1. Question: Is it permissible in Islam for the Khilafah to partially back its currency during a transitional period on the justification (if it is so) that it does not have the capacity (in reserves) to maintain 100% convertibility. In terms of the US, this would mean that it could partially back (at around 20%) all of its currency at the current rate, without having to change that parity or endure the negative effects associated with this. This would grant it the stability it would need to expand its reserves (through various means) so that it can gradually move towards a 100% backed rate.
For the state to issue a gold and silver based currency it will have to depend on the availability of these metals in its treasuries. In addition to this the state will also have to attain the available gold and silver from the merchants, goldsmiths and the general population apart from attempting to extract the metal from the earth.
And in the situation if it does not has the necessary amount of gold and silver so as to be able to replace the existing currency completely then the state will look at mechanisms to attain the gold and silver from outside the state.
However, considering the reality that we live in today and because of the very limited gold and silver reserves maintained by treasuries and the proliferation of fiat currency, it is very likely that the state will not be able to find the necessary amounts of gold and silver to issue enough currency which can replace the existing currency in any state.
The unavailability of the necessary amount of gold and silver to issue currency is similar to the well researched and discussed subject among the scholars which is called ‘انقطاع النقد’ among the scholars which is the reality when a currency runs out in a marketplace.
This is a reality that often occurred in the Muslim market places where people would deal with metallic currencies such as the dirhams and dinars and fils and so on and many a times a person would make a trade deal only to find that the currency has run out at the time of payment. The scholars discussed about this in detail and specially the ahnaaf who mentioned that in such a situation the ‘قيمة’ is still applicable i.e the value is still payable as was agreed upon and it remains a debt.
Note that the term ‘value’ here is different to the price. So the price may have been agreed as 10 dirhams for a certain product, and the dirhams were no more available in the market at the time of payment, then the buyer pays the value of the 10 dirhams in another currency and this will be calculated based on the rate of exchange between this currency and the dirham on the last day before the dirham ran out in the market.
Ibn Abidin writes in his Hashiya –
إذا انقطعت ـ أي النقود ـ بأن لا توجد في الأسواق، ولو وجدت في يد الصيارفة، أو في البيوت، تجب القيمة هنا في آخر يوم الانقطاع وهو المختار”
“if the money/currency ran out in the market, even if it was available with the currency exchangers or in the houses of the people, the value is obliged based on what the value was on the day when the currency ran out”
In Tanbeeh arruqood ala masail al uqood, Ibn Abideen says
وإن انقطع بحيث لا يقدر عليه، فعليه قيمتها ـ أي في الدين والعقود ـ في آخر يوم انقطع، من الذهب والفضة، وهو المختار”.
“if the currency is not available then the value applies on him in gold or silver i.e in debts and contracts as was the rate of exchange on the last day when the currency ran out”
The reality of the currency running out in a market or its demonetization and the removal of the state that minted a currency that people currently use and the loss of the value of this currency are similar. The removal of the state that minted the currency is equivalent to the ‘انقطاع النقد’ i.e after the removal of the state the currency has no value.
The illah (legal reason) that relates the two realities is the loss of the currency’s value due to a cause and the people’s dependency on conducting transactions on it.
Therefore, in the reality that the Khilafah Rashida was not to be able to exchange peoples existing currency with a gold backed currency, it can still issue the currency to them which will be considered a debt on the state. This currency that the state will issue will be similar to a cheque or a bond that the state has to return, and this has been discussed in the books of fiqh as ‘qutoot’ which is a currency issued by the state in the form of a debt.
The evidence to issue Sukook or Qutoot is found in the hadith of Bukhari,
حَدَّثَنَا سَعِيدُ بْنُ أَبِي مَرْيَمَ، حَدَّثَنَا اللَّيْثُ، قَالَ حَدَّثَنِي عُقَيْلٌ، عَنِ ابْنِ شِهَابٍ، قَالَ ذَكَرَ عُرْوَةُ أَنَّ الْمِسْوَرَ بْنَ مَخْرَمَةَ، رضى الله عنهما وَمَرْوَانَ أَخْبَرَاهُ أَنَّ النَّبِيَّ صلى الله عليه وسلم حِينَ جَاءَهُ وَفْدُ هَوَازِنَ قَامَ فِي النَّاسِ، فَأَثْنَى عَلَى اللَّهِ بِمَا هُوَ أَهْلُهُ، ثُمَّ قَالَ " أَمَّا بَعْدُ، فَإِنَّ إِخْوَانَكُمْ جَاءُونَا تَائِبِينَ، وَإِنِّي رَأَيْتُ أَنْ أَرُدَّ إِلَيْهِمْ سَبْيَهُمْ، فَمَنْ أَحَبَّ مِنْكُمْ أَنْ يُطَيِّبَ ذَلِكَ فَلْيَفْعَلْ، وَمَنْ أَحَبَّ أَنْ يَكُونَ عَلَى حَظِّهِ حَتَّى نُعْطِيَهُ إِيَّاهُ مِنْ أَوَّلِ مَا يُفِيءُ اللَّهُ عَلَيْنَا ". فَقَالَ النَّاسُ طَيَّبْنَا لَكَ.
Narrated Al-Miswar bin Makhrama and Marwan:When the delegates of the tribe of Hawazin came to the Prophet (ﷺ) he stood up amongst the people, Glorified and Praised Allah as He deserved, and said, "Then after: Your brethren have come to you with repentance and I see it logical to return to them their captives; so whoever amongst you likes to do that as a favor, then he can do it, and whoever of you like to stick to his share till we give him his right from the very first Fai (war booty) (1) which Allah will bestow on us, then (he can do so)." The people replied, "We do that (to return the captives) willingly as a favor for your sake." [Bukhari]
In another hadith narrated by Abu Dawud
رُدُّوا عَلَيْهِمْ نِسَاءَهُمْ وَأَبْنَاءَهُمْ فَمَنْ مَسَكَ بِشَىْءٍ مِنْ هَذَا الْفَىْءِ فَإِنَّ لَهُ بِهِ عَلَيْنَا سِتَّ فَرَائِضَ مِنْ أَوَّلِ شَىْءٍ يُفِيئُهُ اللَّهُ عَلَيْنَا "
Return to them (Hawazin) their women and their sons. If any of you withholds anything from this booty, we have six camels for him from the first booty which Allah gives us. [AbuDawud]
There are other evidences to prove that the prophet would borrow from the people in his capacity as the head of the state, and he had appointed bilal ibn Rabbah (ra) to undertake this responsibility of raising debt for spending on the people.
These Sukook/Qutoot is acceptable to be sold and purchased. Ibn Shaibah narrated in his Musannaf under the chapter of ‘sale of Sukook arrizq’ that Umar bin Al khattab and Zaid accepted the sale of Qutoot and they and applied the rules of money on them.
In short, the state will make all attempts to avail the necessary amounts of gold and silver to be able to issue the currency and wherever the state falls short it will issue the currency in the form of ‘sanadaat – cheques/bonds’, and in this case the amount of gold/silver equivalent to the currency will be a debt on the state.
2. Question: Is it possible in Islam to fix a parity, announce it, and work towards that conversion rate or would that come under the subject of price fixing (taster) in Islam? It may be conducive to have a parity to work with, in order to accrue enough reserves to meet that rate and ensure that the state can convert all of its currency to gold if it needs to. Also if it announces a rate, people can adjust and plan on that.
If not, can experts estimate what parity the market would likely reach in the future based on the scarcity of gold within the country and the current demand for money, sort its reserves based on this figure, without informing the public - and when transition comes (the conversion rate should be similar to what the experts estimated) the state would simply adopt this figure as the true value so as to enable a smooth transition? In doing this it would not fix the parity but estimate what it would settle at in the future so that it can expand its reserves in the meantime.
The state when it is established will bring about a new economic regime after ending the existing capitalist regime. The state will have to define the exchange value of the dinar compared to the goods and services. And the shari way to do that would be to not give the dinar any additional value other than what the market has given it, i.e its price in gold and silver. For eg, the price of 4.25 grams of pure gold was equivalent to ‘x’ kg of a vital good. In this way the state would have not only set the exchange rates for the new currency and the goods and services but also the exchange rates of the new currency with the demonetized currency.
In short, the value of the demonetized currency will be defined based on its value in the market by comparison to the goods and services that could be purchased with this currency.
Based on this assessment of value at the time of demonetization, the new currency’s exchange rate will be defined.
As for the hadith that the price fixing is prohibited in islam and that the prophet did not fix the prices of gold and silver, it is true and the principle is that the state does not fix prices. However there is a difference between the two realities, i.e the reality of the prophet and the reality of the upcoming state. When he (saw) came to Makkah, the dirham and dinar were already being circulated so he did not undertake any changes rather accepted what was already the situation. However, the state upon its establishment will encounter a new reality which is the responsibility to replace the existing currency with a gold/silver backed currency, so it will have to fix a rate of exchange and thereafter leave the matter to the market.
This is something the state will have to undertake so as to avoid chaos and confusion among the people , so it is not considered as ‘price fixing’ rather it is considered from the aspects of ‘riayah – care’ of the people.
3. Question: Is it permissible for the Khilafah to purchase gold from its people (or ask them to sell) at a just and fair rate in times of desperation. This would add significant gold to our reserves and maintain convertibility - if we could not find the gold in any other way
Answer: Upon the establishment of the first Islamic state, the prophet (saw) encouraged the people of Madina to contribute to the building the bayt al Maal and there are many ahadith that discuss about the sahaba’s sacrifices.
In a similar way the future Khilafah Rashida will encourage people to contribute their gold and silver items to the state and the state will also buy these metals from the people in return of lands that the state owns or in returns of bonds to return the metal upon availability in the future.
However, the state cannot compel or force the general population rather it can only encourage them except for those who the state finds are hoarding gold and silver, in which case the hukm of hoarding would apply on them.
4. Question: Is it fard for the state to implement the gold standard immediately on the first day of its existence, or can it announce its intention to implement it in say, 6 months down the line, just to give some time for the economy to organise itself around this arrangement.
Firstly, it should be clear that with the establishment of the state the constitution of the state will come into effect and all previous laws will be considered abolished.
It is mentioned in Article 167 of the Draft Dastoor (Constitution),
The currency of the State is to be restricted to gold and silver, whether minted or not. No other form of currency for the State is permitted.
However, the setup of the currency minting machines and what is related to it will take time. Much similar to the time taken to setup the Judiciary and the Ministries, which will be a matter of a few weeks to months.
The state upon its establishment will have to declare its currency and the exchange rates of the currency with the vital goods and services and with the demonetized currency and it should start issuing the new currency. Since the new currency will take time to be issued and then be widely circulated, the demonetized currency can be used and its value will be fixed at the exchange rate with the new currency as declared when the state was established. So effectively the demonetized currency would be in lieu of the new Islamic currency and it will only be in use until the new currency is in wide circulation.
So the new currency would be announced along with the establishment of the state and so will its exchange rate with the existing currency however the actual circulation of the new currency will take some time and during this time the demonetized currency which will be fixed to the new currency can be used.
5. Question: There are many ways to move to a gold standard. One has been discussed here (to redefine the existing currency in terms of gold). Another suggested is to implement a parallel system where the Khilafah would legitimise gold as money without demonetising what is already in circulation, so as to avoid any volatility due to an imbalance in the parity between the two. This would allow a transition to happen until gold becomes the predominant currency, at which point we could move to it entirely. Is this permissible?
It is mentioned in Article 167 of the Draft Dastoor,
The currency of the State is to be restricted to gold and silver, whether minted or not. No other form of currency for the State is permitted.
So it is not permitted for the state to accept any other currency other than the Islamic currency.
Upon the announcement of the state the state will announce the exchange rates of its gold and silver based currency with the vital goods and services and with the existing currencies. The demonetized currency of the state where the khilafah rashidah is established would become valueless after this announcement however because it is exchangeable with the Islamic states currency, it can be used until it is exchanged with the Islamic currency.
Therefore, there is no need to run a parallel system with the gold based currency along with the demonetized currency.
6. Question: What happens if the market chooses a parity value multiple times the current price of gold in order to maintain convertibility based on the shortage of gold. So for instance, if the parity of gold was $1300 today and it rose to $13,400 tomorrow. Would it create inflation or deflation or neither, and for what reasons?
At the time of establishment of the state it will have to study and announce the rate at which it will exchange the demonetized currency and that will be defined based on the value of the demonetized currency at the time of demonetization and the value of the gold and silver at the time of announcement of the states establishment. And this exchange rate will remain fixed for the demonetized currency.
We have discussed about this in detail and its permissibility in the previous answers.
Ustadh Abu Khaled al-Hejazi