. 488.

Al-Qur'dn al-karAn, Sura al-Ma'ida ( V ) ,38.

Al-Kasani, Vol.VII, p. 77.

Al-Shafi'i, Muhammad Ben Idris, al-L;tn~r~,

Azhar, 1961, 7 Vols., Vol.VI, pp. 130f.

Brunschvig, p. 130.

326

ARAB LAW QUARTERLY

not even be combined to form the capital of a partnership ('i~an).~'

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. T h e free determination of exchange rates is an
important pillar of modem monetary economics.
T h e third major topic is the difference between the intrinsic value and the face
value of coins. Fals and maghshzish 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 t~zdlribcfwi 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, maghshrish 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 fulzis. This control in turn may be built upon a sufficiently
small circle of traders, or on a traditional agreement to accept money. The jurists'
concern here is whether fals is mdl ribdui, 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 mrisallam fih in the salam contract. AlShaybani, another student of Abu Hanifa, however, rejects this reasoning. He
argues that, like Dirham and Dinar, fulzis are an expression of prices, and hence
capable of r i b ~ . ~In
O 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.
Ahrnad Ibn Hanbal prohibits the use of fals as the musallam fih. Malik is not clear
about this case but expresses disapproval (kariha).j2
T h e same problem emerges with respect to maghshzish 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.53T h e other
schools are subject to a legal problem: in principle, they tend to prohibit counting
47
48

49
50
5'
52
53

Al-Shirazi, p. 245.
Brunschvig, p. 133.

T h e same is true for cenual bank backed paper money.

Al-Kasani, Vol.V, p. 185.

Al-Shirazi, Vol. I, p. 385.

Brunschvig, p. 140.

Al-Kasani, Vol. V, p. 198.

PAPER MONEY I N ISLAMIC LEGAL THOUGHT

327

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 maghshtish money.54 T h e 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.

T H E hlODERN 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 U S 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 preferable. Instead, the conditions imposed by modem 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 modem economies.
Furthermore, politics (siydsa) strongly influences the decisions of the 'ulamd'.
T h e 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 Culama^' as
expressed by fata^wa 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
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-ldayn, which is forbidden due to the immanent rib^.^' Also, forward sales (salam)
are prohibited because in the classical fiqh the thaman for a salam has to be paid on
Brunschvig, p. 137.
Pearce, David W, The MIT Dictionary of Modern Erotlonrtcs, Cambridge, 1992, "banknote" and
"gold standard".
56 Bin Mani', p. 46.
57 Schachr, p. 146.
54
55

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ARAB LAW QUARTERLY

the spot. Paper money would not be adequate for this exchange since it is only a
debt.5s 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 ~ t h r n d nor
, ~ things
~
is prohibited.
measured in weight (rnawz~indt)~~
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.
T h e second approach goes back to the sufraja. But in contrast to bonds, paper
money is regarded here as a replacement for the athrnin silver and gold. Thereby,
paper money itself attracts the characteristics of the respective precious metal.61
T h e 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-1-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 riba 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 IDB 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 fulu^s 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
58

59
60
61

62
63

Bin Mani', p. 46.

Hanafis, but also Hanbalis as the statement of Bin Mani', an Hanbali scholar, p. 49, implies

Shafi'is and Malikis.

Bin Mani', p. 79.

Al-Masri, p. 83.

Bin Mani', p. 80.

PAPER MONEY I N ISLAMIC LEGAL T H O U G H T

329

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 a conventional money like
fzillis. It is therefore plausible to treat it according to the same legal rules. 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 f u l h and paper money is therefore not wholly convincing.
Furthermore, this approach has two shortcomings from a legal viewpoint: most
scholars would agree that the forward sale (salarn) is prohibited or at least
disapproved when paper money functions as the rnwallam fih. Second, for fulu^s 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
most 'trlamci' do not approve of this interpretation.
in this i n t e r p r e t a t i ~ nTherefore,
.~~
'This approach, although legally and historically acceptable, is rejected because the
'.i(famd'are concerned that it may open the door for riba in the economies.
The fourth opinion presents money as a simple good. T h e paper bills themselves
are seen as goods, whose value is determined by supply and demand. Since money is
printed on paper, the consideration is rhat it is neither mawztin nor makil, it is neither
thaman nor tacam. Therefore, a free exchange for any other good is perfectly suitable.
T h e 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 'ulamci'
in Saudi Arabia.65It is, however, not acceptable from a Hanafi point of view which
does not accept the concept of athmdn. But from the Hanbali background of the
Saudi 'ulami' this is legally convincing. T h e 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
bayc al-salam are secured, and transactions which are undesirable in the eyes of the
Saudi 'ularni' like interest are excluded.
However, this approach involves a strong danger of gharar. Since the money is

'"For example: A sells B 100 Rials for 200. Afterwards he gives him 120 Rials as pard hassan

65

Bin Mani', pp. 132-137.

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ARAB LAW QUARTERLY

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 general level.
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 fullis and maghshrish money. The Hanafi scholar Ibn Abidin (d. 1252) writes about
delayed repayment that gold and silver have to be repaid in mithlisince their value is
assumed to be stable. However, the value of fullis is unstable, and hence a debt of
fullis has to be repaid in the same value (qi?na).67The lender cannot be encumbered
with the decrease in the value of the currency.68 Modem scholars like the Indian
Ziauddin Ahrned suggest that loans in general should be pegged to the price
This raises the economic problem of indexation, which has been addressed only
recently by Islamic scholars.70The main difficulty here lies in the diverging interests
of the borrower and the lender. A fm that borrows money will want the loan to be
pegged to its products since this is its source of income. However, the lendmg 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
this is unacceptable to other scholars who argue that a
of ~ u r r e n c i e s However,
.~~
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 time.72 However, all these are suggested
solutions for the symptoms of inflation only.
Siegfried, Nikolaus; Muha,nmad Bagir as-Sadr: al-bank al-la ribawi, mirneo, Berlin, 1993, pp. 7-8.
Ibn Abidin, Hashiya radd al-mukhrdr, 8 Vols., Cairo 1966, Vol. 5, pp. 162-164.
Ibn Abidin, Tanbih al-ruqu'd 'ala r,rasci'il a[-nuq~id,s. 1. s. d., p. 10.
69
Ahmed, Ziauddin, "Currency Notes and Loan Indexation" in Islamic Srudies, Val. 28,1, 1989, pp.
39-53, p. 44.
70
Chapra M Umer, "Money and Banking in an Islamic Approach" in Monerarj and Ftscal Economics
of Islam, Ariff, M (ed.), Jeddah, 1982, pp. 145-176, p. 148.
" Al-Masri, p. 86.
Ibid., p. 90.
66

"

''

PAPER M O S E Y I N ISL.4MIC LEGAL T H O U G H T

33 1

T h e second solution is proposed mostly by economists who are also concerned

with Islamic legal issues. Their argumentation is based on the prohibition of ribu
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
-hoardingY7*they suggest negative interest rates through the collection of zakir."
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 the danger of gharar in money-holding. Also
some Western economists call for 100 per cent reserve requirement to guarantee
the stability of the banking sector.i7 However, Islamic economists with a strong
In a highly
background in Western economics favour controlled money
interdependent world economy, a full reserve requirement is impossible to
implement since the central bank cannot react adequately to contractive shocks
from the world markets, 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 the increasing integration of the Arab countries into the
world market, economies in the Middle East and the 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. T o 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 ( q i y i s ) 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

'' Chapra, p. 149.

'.'Keynes, pp. 233-4.

Siddiqi, M N, "Islamic Approach to Money, Banking and Monetary Policy - A Review" in

Monetary and Fiscal Econonlics of Isla~rr,Ariff, M (ed.), Jeddah 1982, pp. 25-38, p. 26.
' 6 Siegfried, p. 21.
Ti
Cf. Simons, Henry C, A Posirrvr Progra~nforLaissez-Faire, Chicago, 1934.
Chapra, p. 172.
'5

332

ARAB LAW QUARTERLY

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.