Money and Monetary Issues in Islamic Finance

Money and Monetary Issues in Islamic Finance

Hifzur Rab (Independent Researcher, India)
DOI: 10.4018/978-1-7998-0218-1.ch003

Abstract

Most of the countries suspended gold standard around 1914 leading to massive currency depreciation. Thus, money was delinked from gold and Freely Floating Fiat Money (FFFM) came into being. Riba in case of free-floating money is real interest and profit according to Shari'ah is real profit. Free floating money and its use as a unit of account is an important cause of dominance of the system of interest, growing disparity of income and wealth. It is a major cause of most of the economic problems that led to social political and moral degradation. It is an important reason of failure of Islamic financial institutions in adopting financing modes preferred in Shari'ah. These led to massive poverty, deprivation, and marginalization of the Ummah and its institutions. Currency linked to constant quantity of the basket of national product provides the way out.
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Freely Floating Fiat Money Or Depreciating Paper Currencies

System of interest is in massive conflict with the nature and it can survive only with monetary manipulation1 (Rab, 2006). The gold currency was gradually substituted by gold standard-based paper currency. This allowed money supply to be raised using system based on fractional reserve. With increased money supply interest-based income and finance flourished. Continuing exploitation of the masses and concentration of wealth in the hands of interest seeking capitalists led to:

Key Terms in this Chapter

TMCL: The benefit from an interest free loan may be expressed by multiplying amount of loan with time for that it was made. Time multiple counter loan is the interest free loan Islamic financial institutions should grant to those in need who deposit their surplus with them and do not take any benefit for it.

Monetary correction: Correction for change in purchasing power of money for the change in quantity of what provides money with purchasing power.

Riba: Quantitative excess over the principal strictly prohibited in Shari’ah. For FFFM it is real interest.

Interest: Nominal interest i.e., nominal excess over the principal.

Manipulation of currency: Change normally reduction in quantity of what provides money with purchasing power.

FFFM: It is paper money printed by government or created by the banking institutions and it derives purchasing power from fiat of the governments mandating its acceptance as payment and it floats freely i.e., accepts value market assigns without any backing. Thus, its value is mainly determined by its supply and national product.

Depreciation of currency: Reduction in quantity of what provides money with purchasing power.

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