Azhar Mohamad & Imtiaz Mohammad Sifat

ISBN 978-967-394-230-5 [PROCEEDINGS OF IDMAC2015]
9th ISDEV International Islamic Development Management Conference
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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: m.azhar@iium.edu.mya
, imtiazsifat@gmail.comb
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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