UAE Laws and Islamic Finance

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The Gold Dinar and the Role of Money In Islam

Sheikh Zayed Mosque at Night, Abu Dhabi, UAE 

 

 

Serve Allah and join not any partners with Him: and do good – to parents, kinsfolk, orphans, those in need, neighbors who are near neighbors who are strangers, the Companion by your side, the wayfarer (ye meet), and what your right hand possess.  (4:36)[1]

The gold dinar is referred to in the Qu’ran in various surahs, indicating that it is the preferred vehicle of expenditure and medium of exchange along with the silver dirham.  However, if gold dinar and silver dirham were not available, then trading in commodities was allowed.

Shiekh Imran Hosein observes that (2007:14): “Abi Sa’id al-Khudri reported Allah’s messenger as saying, “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt.  (When a transaction is) like for like, payment being made on the spot, then if anyone gives more or asks for more, he has dealt in Riba, the receiver and the giver being equally guilty.  (Sahih, Muslim)”[2]

Although fiat money is not expressly prohibited by the Qu’ran, fiat money defeats the Islamic concept of the role of money, which ideally should be in the form of the commodities such as gold and/or silver and used as a medium of exchange and measure of value.  In Islam, it is permissible to trade money for commodity, commodity for commodity, however, not money for money as this produces interest (riba).  In order to purify the economic system of this M-M occurrence (interest), the basis of transaction should be commodity such as gold.  It is the endogenous Islamic money later replaced by fuluws.

Dr. Nik Nozrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan state that issuing currency in gold would be advantageous due to the fact that (2003:243): ‘It is commodity based and therefore has intrinsic value; The intrinsic value would remain stable notwithstanding the passage of time whereas paper money can rapidly fluctuate in accordance with inflation (the rise and fall of interest rates); It does not need a government to issue it, in fact, it does not need rules or regulations, laws or official control.  It only needs the individual freedom to possess and use gold and silver coins, with an implicit elimination of all taxes imposed on their use; It is a naturally international currency notwithstanding different names and various weights and standards; It cannot be inflated by printing more of it; it cannot be devalued by government decree and unlike paper currency it is an asset, which does not depend upon anyone’s promise to pay.’[3]

The use of gold would lead to a more stable economy where transactions are based on true money rather than false money or credit and would eventually lead to the cleansing of the capitalist system of interest and its subsequent pitfalls. Transacting within a system based on debt with paper money, which is in essence issued debt and where all transactions are based on debt can only lead to more debt.  As paper money is devalued at the whim of the bankers who control the money supply in a system entirely based on debt within a framework of interest and speculation, inflation further kills the purchasing power of paper money.  Not only does this devalue currency, however, it devalues all of one’s labor efforts, asset values, and the future.

Fiat money is based on supply and demand and may lose its’ value without notice due to economic crisis or the collapse of the issuing government or other events engineered by bankers.  According to Ezry Fahmy Bin Eddy Yusof (taken from Umar Vandillo[4] (2002)), “fiat money is basically a piece of paper not backed by any specie, whose legal value is determined by the compulsion of State Law.  Therefore, in other words, the fiat and even credit forms of money are generally made acceptable through a government decree that all creditors must take the money in settlement of debts; the money is then referred to as legal tender.”[5]

Ezry Fahmy Bin Eddy Yusof explains that, in capitalist theory, money has three main functions including medium of exchange, unit of account, and store- of -value.  As a medium of exchange, money is used as an intermediary for trade. A unit of account is a standard numerical unit of measurement of the market value of goods, services, and transactions.  A unit of account is a pre-requisite for the formulation of commercial agreements that involve debt.  The store- of- value is known as an act of a store of value or in other words, the money must be reliably saved, stored, and retrieved.[6]

Toutounchian elaborates on the function of fiat money in the capitalist system, which is built upon the foundations of interest, speculation, and uncertainty.  He asserts that within capitalism (2009:72), “the store- of -value function of money equates to a triangular trap whose equal sides are hoarding, liquidity preference, and speculative demand for money – none of which can be studied independently from the rate of interest.”  He says (2009:72): ‘speculation, in any market, produces a rate of interest in terms of itself.”[7]  Toutounchian says that in an Islamic economic system, which is riba-free and presumably based on the gold dinar (2009:78), “money can no longer perform the conventional store-of-value function.  No speculation in any market is allowable because of the interest (Rate) that it naturally bears.  All in all, there is a one-to-one correspondence between the store-of-value function of money and speculative demand for money.”[8]  Without speculation, interest, and uncertainty, we would ideally have a stable economic system based upon gold dinar transactions, absent of fictitious crashes and minus unemployment and inflation and where variables cancelled each other out to produce harmony.

In capitalism, Toutounchian explains that unemployment and inflation are the normal offspring of a system based upon interest, uncertainty, and speculation.  He says that (2009:79): “Speculation in any market brings about income for the major speculators behind the scenes.  The gains are enjoyed by a few and the losses borne by the rest of society.  The money whirlpool, which emerges from every speculative activity does not allow the equality between saving (S) and investment (I) to hold. This means that speculation and the interest bearing on it produces a savings gap; that is S>I.  Hence, the necessary condition for full employment is never satisfied.  The loss to society is the cost of unemployment.”[9]  He says that (2009:78): “Uncertainty – artificial risk – is an essential element in all speculative activities, the sole purpose of which is to make the environment suitable for a few speculators to make a profit.  Such a risk manifests itself directly in the rate of interest.”

Toutounchian explains that (2009:80), “There are two reasons to believe that in an interest- free Islamic economic system, money cannot be speculated upon: firstly, it is an impure public good; and secondly, speculation on any commodity in any market, which brings forth with it a rate of interest is totally prohibited.  These factors bring about equality between saving and investment, the consequence of which is full employment.”[10]  Therefore, the abolition of interlinked speculation and interest in an interest-free Islamic economic system brought about by the introduction of the gold dinar eliminates the classical capitalist store-of-value function of money and would restore the original Islamic function of money as medium of exchange and measure of value.

Choudhury explains (2007:89), “In development regimes with the supply of saving (S) being either higher or lower than the demand for investment (I), there will be either upward pressure on interest rates or interest rate volatility will appear.  These will adversely affect capital market and real economy linkages…When savings (S) exceed investment (I), potential financial resource withdrawal, and thereby debt, are caused by the financing of the potential output gap.  When investment (I) exceeds savings (S), there is excess demand for funds.  Consequently, debt financing and increasing interest rate in the face of scarcity of funds draw down investment once again.”  According to Toutounchian, as long as we exist in an economic framework built upon speculation, there will exist a savings gap, which according to Choudhury, will produce debt-financing and increasing interest rates, which will draw down investment.  This cyclical whirlpool of speculation, interest, and uncertainty can only result in a cyclone of volatility and devaluation of currency and investment.

Choudhury says that (2007:89): “In between these scenarios, when savings (S) equate to investments (I), interest rates decrease.” Choudhury explains that (2007:89): Keynesian macroeconomics refers to this state of the economy as the low-level equilibrium trap with low interest rates and a corresponding expansion of potential output.[11]  This can only be brought about if we subtract speculation from the economic framework and this in turn is only possible if we transact in an interest free system based upon gold dinar, where money serves as measure of value and medium of exchange rather than store-of-value, which according to Toutounchian, results in (2009:72): “a triangular trap whose equal sides are hoarding, liquidity preference, and speculative demand for money.”

Choudhury states that (2007:86), “There is an inverse relationship between interest rate and real rate of return.  Therefore, if savings increase under the impact of a high interest regime, then all along, the real rates of return in productive outlets will remain low…Consequently, real output and rates of return will be discouraged, while savings with higher interest rates continue to be attractive…this kind of withdrawal by the route of savings means continuously increasing loss in potential output.”[12]  Therefore, as long as interest rates remain high in the cyclical whirlpool caused by the store-of-value function of money in capitalism, we can never grow because this results in increasing loss in potential output.  Therefore, development is halted and we shrink rather than expand.

Choudhury says that (2007:87), “Savings accumulated in banks go to build up the excess reserves and the statutory reserves.  The excess reserve becomes the source of multiple credit creation by interbank loans.  Part of this rate is paid to customers as interest to maintain the incentive to save and continue on the saving process.  A higher differential is retained with the banks as surpluses from the multiple credit creation generated by interbank interest rates…The savings as financial withdrawal at the time it is done causes both a potential loss of output that could otherwise have come from real returns, and it represents contrarily an amount that must now come from multiple credit creation, which generates bank interest related to profit and income.  Thus, the interest on the principal is not generated productively. It comes out of nothing, i.e. as paper money through multiple credit creation.  Such interbank and interproject or clientele loans are multiplied by interbank lending at given interest rates to produce compound interest.”[13]  In our fractional reserve banking system, we need interest to produce debt so that we can create debt by issuing debt (money) to produce profit by keeping everyone in debt.  As long as interest is compounded, money- lenders  grow rich by slowly stealing the value of your money until you reach a position where you can no longer get out of debt in this lifetime or any lifetime in the future.

Dr. Nik Nozrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan clarify this process by explaining that (2003: 242): “Fiat money is issued by a central bank to which the government owes money and will have to pay interest for the use of that money.  This is of course (riba) interest.  Then, the money is circulated in the market and lent by commercial banks to earn interest without any real economic activity, which would be (gharar) uncertainty.  In recent times, the currency speculators earned their notoriety by flagrantly manipulating weaknesses in the international monetary regime to influence the rise and downfall of currencies.  Their excessive speculative maneuvers are clearly (maisir) gambling as the effects have caused absolute disasters to economies.”[14]

In Islamic thought, gold as a commodity can help to avoid transacting within a monetary system, which is inherently based on (riba) interest, (gharar) uncertainty, and (maisir) speculation.  If governments rather than banks controlled the supply of gold in circulation even better as bankers would lose the power to wreak havoc and engineer crises and war for profit.  When the laws of man overpower the laws of God, we get an invisible prison creating hell on earth where all of humanity is locked into debt servitude to the banking elite, living each day purely within the profit motive of the bankers, whom make money from the exchange of money for money or interest.  In this process, 99% of humanity loses purchasing power by the day while the bankers manipulate the monetary system purely out of self-interest.  If we injected Divine law into the monetary system, for example, by transacting in gold dinar and purifying the capitalist system of (riba) interest, (gharar) uncertainty, and (maisir) speculation, slowly life would be pumped back into the economy and people and nations would break free from their shackles.

It is not righteousness that ye turn your faces towards East or West; but it is righteousness to believe in Allah and the Last Day and the Angels, and the Book, and the Messengers: to spend of your substance, out of love for Him, for your kin, for orphans, for the needy, for the wayfarer, for those who ask, and for the ransom of slaves; to be steadfast in prayers, and practice regular charity, to fulfill the contracts which ye have made; and to be firm and patient, in pain (or suffering) and adversity, and throughout all periods of panic.  Such are the people of the truth, the God-fearing.  (2:177)[15]


[1] The Qu’ran.

[2]  Hosein, Imran N. (2007).  The Gold Dinar and Silver Dirham: Islam and the Future of Money.  Available at: <URL: http://www.imranhosein.org/books/103-islam-and-the-future-of-money.html> Access Date: 22 October, 2012

[3] Thani, Dr. Nik Nozrul; Abdullah, Mohamed Ridza Mohamed; and Hassan, Megat Hizaini (2003). Law and Practice of Islamic Banking and Finance. Selangor, Malaysia: Sweet and Maxwell Asia.

[5] Bin Eddy Yusof, Ezra Fahmy (2009). The Role of Money as a Medium of Exchange and Price of Goods Sold (thaman al-Mabi) According to Islamic Law of Transactions.  Available at  <URL: http://ilovetheuae.com/2012/10/13/the-role-of-money-as-a-medium-of-exchange-and-price-of-goods-sold-according-to-islamic-law-of-transactions/> Access Date: 22 October, 2012.

[6]Bin Eddy Yusof, Ezra Fahmy (2009). The Role of Money as a Medium of Exchange and Price of Goods Sold (thaman al-Mabi) According to Islamic Law of Transactions.  Available at  <URL: http://ilovetheuae.com/2012/10/13/the-role-of-money-as-a-medium-of-exchange-and-price-of-goods-sold-according-to-islamic-law-of-transactions/> Access Date: 22 October, 2012.

[7]Toutounchian, Iraj (2009). Islamic Money and Banking, Integrating Money In Capital Theory.  Singapore: John Wiley & Sons (Asia) Pte. Ltd.  

[8]Toutounchian, Iraj (2009). Islamic Money and Banking, Integrating Money In Capital Theory.  Singapore: John Wiley & Sons (Asia) Pte. Ltd.

 [9] Toutounchian, Iraj (2009). Islamic Money and Banking, Integrating Money In Capital Theory.  Singapore: John Wiley & Sons (Asia) Pte. Ltd.

[10] Toutounchian, Iraj (2009). Islamic Money and Banking, Integrating Money In Capital Theory.  Singapore: John Wiley & Sons (Asia) Pte. Ltd.

[11] Choudhury, Masudul Alam (2007). The Islamic World System, A Study in Polity-Market Interaction.  Singapore: World Scientific Publishing Co. Pte. Ltd.

[12] Choudhury, Masudul Alam (2007). The Islamic World System, A Study in Polity-Market Interaction.  Singapore: World Scientific Publishing Co. Pte. Ltd.

[13] Choudhury, Masudul Alam (2007). The Islamic World System, A Study in Polity-Market Interaction.  Singapore: World Scientific Publishing Co. Pte. Ltd.

[14] Thani, Dr. Nik Nozrul; Abdullah, Mohamed Ridza Mohamed; and Hassan, Megat Hizaini (2003). Law and Practice of Islamic Banking and Finance. Selangor, Malaysia: Sweet and Maxwell Asia.

[15] The Qu’ran.

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