Non-Existence of Legal Tenders in ISLAM

The Legal Tender and Islam

The concept of legal tender as a source of government financing is not new to modern capitalist economies. Even the known oldest civilization had established coins to pay for the government services and imposed strict measures to ensure the state control of these coinages. The state imposed taxes and make it mandatory to collect taxes in the coins of their choice. Interestingly the concept of legal tender is missing in islam. During the advent of Islam different types of coins circulated such as romans and Iraqi and yemni coins however, Rasool Allah did not issued any legal tenders, neither encouraged nor specified any coins in trading activities as well as for payment of zakat.

Money is states creature and it is abstract. Legal tenders carry not only the intrinsic value it has also economic value and often the economic value and the intrinsic value differed throughout the human history. Severe punishments have been pronounced for those commiting imitations of these legal tenders both in prehistoric times and in modern times. Imitators found to derive value because of this discrepancy. These legal tenders have been notarized as money and are used in exchange for goods and services as well as for unit of accounts and store of value.

In islam, the state finances were primarily provided through zakat system, ushr and taxes and not by issuing tokens or legal tenders. Furthermore, In collecting zakat, ushr and taxes no restrictions as to the form of payment was placed so that only certain coins were acceptable. Even during the draught, Hazrat Omer (PBUH) did not issued coins for the purpose of legal tenders. There were no mandatory requirement of using legal tenders in the course of business, trading activities and payment for services etc. and therefore the role of money as assumed by legal tenders were missing in early islam.

State of Chartalist Theory of Money and Money as Means of Payments

The proponents of state theory of money considers that the definition of money is provided by the state or sovereign and the state describe what is acceptable as means of payments. The definition of money has always been considered as abstract and the different forms of money merely satisfy the description of money. The description of money can take many forms including varied forms of coins including silver, gold and copper coins in islamic era such as Dinnar, Dirham and Foluse etc. In modern times the money included the promissory notes, negotiable instruments, demand deposits, travelers checks, electronic money including debit and credit cards etc. what is important of money is money of account defined by state which is abstract like Dollar, Pound Sterling, Euro, etc.
Quite interestingly money is not identified from Quranic verses as one can conclude any thing which is subject matter of Riba can be considered as money. Here riba applies to loan contracts. However, all loan contracts do not refer to money. In other words all economic objects which are subject matter of islamic loan do not constitute money. Money is derived from trade contract or contracts of sale whereby economic agents try to give opinion regarding an economic object using some well established or socially acceptable money of accounts including that of dinar, dirham, and foluse etc. One can assume that money still not identified or defined in Islam as different object of reference like dinnar, dirham and foluse could have acted as money as means of payments, or money as means of exchange, money as store of value even if can be safely argued that single money of account did not existed. In other words, the decimal exchange of money of account was absent in Monetary Theory of Islam.

Capitalist Abstract Money of Account

The problem of market economy is that the relative prices of goods and services are to be determined using money of account. This money of account could be a commodity money like gold, silver, copper etc. or paper money also know as fiat money backed by some reserves say gold reserves or an abstract money of acount like dollar, euro, yen, etc. What happens once price listing is done using money of account? Obviously money is demanded as for Exchange purposes. People require money to buy goods and services. Government require money to pay for public services, such as policing, defense, identity provision,legal and civil services and hence money's use of as means of payment. Because of money's utility, people start saving or investing using money as means of store of value despite there are other best alternative vehicles of investment. and finally money's use as money of account, the demand for all assets will be affected by monetary conditions in the market economy.

Money like any other commodity has its own price and obviously a commodity which is also providing monetary services will have more price then its usual market price. The capitalist money is a concocted one. It is abstract money an human incursion. Both its price and quantity is subject to human interference. The abstract money facilitate economic activity and organisation of resources more efficiently then any other natural commodity acting as money. With the advent of abstract money more is possible albeit with significant uncertainity.

The phenomenon of abstract money has particularly supported the idea of inflation mainly in the times when a monetary economy operated near its long term trend. Excessive money chasing few goods and services would result in inflation.

The abstract of money has created all kind of economic contract susceptible to variation even if the inflation is absent. the poor time-invariant quality of capitalist money led to wide spread financial instability and chaos and confusion.

Power subsidy, budget deficit and inflation in Pakistan

The government is likely to sustain high budget deficit owing to increased subsidy to power sector to the tune of US dollar 2 billion annually. The increase budget deficit of level not less than 7.5% of GDP or almost RS 1285 billion will be met through mainly by state bank of Pakistan. Although study suggest that there is poor long run relationship between inflation and budget deficit, the budget deficit will likely trigger fresh wave of inflation in the country which is already in double digit figure of almost 15% in November. The high inflation rate and high interest rate environment is thwarting businesses and investments in the country and aggravating economic condition of the country as witnessed by power outages, power shortages, etc.

The nature of money in Islam: A perspective from Riba

The money in islam is derived from the concept of riba. the Riba is an increase in a loan contract or hand to hand transactions. For example the loan of 10 gram gold in exchange of 11 gram gold would constitute riba as more of gold is received by lender. any commodity loaned would constitute riba if more is received by the lender. Similarly, if two dissimilar object is exchanged hand to hand then this constitute riba as comparing two dissimilar distinct object, one object must be greater than the others and hence constitute riba.

The money in islam is distinct as compared to 'abstract nature of money in capitalism'. The instrument of money is basically used to hedge the contract terms between two economic agents so that the nature of contract is time-invariant. the time-invariant contract between economic agents are hedged using money and hence money in islam is an hedged instrument. Infact there are many commodities that can be used as money including Silver, Gold, Copper etc. Whereas, in capitalism money is abstract and very poor hedge instrument and contract based on capitalist money is not time-invariant leading to frequent financial instability, chaos, and confusion.