As-Salamu 'Alaykum wa Rahmatullahi wa Barakatuh; Bismillah ir-Rahman ir-Raheem. The question I want to ask is about what type of monetary system is halal according to Shari'ah and the practices of RasulAllah(SalAllahu Alayhi was-Salam). Today most of the money in circulation around the world is not in the form of paper nor is it in gold. It is simply amounts typed into computers. The money doesn't even have to ever be in the form of paper. I shall tell you the way it works here in America. In America we have the Central Bank, known as the Federal Reserve. It is the lending institution to both the Government and to the banks that opperate in the country and the world sphere. What happens is that the Government decides that it needs money, so it sells the Federal Reserve things called Treasury Bonds. Treasury Bonds are debt obligations that, according to the rules of society today, mandate that interest be paid on loaned money. The Federal Reserve lends the US Treasury Department money, through the form of electronic transfers. The money that is being lent is conjoured in the computer and has no basis in reality. It has neither gold backing nor is it an account of paper that the Federal Reserve has in a bank vault. It is simply added to whatever money there is in circulation i.e., just typed into the computer. The Government is now in debt obligation to the Federal Reserve, a Central Bank that loans money with interest expected to be repayed. There is another practice being implemented in modern banking; something being called Fractional Reserve Banking. In this system banks are mandated to keep a percentage of what they have deposited in the bank vault. This money cannot be lent and must stay in the possession of the bank. The rule is, it might have been changed to a lesser percentage, that the bank must keep at least 1/10 of the deposited money in the bank vault and cannot lend it. Banks have found loopholes in this rule and have stated that whatever they have as deposits is the 1/10th that they are mandated to keep in the vault. For example, if a bank were to receive $100.00 in deposits, it would claim that the $100.00 is the amount that must be kept in the vault. What the bank then does is lend $900.00. The banks expects interest/riba on that $900.00 dollars that has been lent. What happens here is that banks have authority to, theoretically, add unlimited money to the money supply. The history of Paper money is also something that is mired in Fitnah. Gold was the money that was used traditionally. What happened was that people started to store gold in warehouses, the precursers to the banks of today. The warehouse would give out paper certificates enumerating the amount of gold that was stored for safe keeping. Here the Mujrimeen bankers saw opportunity. Since people were doing transactions in the paper certificates, rather than the gold that was stored in the warehouse; people became unaware of the amount of gold that was in storage. The warehouses became lending institutions as well. They started to print more certificates than there was gold to back them. They thought that because people became unaware of the amount of gold available, they could bamboozle the population. They started to "lend money they didn't have." Today there is no Gold Standard and people seldom know how much paper there is in circulation. The logic to having Gold and Silver as money is that they are scarce things. Gold cannot be grown in the manner that trees are. In this manner, the purchasing power of the populace is protected i.e., the currency does not "Inflate." Paper money is an "Inflatable" thing. You print more of it. What happens though is that when you print more, the purchasing power of the populace decreases. Eg. A loaf of bread that once cost $.05 now costs $1.50 . Salaries remain about the same. What happens to the purchasing power of the populace? They are put to depravation. In this scenario there are the Banks who come saying "You're having trouble, I see that and you know that. How's about a loan? It'll help you pay for the things you need and get you out of poverty." What you don't know is that the bank wants Interest/Riba from the loan that you have taken. In that way, banks opperate much the same as drug dealers and pimps. The salary you earn remains much the same, so paying off the loan will be problematic. You take one loan, you can't pay it, so you go to another bank to get another loan to pay the first. "Once they get you hooked, you can't stop using." Brother/Mufti what is the Shari'ah way? Subsets to that question are: What is Halal money? What does Islam say about the Central Bank? The US Constitution designates the power to coin money to the Congress, not to the Central Bank. Using the system written in the Constitution, the money is Debt Free and Interest Free. Many African Nations are being put into financial constraints, brother. They have to decide whether they want to fund schools and hospitals or to pay the interest on the National Debt that they owe to International lending institutions. Jazak Allah Khair wa Barak Allahu feek.

AAWW

The dilemma you are raising in your question is not only an American one, it is an international one! The Muslim world is struggling the same in its financial system, because the economic system applied nowadays and dominates the globe-with few exceptions- is the Capitalist Economic System. This system does not abide with the golden currency, nor with gold-backed currency, rather it is bills and papers that have no intrinsic value. Worse than the above is the fractional reserve mode of lending that creates artificial money which has no reality.

 

In the Islamic Financial System; the ideal solution is to go back to the golden currency –or at least- to the gold-backed currency. If not possible, then coining currency industry must be closely monitored by the Central Bank to assure equality with the actual values the society possesses at large.

As of the fractional reserve, CDOs, CDSs, derivatives, and other modes of finance or trade with nominal money ; that should be completely terminated.