The first aspect of arriving at a
judgment is to understand the subject matter, in this
case what paper money is. After that we can look at the
Qur'an and the fiqh.
Paper money has evolved in nature
through history. What we know today as paper money is
not what it used to be. This evolution has passed
through basically three stages:
1] A promissory note backed by gold
2] A process of unilateral
devaluation leading to a complete revocation of the
3] A piece of paper not backed by any
specie, whose legal value is determined by the
compulsion of the State Law.
Let us examine these three stages one
1. Firstly, paper money was issued by
banks and it represented a certain amount of gold or
silver, known as the ‘specie’. Even though it never was
100% backed by the specie, the issuing bank was obliged
to pay the amount on demand. In this sense it
represented a kind of debt.
When paper money was a debt, was it
acceptable? What issues concerning Islamic Law are
At this stage a certain amount of
gold was held by typically a banking institution and it
issued a paper certificate giving the owner the right to
withdraw the specie on demand. (We will ignore the fact
that this was a banking institution and it would have
been dealing with Riba. We will pretend that they did
not deal with interest in order to concentrate on the
issue of paper money itself.)
A) The first issue that arises is the
one of amana (trust): Your gold is in trust with a
treasurer. What does Islamic Law have to say on this
issue? Allah ta’ala says in the Qur'an in Surat al
'Imran (3, 74):
People of the Book there are some who,
if you trust them with a pile of gold,
will return it to you.
But there are others among them who,
if you trust them with a single dinar,
will not return it to you,
unless you stay standing over them.
That is because they say,
“We are under no obligation
where the gentiles are concerned.”
They tell a lie against Allah and they know it.
The hukum (legal judgment or command)
of this ayat, according to Qadi Abu Bakr ibn al-Arabi in
his ‘Ahkamul Qur'an’, is as follows:
“It is forbidden for Muslims to have
amana with the kuffar outside Dar al-Islam,”
that is, “without standing over them”
under the power of a Muslim authority. And the
explanation for this is found in the ayat itself: “That
is because they say ‘we are under no obligation,’ that
is to say, because they can/will repudiate the
agreement. Since this has been proven to be historically
the case, we may conclude that this is of vital
What this means is that it is not
acceptable for Muslims to have money deposited with
kuffar anywhere since we do not have a Dar al-Islam in
which to exercise ‘standing over them’. A lighter
interpretation would suggest that it would be acceptable
to have amana with a kafir if the deposits are under the
power of a Muslim authority. We accept the latter
version. But what it categorically denies is the
possibility of having amana with the kuffar when the
wealth is stored under kafir authority.
We can conclude that when paper
currencies—dollars, pounds, francs, etc.—were a debt,
because the specie they represented was stored in trust
away from our control, they could not be accepted by us,
since we would fear that they would repudiate the
agreement—as in fact later happened.
B) Now, assuming that the amana is
under a Muslim authority, the second issue that arises
is whether the promissory note can in itself be treated
as money. In other words, whether the note can be used
as a medium of exchange according to Islamic Law.
In this case the law of ‘transfer of
debts’ becomes relevant. According to the School of the
Amal of Madinah we find the following judgment and
explanation in the Muwatta of Imam Malik:
Malik said, “One should not buy a
debt owned by a man whether present or absent, without
the confirmation of the one who owes the debt, nor
should one buy a debt owed by a dead person even if one
knows what the deceased man has left. That is because to
buy it is an uncertain transaction and one does not know
whether the transaction will be completed or not.”
He also said, “The explanation of
what is disapproved of in buying a debt owed by someone
absent or dead is that it is not known which unknown
debtors may have claims on the dead person. If the dead
person is liable for another debt, the price which the
buyer gives on strength of the debt may become
Malik said, “There is another fault
in that as well. He is buying something which is not
guaranteed for him, and so if the deal is not completed,
what he has paid becomes worthless. This is an uncertain
transaction and it is not good.”
The general idea is that in order to
transfer a debt the original issuer of the debt (the
person who has the obligation) must guarantee the value
of the debt to the transferee (the person receiving the
note). Thus, the first contract is liquidated and a new
private contract is created. Debt is always kept as a
private contract between the parties. It does not
circulate without the creation of a new private
guarantee (a new contract). The reason is that the
person who has issued the debt may have more obligations
than he can fulfil.
How would this injunction have
applied when paper money was issued by the banks as a
debt? Since every bank—and this is the whole idea of
credit money—issued more obligations than the amount
that they held in specie, it would not be acceptable to
use any of its notes for trading. The reason is, that
the person would be accepting a debt that is not
guaranteed for him, especially when it is known that it
cannot be guaranteed for him since the issuer (the bank)
has more obligations than what it can fulfil. If every
depositor in the bank were to demand the value of their
notes, as is the case in a ‘run on the bank’, the bank
would be unable to fulfill its obligations.
Conclusion. When money was a
debt, in Islamic Law you would not have been allowed to
use it. You would not be allowed to use a dollar, or a
pound, or any note, whether it came from a kafir bank or
a Muslim-owned bank, whether the specie was stored in a
kafir country or in a Muslim country. Banking notes are
not permitted to circulate.
But if the note is issued not by a
bank, but instead by a person, and that person is
present and can privately guarantee the physical
possession of the goods, can in this case the note be
transferred, sold or circulate in general? What aspects
of the Law are relevant to the analysis of this case?
Again we have to go to the transfer
of debts. What is relevant here is: what is the specie
that is held as guarantee for the obligation? In other
words, what is the specie of the note? If the obligation
is in gold (money) then another set of restrictions come
into place. If it is food then, again, another set of
restrictions come into place. This is because gold,
silver and food have a particular significance to
trading—they are commonly used as a medium of exchange.
The case is the following:
In the chapter called Money-Changing
of the Muwatta of Imam Malik we read:
“Yahya related to me from Malik from
Ibn Shihab from Malik ibn Aws ibn al‑Hadathan an-Nasri
that he once asked to exchange 100 dinars. He said,
‘Talha ibn ‘Ubaydullah called me over and we made a
mutual agreement that he would make the exchange with
me. He took the gold and turned it about in his hand and
then said, “I cannot do it until my treasurer brings the
money to me from al-Ghaba.” ‘Umar ibn al-Khattab was
listening and ‘Umar said, “By Allah! Do not leave him
until you have taken it from him!” Then he said, “The
Messenger of Allah, may Allah bless him and grant him
peace, said, ‘Gold for silver is usury except hand to
hand. Wheat for wheat is usury except hand to hand.
Dates for dates is usury except hand to hand. Barley for
barley is usury except hand to hand.’””
The first restriction is that you
cannot use the gold or food in an exchange (sarf) unless
the specie is physically present there. You cannot use
the claim of gold or food stored with a treasurer. The
items exchanged have to be present.
This matter rules out any possibility
of using paper notes representing gold or silver to buy
physical gold or silver. In addition, the exchange of
paper notes with other paper notes is prohibited because
it is Debt-for-Debt.
This prohibition of using promissory
notes in an exchange is further reinforced by the
Yahya related to me from Malik that
he had heard that al-Qasim ibn Muhammad said, “‘Umar ibn
al-Khattab said, ‘A dinar for a dinar, and a dirham for
a dirham, and a sa' for a sa'. Something to be collected
later is not to be sold for something at hand.’”
Yahya related to me from Malik that
Abu'z-Zinad heard Sa'id al Musayyab say, “There is usury
only in gold or silver or what is weighed and measured
of what is eaten and drunk.”
All this clearly indicates that not
only gold and silver but also any food that could be
used as payment is included in the prohibition, that is
to say, the prohibition extends to any form of ‘common
money’. Any note that represents any form of ‘common
money’ cannot be used in an exchange. With that
restriction in mind, it means that a banking note cannot
really be used as money, but only as a private
contract—which is the basis of our argument.
But what about a note held by a
Muslim treasurer and guaranteed: can it be used in a
transaction other than an exchange? Can it be used, for
example, to buy other goods in the market?
“Yahya related to me from Malik that
he had heard that receipts (sukukun) were given to
people in the time of Marwan ibn al-Hakam for the
produce of the market of al-Jar. People bought and sold
the receipts among themselves before they took delivery
of the goods. Zayd ibn Thabit and one of the Companions
of the Messenger of Allah, may Allah bless him and grant
him peace, went to Marwan ibn Hakam and said, “Marwan!
Do you make usury halal?” He said, “I seek refuge with
Allah! What is that?” He said, “These receipts which
people buy and sell before they take delivery of the
goods.” Marwan therefore sent guards to follow them and
take them from people’s hands and return them to their
This means that you cannot use a
promissory note and use it for trading as if it were
money. The purpose of the promissory note is not to be
money, but to be a private contract that must remain
private and not public.
So, what is the use of the promissory
note? What is the halal usage of it? It is halal to have
a contract or a debt, and it is also halal to transfer
that debt, provided that the person who issued it is
accessible and can guarantee the payment of the debt by
signing a new contract (promissory note) with the new
recipient. If the guarantor is not a Muslim, then in
addition to what we have said, he also has to have his
amana within Muslim territory and under the overall
supervision of an enforcing Muslim authority.
2. The second stage refers to the
process of those years in which paper money was
constantly devalued from its initial obligation (they
paid less than they had promised), up until the debt was
finally completely revoked (they withdrew their
obligation). This final elimination of the obligation
took place with the dollar in 1973, when Nixon
unilaterally revoked the obligation of paying one ounce
of gold for every 35 dollars.
What is the Islamic position
regarding a promissory note when one of the parties
unilaterally revokes its obligation, whether it is
complete or partial? That is to say, what is the Islamic
ruling when a debt is unilaterally revoked or devalued?
It is not acceptable. It is a
violation of the contract. If this is done with
premeditation and no responsibility is accepted, it
amounts to pure theft. Theft is punishable in Islam.
To use the note to transfer it to
other people, falls under all the restrictions that we
have expressed before, with an added element. You are
dealing with the promissory note of a known thief who
does not admit his guilt or past obligations.
3. Finally we arrive at the money
which we have today. There is no promise of payment in
specie of any kind. It only has a legal value based on
the obligation of the citizens of the country to accept
the national currency as a means to redeem debts. This
is the ‘Law of Legal Tender’. It gives the State the
unique ability to confiscate anyone’s wealth within the
nation and to pay for it in compensation with its own
Is this an acceptable means of
payment in Islam?
Imam Malik said money is “any
merchandise commonly accepted as a medium of exchange.”
This implies two things:
A) Money has to be a merchandise.
Therefore it could be paper. But paper only for the
value of the paper itself, not for what is written on
it. Money must be something tangible (‘ayn). Money
cannot be a liability of any kind.
B) Money must be commonly accepted.
Therefore it cannot be imposed. No-one can say it is
obligatory on you. No-one can even make the Gold Dinar
obligatory on the people. The Gold Dinar and the Silver
Dirham become a currency out of free choice, not as the
result of decree. Paper money is imposed on people. This
obligation is not accepted in Islam for two further
—The fraudulent nature of the offer:
they oblige you to accept something above its value (its
real value is zero).
—The obligation of the offer: you are
obliged to accept it whether you like it or not.
This unlawful behaviour is further
reinforced by the application of State laws that
restrict the use of any other merchandise as a means of
payment, thus enforcing the State monopoly on the
currency, particularly in regard to gold and silver.
Gold and silver are either taxed, or their use is
regulated and sometimes disallowed. In some extreme
cases we have seen gold confiscated by law from the
private citizens, as has been the case in the USA.
Paper money is not valid money in
Islamic Law, whether in its present form or in any of
the forms in which it has existed in the past. The
Shari‘ah money is the Gold Dinar and the Silver Dirham.
Any merchandise commonly accepted as a medium of
exchange is also accepted as a valid money in Islam.
Umar Ibrahim Vadillo