azhar mohamad & imtiaz mohammad sifat

ISBN 978-967-394-230-5 [PROCEEDINGS OF IDMAC2015]

9th ISDEV International Islamic Development Management Conference

(IDMAC2015) 577

THE FIAT FIASCO: THE INSIDIOUS EROSION OF MAQASID OF SHARI’AH

AND PRACTICAL ALTERNATIVES

Azhar Mohamada

Imtiaz Mohammad Sifatb

Department of Finance, Kulliyyah of Economics and Management Sciences,

International Islamic University Malaysia.

Email addresses: [email protected], [email protected]

b

Abstract

In the backdrop of recent financial crises and currency fallouts in the global market, a lot

of focus in academia and popular media has shifted towards a re-examination of efficacy

of fiat monetary system. While the competence of the endemic system is contentious to

utilitarian economists and pragmatists, the tawhidic (monotheistic) paradigm of Islamic

Shari’ah demands a more absolutist scrutiny of the validity of such a monetary system

in the first place. Notwithstanding this system’s perilous proximity to elements of riba

and resultant socio-economic ills, the paper challenges the legitimacy of the fiat system

at the definitional, axiological, moral, and Shari’ah levels. To this effect, we outline a

brief survey of the historical attempts and success rates (failure rather) of fiat and paper

currency experiments around the globe, the salient arguments for and against it (along

with our rebuttals), the threats it poses to Islamic ideals, as well as its ceaseless

jeopardization of Maqasid (objectives) of Shari’ah. While not decrying the utopian

vision of Gold and Silver currencies, the paper contributes to existing theory in line with

the Islamic concept of tadarruj (gradualism), as we propose presently plausible

“intermediate” alternatives to the fiat system, particularly in payment mechanism area,

keeping in mind an ultimate goal of cementing a monetary system fully congruent with

the Maqasid of Shari’ah.



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INTRODUCTION

From the laconic brevity of adages like “Money talks” to songs (Money makes the world

go round) to Biblical proclamations—Money is the root of all evil—to classic Mark

Twainian quip (Lack of money is the root of all evil), money has been defined in

innumerable. Despite millennia of human advancement, confusion over money’s

definition by economists has waxed with time, whereas consensus over its parameters

has waned. While Hicks (1935) pithily defines money by its functionality—‘money is

what money does,’—Scitovsky (1969) takes a periphrastic route in defining money

through three characteristics (unit of account, medium of exchange, and store of value),

each of which imbue money with moneyness. This definition is most consistent with

what is proclaimed today by most central bankers as well as college level Economics

textbooks, characterized by the rhyme:

"Money is a matter of functions four,

a medium, a measure, a standard, a store."

Some experts have a less normative approach towards money. Zubair Hasan (2011)

considers money a socially constructed product evolved from human ingenuity to

facilitate exchange and transactions. This echoes Harrod’s assertion (Davidson, 1972)

that money is what people think it is or should be.

The purpose of this paper, however, is not to delve into the circular argument of what

money is. It is, however, important to adopt an operational understanding of what money

entails, for this section serves as a pre-cursor to currency systems, which indubitably

hinge upon a basic understanding of what money stands for. For operational parameters,

we embrace the Royal Bank of NZ definition of money as facilitator of exchange, unit of

measure, standard, and store of value. For purposes related to objectives of a monetary

regime, societal goals, and Islamic legal objectives, we adopt Keynes’s (Skidelsky,

1996) understanding of money as a subtle device that links the present to the future,

based upon the maxim that money buys goods and goods buy money, but goods do not

buy goods.

Currency

Currency refers to an accepted form of money, including coins and paper notes, issued

by an agency (typically a Government) within an economy. It is used as a medium of

exchange for goods and services and performs as the basis for trade.

Under international financial reporting standards, a functional currency is the currency

used in the primary economic environment where an entity operates. This is the

environment in which an entity primarily generates and expends cash. You should

consider the following primary factors in determining an entity’s functional currency:

1. The currency that primarily influences sales prices (usually the currency in which

prices are denominated and settled).



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2. The currency of the country whose competition and regulations primarily

influence sales prices.

3. The currency that primarily influences labor and other costs of goods sold

(usually the currency in which prices are denominated and settled).

Fiat Money

A word with a Latin root which means “let it be done” or “let there be”, a practical

definition of a fiat currency is that it is a kind of money which exists due to authoritative

decree of a Government or custom which declares it as legal tender or forces it to be

such. American Heritage dictionary defines it as a paper money that is declared legal

tender, unbacked by Gold or Silver. Therefore, fiat money refers to any form of money

proclaimed as legal tender by authoritative decree. Thus, in practice is refers to any

currency deriving its value from a legal decree. Present day modern currencies are all

fiat money.

How and Why Fiat Money Came About

The advancement of human civilization gave rise to occupational and trade

specializations. Earlier economic actors agreed on commodities like metals to facilitate

exchange to solve problems arising in trade coordination. Later on, minting of a specific

amount of metal into a coin served as an emblem of quantity and purity of that metal.

Thus coins became standardized. However, standardization required common

acceptance and credibility, which allowed Governments with popular acceptance to

undertake the task of standardization. At this stage, monetary system was dependent on

coinage and thus all money was commodity money. Documented history credits China

with the first usage of fiat money, then called "flying money". A shortage of copper by

banks spurred iron coinage, which in turn was over-issued and fell in value. Hence A

Szechuan bank in 11th century chose to first issue paper currency (first true fiat money)

in exchange for iron coins. Although 10th century China is mostly credited as the first

precedent of fiat money usage, conceptual usage of fiat can be traced back to the Roman

Era when emperor Nero first choice to debase the silver coin from 94% down to 85%.

Succeeding emperors followed suit to cater for self-indulgence and to finance wars. One

century later Denarius was debased to 43% silver, and at the time of demise of Roman

Empire, silver content fell to 0.02%. As a natural progression, soon paper came about as

a substitute for contracts between bearer and the bank or Government. The paper

represented the contract which entitled its bearer to exact demand of the agreed quantity

of commodity or coin.

As mentioned earlier, the standardization process of the coinage hinged upon credibility

of Governments or similar authorities. Sometimes, however, some Governments reneged

on their contracts and suspended convertibility of the paper notes back to commodity.

The currency, still, however continued to maintain some value (though not always as

much as before) due to sustained public faith that the convertibility will resume in not-

so-distant future. Such systems only worked if and when people truly believed the

suspension is temporary. More recently, specifically first in 1934 and again in 1971,



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Governments have irrevocably suspended the convertibility of aforementioned contracts

and thereby gave birth to the truly universal fiat money represented by irredeemable

paper currencies, from which no bearer can expect intrinsic utility except for a medium

for exchanging goods and services. Despite the complete lack of intrinsic value, such

notes continue to be an acceptable medium of change, which presents economists with a

paradoxical conundrum: why would rational economic players accept the legitimacy of a

contractual paper with no tangible or industrial value as an unprecedented medium of

exchange? The answer lies in a repetition of history; albeit in a modified form:

perception of credibility of Governments. Not very unlike the coinage standardization

phase, now has credibility consisted of public certitude that Government will not abuse

its privilege of seigniorage to the extreme by rendering the money worthless. This

fascinating paradoxical aspect of faith has been explained by experts of various

disciplines in various lights. For examples, some economists (Ritter and Silber 1974)

explained it in Smithian fashion of rational self-interest; political scientists cited the

legitimacy, popularity and stability posed by Government authority, and sociologists

referred to a silent understanding between Government and its citizen born out of

convenience. Agreeing with Friedman and Schwartz, Ritter imputes the widespread

acceptance of fiat money on the result of a self-interested intervention by a government

which is large relative to the economy (Ritter, 1995).

Islamic Take on Money

The task of elucidating the Islamic history of money is almost as convoluted as modern

day economic discipline’s quandaries, if not more. This is due a lack of divinely

legislative texts or orders regarding monetary aspects of an Islamic society. An issue

contributing to the opacity in defining money in Islamic paradigm is the historical nature

of evolving functionalities and understanding of money, especially owing to the tradition

of Islamic scholars having to resort to legal precedents in history. An interested

researcher could thus divide the Islamic history of defining money in three stages: the

pre-prophetic era where convention was accommodated, the prophetic era, and the

modern era. Celebrated Hanafi scholar al-Sarakhsi considered Gold and Silver

synonymous as money while outlining its property as medium of exchange. He further

asserted that money (Gold and Silver) isn’t desired for itself; rather it represents the

values of things. This resonated in latter-day Hanbali juris consult Ibn Taymiyyah’s

position on money’s desired attribute as a unit through which value of goods are known

(Haneef and Barakat 2006). Another Hanbali jurist, a close disciple of Ibn Taymiyyah,

Ibn Qayyim requires that money have a determined and specific value which ideally

doesn’t fluctuate much, because if the value of money rises and falls akin to other

commodities, society will lack a measure to measure the value of traded objects—and by

extension all objects (Islahi 2006). Islamic law further requires that money or currency

no contain najas or impurities. As such articles like pigskin are disqualified as money.

Interestingly the classical notions of money in Islam are synonymous with commodities:

gold and silver. In fact, classical fiqh primers term these two metals as naqdan, plural

for naqd, meaning money, currency, or cash (Sanusi 2002). Some scholars (Abu Saud)

posit that the Islamic take on defining money entails fulfilling human needs and desires

through means of commodity exchange arrangements. This definition reflects the Maliki



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school of thought, whose eponymous founder Imam Malik considered any commodity

used for medium of exchange as money.

Additionally, in Islam a saleable commodity is proscribed from qualifying as money. A

commodity sold in the markets at a price composed of either cost of production, factors

of production adding economic value and entrepreneurial rewards is regarded as a

saleable commodity, which isn’t applicable to money. In this case, the Islamic notion of

money is at odds with the conventional source and practice of money, which is touted to

emanate from credit creation (Werner 2014).

Though Islamic scholars have been forthright about their understanding of money as a

measure of value, literature on whether the currency itself must be intrinsically valuable

is at best unclear. To consolidate, Islamic law thus prescribes money to be an object

devoid of impurities through which value of sales, trades and all things are measured,

and exchange of which does not constitute usury. The mere qualification of these

parameters, however, doesn’t suffice as the ideal Islamic notion of currency. As the next

sections will expound, whether a currency fulfills or aids in attaining the greater

objectives of Shari’ah is also worthy of scrutiny.

Maqasid of Shari’ah

Before embarking on what the theory of Maqasid of Shari’ah entails, the term Shari’ah

itself deserves an examination, for with the varying definitions offered for this term

come scopes which are intertwined with parameters of its goals and objectives, and

Maqasid being the raison d’etre of Shari’ah, depends closely on how Shari’ah is

defined. Lexically, Shari’ah can be translated as source of water or a path to the watering

hole (Kamali 2008). A concise definition of Shariah entails the formal code of Islam as

defined by the Qur'anic texts and the prophetic way as captured by the ahadeeth. While

not inaccurate, this definition is simplistic. Over the century many scholars have strived

to define Shari’ah. Egyptian scholar Yusuf Qaradawi mentions two broad approaches to

understanding of Shari’ah in existing literature (Auda 2008). The first strand holds

Shari’ah to be constrained to the domain of law which regulates practical aspects of

human life. In this definition Shari’ah is closer to fiqh but differ in the sense that fiqh

represents the technical rulings and Maqasid represent the framework for objectives of

Islamic law. The second, broader view, holds that Shari’ah is a system of life

encompassing all spheres of belief system (aqidah), the systems of ethics and morals

and the rules dictating slave-God relationships as well as inter-personal transactions.

This definition therefore covers the entire panorama of human life including in it

morality, virtues, economic and political realities, socio-cultural aspects, civilizational

advancement, etc. For the purpose of this paper, the second view is embraced not only

because we hold this definition to more accurately match the divine texts but also it’s the

only definition which allows for an analysis of Islamic take on fiat currency, and it’s the

only framework which accommodates economic realities of humankind.

A Based on the definition adopted above, we understand the Maqasid of Shari’ah to

entail a summative framework that integrates the purposes, ambits and desiderata of



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Islam as a system of life encompassing values, ethics, structures, standards, guidance,

and values embedded upon divine revelation and Islamic epistemology with a view to

furnishing solutions to worldly problems and work as a rudder for Muslim life.

Analysis of Common Objections and Problems Cited with Fiat Money

Strictly from an economic lens, a unit of fiat currency is worth whatever can be bought

with it, but that doesn’t legitimize its candidacy as a measure of value since its

purchasing power is unstable.

Fundamental Erosion

The fundamental flaw in a fiat money system can be summed up as human nature:

“When the going gets rough, the rough starts printing.” In absence of anchoring of

money to a real (ideally scarce also) history shows Governments cannot be trusted to not

print too much money. This begs the question, “How much is too much?” As evidenced

through bouts of quantitative easing and frantic treasury purchases, even the slightest

economic disappointments are meted with a deluge of more paper. The Richenbacher

Letter has demonstrated that over the past years, it has taken worryingly higher levels of

debt to generate an additional unit of GDP growth. He argues this policy to be highly

inflationary and alleges that the whole system depends on maintaining confidence on the

currency—a confidence, incidentally, fiddled and wrought by regulatory agencies to the

extents of farcicality. Such practices by the regulators and Governments constitute zulm

or injustice in the Maqasid framework and threaten the public welfare maslaha element

and therefore are worthy of censure.

History of de-leveraging and disintermediation

The history teaches us that no Government had the discipline to maintain the currency

without resorting to the printing press. It is doubtless that one of the glaring results of

fiat experiment has been massive over-leveraging of the monetary and financial system.

Any problem arising from this phenomenon is typically tackled by central planners (or

bankers) through re-leveraging. Attempting to re-lever an already over-levered system is

yet to yield a definitive boon in any economy. The disintermediation of risk is one of the

primary causes of the current problem, NOT the solution. Islamic principles typically

advocate risk sharing and not risk transference as it jeopardizes common welfare of the

people and threaten both the mal element of Maqasid as well as the wellbeing of

individuals and their families—the nasl (lineage) maqsad.

Inflation & Irrational Behavior

Fiat regimes have resulted in confiscation of wealth through inflation due to a lack of a

safe store of value (Meera and Larbani 2004). Even if there were, Governments have or

would have made its hoarding (holding) illegal, as precedented by the Gold in the early

1900s.



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Departing from Adam Smith’s canonical assumption of rational economic agents, the

fiat money system has engendered a culture of debt reliance to fuel the lure of unearned

consumption. The average Joe or Ahmad is fairly illiterate of economic matters. His

tendencies are easily influenced by Governments, and thus he is dangerously over-

exposed financially. This constitutes injustice, another cornerstone of the Shari’ah

objectives.

Coinage Lessons from History

Though not exactly paper money as commonly understood today, earliest attempts at de-

anchoring money from its physical attributes harken back to 20 BC when after

successful empire erection, emperor Augusts commanded around the clock operation of

Spanish and French mines to finance his infrastructural plans. A brisker production of

money led to inflation as economic activities remained unchanged. While this made

Augustus retrench on coinage, his stepson failed to resist the temptation to put coinage

into government coffers. This example was later abused by his predecessors—Caligula,

Claudius, and Nero—by a geometric proportion, obliterating Rome’s riches.

Chinese experiments too were demitted as money supply surpassed production. An

admonitory example in history is found in the Spanish experiment. After the discovery

of the new world, Spain gathered Gold from Mexico and became obscenely rich. Instead

of developing their own economy they sent Gold to trade partners in a consumption orgy

not dissimilar to the US today. They went on a military rampage to extinguish pirates in

an imperialistic march into other lands, dropping any distinction between terrorists and

the countries which harbor them. The excessive consumption ate through their gold

hoard, so they turned to financing the war with debt, which bankrupted them eventually

(Weatherford 2009).

Noteworthy 18th

century experiments with fiat money include John Law’s decree that all

taxes must be paid in paper money. So paper money became more desirable than coins

and as predicted by Gresham’s law, it led to exorbitant printing and the inflated values

combined with money printing imploded the French monetary system. Nearing the end

of 18th

century France retries the paper money, which ended disastrously with the

famous 13,000% inflation, prompting Napoleon to abandon the assignats in favor of

Gold Franc (Wray 1998). Similar experiments ensued in the coming centuries, notably

by Abraham Lincoln in the 1860s, Argentine in 20th

century and Post-great-war

Germany. While Lincoln’s attempt failed and paved the way to the Federal Reserve

establishment in 1913, Argentina precipitated from the 8th

largest economy in the world

to 24th

, a specter of her former glory. In Weimar Republic, the over-printing of money

for war reparations and resultant inflation decimated the entire German middle class and

enabled Hitler’s ascension to power (Eichengren 2004). The most dominant currency of

the world today, US Dollar, entered its present fiat status in three phases: first in 1934,

through presidential decree of Roosevelt, who revalued Gold from $20.67 an ounce to

$35, in an attempt to print more money to lift US economy out of depression. In second

stage, the Bretton Woods agreement of 1944 called for treatment of dollar as a Gold

substitute, opening the door for worldwide printing of money by foreign nations; all they



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needed to print money was being in possession of a unit of Gold or 1/35th

of a unit of

Gold (i.e., US Dollar). As the US abused its exorbitant privilege by printing too many

dollars and living beyond its means, foreign nations led by France recognized it and

began demanding payment in Gold, breaking the system as the US experienced a major

gold drain (Eichengren 2011).

The coinage debasement witnessed over the history surrounding bi-metallic currencies

invokes a corollary in the modern paper fiat currencies where the debasement is in a

more subtle and sophisticated form. Such cases of debasement, rudimentary to fiat

currencies, is compared to fraud by some Islamic scholars, drawing inspiration from

legal precedents set by medieval scholar al-Ghazali who proclaimed currency

debasement to be an unequivocal sin and an oppression upon the masses. He further

ruled that the first person to use such currencies will receive the sins of all people who

subsequently hands them over to others. Along a similar vein, Ibn Taymiyya also

vehemently opposed currency debasement and goes so far as to claim that the difference

in the intrinsic value of coins lead the way to a source of profit for the wicked—

damaging value of people’s goods and services. He also took a historical stance against

the rulers by opposing the demonetization of currencies and instead advocated minting

more real money of intrinsic value rather than debasing. He considered this act

tantamount to injustice (zulm) and contrary to public interest (maslaha). Islamic historial

al-Mawardi reports the case of Umayya dynastic rulers who decried the currency

debasement so much that Khalifa Marwan ordered a man’s hand to be chopped off due

to debasing a dirham.

Unemployment

A survey of historical monetary systems demonstrate that whenever a country adopts the

fiat currency for a period of 30 years or more, its economy experiences a boom, almost

invariably more than its preceding monetary regime. Howbeit, the fiat generated

affluence induces amassing of excess. When these excesses reach extreme levels,

burdens of the debt in economy become steep. Thus the marginal rewards of production

i.e., profits, are compelled towards repaying debt obligations. Coupled with inflationary

pressures, servicing debt often leads to cannibalizing of all the profits, up to the point

where it cannibalizes the production itself—leading to a bankruptcy and thereby a bust

in the economy. This boom and bust cycle, innate to the fiat regime, has been argued as

the chief culpable agent of unemployment, as a growing portion of the economy shifts

from the real production of goods and services to pushing various forms of paper.

Philosophical Analysis

Economics literature on money espouses two distinct concepts of money: value

subjectivism and value objectivism. Experts in the first camp assert that the defining set

of traits of money ought to be sought in the role of money in the plans of individual

economic actors. Thus they believe moneyness to be a property conferred upon an item

by individuals' plans, not by the econometric performance of an aggregate containing

that item relative to an aggregate committing it. Therefore, for subjectivists the value in

money derives from people’s certitude of its value for reasons not requiring



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justification—legislation, coercion, persuasion just to name a few. Hence the value

resides only in minds of humans as a concept or belief and can be created ex nihilo.

Objectivists, per contra, posit that money has a value because it is the fruit of labor and

resources needed to produce it—not different to how food and shelter are an inexorably

valuable for their worthy contribution to survival of human life. An expository case in

point: the difference between the value of Mona Lisa and Maize is a key example. While

the artistic value of the authentic copy of Mona Lisa stems from its legendary status and

is worth considerable sum of “money” to an art connoisseur or collector, its subjective

value refers to mental states of the appraiser. Per contra, a kilogram of wheat is a

product of human labor with real world utility, recognized by humans of all artistic

predispositions as possessing value relative to the material needs and survival

requirements of life. This survival value is absolutely pragmatic and is rooted in the

natural understanding that human beings harbor about their biological needs and

physical relationship to the objective world.

Price Mechanism Corollary to Modern Economics

The link between fiat money and price mechanism in contemporary economic theory

will be demonstrated through a conceptual example of how commodity money is

tethered to production of real goods. While fiat money requires nugatory resources and

labor to produce, the resources needed to manufacture commodity money exists in

relation to other economic resources needed for survival requirements of humanity.

Production of commodity money deducts resources with direct survival value from other

economic activities. Thus, the law which regulates the production of commodity money

is concomitantly the law of survival—which is not a proscriptive law stated

emphatically by a human authority but rather an organic law based on observation. Thus,

unlike commodity money, fiat money is not governed by the biological needs of human

beings and is untethered to the physical economic activity in the objective world—much

like the aforementioned example of 1 kilogram of wheat. Human rationality dictates that

human beings almost never purposely grow more wheat that necessary because the

economic inputs needed to do so are better spent in other activities once food needs are

met. Thus the philosophy of fiat money fails substantially to match the underlying

reality of economic price mechanism, unlike commodity money that has an inherent

tether to objective reality.

Abstract vs. Abstraction

Money is an abstraction much the way a both a water tower and a pond are a reservoir.

Abstractions, on the other hand are artifacts of knowledge used to explain the world

around us. This is in contrast to abstract which are ideas existing in human mind. Using

a legal corollary, the abstract concept of justice does exist in human minds. When

applied in real terms, various law emanate from that abstract. Merely the fact that a

specific law’s roots are embedded in the abstract of justice doesn’t render it just. Thus,

the abstraction (unjust law) illogically tails the abstract (justice)—leading to injustice;

opposite of the initial abstract. Similarly, claiming that a pebble and a ship are the same

is absurd. Merely declaring a pebble as a ship does not infix it the physical capacity to



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float on water despite its ephemeral ability to skip on aqueous surface provided enough

spin is projected during hurling it. The conflation of money—an abstraction—and

value—an abstract—is similarly specious. This is even more applicable in present

times—beginning from the 20th

century as merely accounting entries (Ryan-Collins,

Greenham, Werner & Jackson, 2012; Werner, 2014) and since the advancement of

technology, now as electronic digits.

Coercion

Despite widespread claims of volition as the primary motif of accepting fiat money, it is

argued that most people accept it because of legislative decrees and not of own volition.

This claim is bolstered by its originating precedence in 19th

century France when

citizens were compelled to use paper money due to tax reasons. More recently,

Roosevelt in the 1930s threatened US citizens with financial penalties or jail-time or

both for refusal to accepting irredeemable Federal Reserve Notes. Such coercive

schemes that force people to accept a form of money without objective value thus

naturally run into opposition from free-market advocates who dub it immoral.

Rent-Seeking

The inherently interest-laden nature of fiat money is analogous to economic rent

seeking. Some libertarian free market proponents posit that trading with fellow human

beings is a natural right of all humans. Thus forcing trade and commerce to be

performed in the fiat regime and thereby fleecing rent from is a threat to the moral

foundations of humanity.

Wealth Disparity & Concentration of Wealth

Arbitrarily increasing the quantity of currency in an economy distorts the distribution of

money and therefore redistributes purchasing power, effectively stealing wealth from the

majority (savers, wage wrokers, borrowers) and serves the interest of a privileged

minority. Redistribution of weath, unlike production of wealth, causes a net loss of

wealth to society. Government deficit spending, although it can be motivated by good

intentions, changes the quantity of currency and results in debasement of the currency.

Therefore, Government deficit spending operates as a dishonest, hidden tax on savers

and wage workers—succinctly declared by Greenspan as confiscation of wealth.

Over the time fiat currency schemes cause wealth and property to accrue to those who

enjoy the extraordinary privilege of creating the currency. This causes wealth to be

concentrated to those near the top of the pyramid. This ultimately can cause economic

and political destabilization. For example, a person with a RM 1 billion income will not

buy as many consumer products, cars or appliances as 1 million households with a RM

1000 income.

Moral Hazard



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Ex nihilo creation of fiat currencies by monopolies though credit contracts allows for the

legal means of obtaining something for nothing. While to conventional economists and

legal experts this may constitute a moral hazard, to Islamic economists and Maqasid

experts this also carries the bane of riba and zulm. This enables the creators of fiat

money to enjoy absolute influence over the economic and political life of citizens. If

history has shown anything, it is the abject lack of performance of human beings as the

shepherds of a currency system in which a group within the society has unmitigated

access to obtain something for virtually nothing. This thus comes as no surprise that the

something-for-nothing culture emanates from this monetary regime, leading to a culture

that aspires for material entitlement instead of producing wealth. Everyone endeavors to

live at everyone else’s expenses.

Counterparty Risk

The nature of fiat regimes require trust in both counterparties. In reality, trust—just like

confidence—is an ephemeral and subjective mental state. In the objective world,

agreements between Governments and central banks and those who depend on their fiat

currency schemes can be and are arbitrarily broken or modified. In fact, a currency

debasement qualifies as an implicit breach of agreement. Besides, the promises of

deposed Governments and failed banks become instantly worthless.

RECOMMENDATIONS

So far this article has outlined the ills and vices of the fiat currency and how it threatens

the maslaha (public interest) of the ummah and runs contrary to the maqasid set out both

by classical and contemporary scholars. Though we admit openly to the absence of a

knowledge of any panacea to remedy the current situation, scholarly and academic work

has to trudge along to advocate solutions to the issue of economic well-being of the

ummah and pave the way to the incremental progression of designing and implementing

what will ultimately be an Islamically viable and Maqasidically defensible fitrah based

monetary regime. To this extent we promulgate the following recommendations:

1. Owing to the diversity of fiqhi opinions on legality of usage of fiat money in

transactions by Muslims, an ultimate goal as to be undertaken by scholars and

laity alike to limit the usage of fiat in inter-personal financial transactions. As a

stop-gap measure, more of barter can be employed. Despite the widespread

claims on elementary economics textbooks the disadvantages of the barter

systems have been overstated inordinately (Fayazmanesh 2006), as corroborated

by nearly two decades of work by Davies (2010). Further anthropologically

slanted studies (Thomas, 1992) too find barter system to have been misconstrued

greatly by economists and confess its advantages have been unfairly

underestimated. The implications for Muslims in this regard is that while

engaging in fiat transactions is ineluctable in many cases, there are issues where

the coincidence of wants truly presents itself. Those opportunities should be

cashed in on (pun intended) as a tenet of faith to preserve the deen, as



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propounded by the Maqasid theory, since the extenuating darurah rationale no

longer persists.

2. Unification of Islamic funds through creation of a consolidated bank which is

devoid of riba, pays zakah annually and alertly regulates itself to prevent wealth

disparity and concentration of wealth in the hands of few. A creation of one such

financial institution will not only defray some of the ummah’s dependency on

foreign exchange reserves but also allow a circular riba-free credit based trading

within the nations reducing strains on balance of payment due to trade

imbalances; not to mention the massive sign of unity it imparts to the non-

Muslims and upholding the dignity and intellect of the Muslims, two facets of

Maqasid the Muslims have sadly forgotten or ignored. The ability to perform as

an economic block will also endow the countries higher leverage and purchasing

power against the non-muslims in terms of trade negotiation and equitable deals.

3. Successful design of a truly maqasidic currency will halt unlawful transfer of

currencies that violate not only Islamic legal principles but also the ummah’s

maslaha—examples being unhealthy currency and financial market speculation

and cross-market recessions and contagions.

CONCLUDING REMARKS

The financial crises in recent times and the ongoing currency fallouts (Greece, Euro,

potentially Ringgit) spurred a lot of attention in academia in recent times to revisit its

once dogmatic acceptance of fiat monetary regime. Unsurprisingly, this has caused the

goldbugs to chirp even louder. Not surprisingly, it also led Muslims to re-examine their

financial practices and juxtapose the spirit and laws of Islam upon their economic

actions. With the renewed emphasis on reviving the tawhidic paradigm, more Islamic

experts are closely monitoring the unraveling of fiat currencies and being more vocal

about its dangers to the public interest and overall Maqasid of the divine Shari'ah. While

in this paper we have avoided an objective trutination (tarjeeh) of alternatives to fiat

currency, we have nonetheless examined the dangers it poses from a multi-prong and

fresh lenses of definitional, philosophical, moral, axiological and fiqhi perspectives. To

this extent we surveyed the historical evolution of fiat systems along with their success

(failure rather) rates and the threats it poses to Islamic ideals. As proponents of Tadarruj

(gradualism) we hereby refrain from proclaiming any radical or overnight solution to the

fiat dilemma and instead propose taking slow but steady remedial steps to reverse the

damages inflicted by fiat: on counts of riba, economic crippling, inordinate dependence

on the west, intellectual and financial subjugation of the ummah, retardation of tawhidic

advancement, etc. As part of our gradual approach, we propose establishment of a

unified Islamic central bank to consolidate surplus wealth of the Muslims, which,

Islamically speaking, belong to all Muslims and hoarding of it is unlawful. Nonetheless,

more serious academic and practicationers' contribution and idea spitballing is necessary

to ultimately design and implement a monetary system which will truly fulfill the

necessities of the Muslim ummah and rid it of the yolk of an unjust monetary regime as

fiat.

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azhar mohamad & imtiaz mohammad sifat

Economy & Finance