Question Summary:
Is paper money allowed in Islam?

Question Detail:

Is paper money allowed in Islam?

Answer :

Question:
I heard a talk by a certain shaykh that said paper money is not allowed in Islam. Is this correct?
In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa rahmatullāhi wa barakātuh.
Broadly speaking, paper money or banknotes went through two stages in their history:

We will discuss each of these scenarios in turn, and in doing so, we will briefly discuss the arguments of those who consider it harām to use paper money as a medium of exchange.
Banknotes as Promissory Agreements
When paper “money” or banknotes were first introduced, they were legal documents that transferred a debt to the original debtor who promised to pay the amount of gold represented by them upon demand. Those who hold the view that it is impermissible to use banknotes as a medium of exchange argue that to trade with these notes equates to the “sale of a debt” (bay‘ ad-dayn) or “sale of a product before receipt of it” (bay‘ qabl al-qabd) which are impermissible in the Sharī‘ah.[1] However, this argument is based on a misunderstanding of Islamic laws of commerce. Using these promissory notes as a medium of exchange would not be regarded as the sale of a debt, but the transfer (hawālah) of a debt. In a sale, once the price has been confirmed, and the transaction concluded, the purchaser is not under an obligation to hand over the money immediately. He may transfer the debt (i.e. the price) due on him to one of his own debtors, and in doing so, he will become free of his debt.[2] The note merely certifies this transfer in writing.
Furthermore, the gold that is represented by the note is the thaman or “price” and not the mabī‘ or “subject of trade.” Thaman is not “sold”, but is merely a medium of exchange.[3] Hence, the jurists have made it clear that for the transaction to be valid, it is not a condition for the thaman to even be in existence.[4] Instead, the purchaser may pay with money that comes into his possession later.[5] Furthermore, when commodities are sold for money, it is only necessary that possession is taken of either the commodity or the money, and it is not necessary to take possession of both at the time of the transaction.[6]
In short, when banknotes were regarded as promissory notes or receipts for the payment of gold, it would have been permissible to use them as media of exchange.
Banknotes as Money
The above discussion relates only to the period when banknotes were regarded as promissory notes for the payment of a specified amount of gold. However, since the nineteenth century, the international community has regarded banknotes as “legal tender.” Creditors were compelled to accept it for the repayment of a debt. Commercial banks were prevented from producing them, and production was limited to the central government banks. Eventually, in the latter half of the twentieth century, gold and silver became totally disregarded in the appraisal of paper money, and banknotes came to be regarded as money equivalent to gold and silver. Today, banknotes do not represent gold or silver but represent the “purchasing power” of that currency. Hence, they are now legally and customarily regarded as money.
Undoubtedly, banknotes were initially treated as certificates of debt, which is why many earlier ‘ulamā’ regarded them as such and did not consider them wealth.[7] However, describing the later context, Geoffery Growther wrote in his An Outline of Money: “The promise to pay which appears on their face now is utterly meaningless…But it is accepted as money throughout the British Isles.” (p. 16)
Based on this, the vast majority of contemporary jurists favour the opinion that paper money is to be regarded as a form of money, and not a promissory note or receipt.[8]
Those who hold that it is impermissible to use paper money as a medium of exchange argue that banknotes have no intrinsic value, and the ‘value’ assigned to them has merely been imposed by the state. In other words, they are ‘fiat currency,’ that is, given the status of ‘money’ by governments while having no intrinsic value themselves. Hence, they argue, since in a valid sale, both of the items that are exchanged must be wealth (māl) and must have intrinsic value, it is not permissible to deal in paper money. Instead, according to them, we must revert to the use of gold and silver as media of exchange.
This argument is also misplaced. In fact, many early jurists have stated explicitly that a form of currency in vogue at their time, referred to as fulūs or artificial currency, holds the same status as dirhams. Fulūs contained neither gold nor silver, and were thus ‘fiat currency’ in much the same way banknotes are today. Moreover, the jurists have stated that this status of fulūs is based on human conventions and the value assigned to them by people.[9] From amongst the jurists, Imām Mālik too approved of using fulūs as mediums of exchange.[10] Moreover, fulūs were used in the time of the Sahābah.[11] There are no Shar‘ī justifications for drawing a distinction between fulūs and present-day banknotes.
Furthermore, customs and norms (‘urf) play a large role in determining what is and what is not regarded as “wealth” in the Sharī‘ah. Ibn ‘Aibdīn ash-Shāmī said:
“The meaning of ‘wealth’ (māl) is that which [human] nature inclines towards, and it is possible to store it for a time of need. The attribute of wealth is established by the people regarding [it] as wealth.”[12]
It is also undoubtedly true that in today’s world, fiat currency is accepted by the masses without any coercion or force, and out of free will.
Hence, the correct Shar‘ī position is that in today’s time, banknotes are legitimate media of exchange. The view that it is impermissible to use them as a medium of exchange is a minority position which besides being impractical, is not supported by sound arguments from Islamic jurisprudence.
And Allah Ta‘ālā Knows Best
Zameelur Rahman
Student Darul Iftaa
UK
Checked and Approved by,
Mufti Ebrahim Desai.
www.daruliftaa.net