First of all, I would like to express my sadness at the loss of a great champion of Islamic finance, Hussain Ahmad Najadi recently. He was a proponent of Islamic finance, who had moved the industry, at times single-handedly, to be where it is today.
It was an honour to have had the opportunity to interact with him especially in the early days of my career. May Allah bless him to be among the faithful in Jannah.
Last month, I wrote about the fact that there is no prohibition in the trading of debt at discount or premium under Shariah. I also said the argument prohibiting it is weak because it is based on an indirect Hadith on the trading of money. I received interesting feedback and queries on what I wrote, mostly centred on the difference between debt and money.
As such, in today’s article I will try to shed some light on what money is.
We know that money has been used by human beings as a medium of exchange for thousands of years Before Christ (BC). Money was invented because bartering system became difficult to operate. Money is simply an object that is agreed by people as having value as a medium of exchange in a trade.
Throughout the annals of human history, we know that many things have been used at one point or another in different cultures and civilisations as money, and they included things like precious stones and metals, salts, cattle, wood, tobacco, spices, leather, seashells, manillas, whales’ teeth and even wampum.
Metallurgy became a known skill and subsequently, the first official coinage was introduced in the Western world around 600BC-700BC by a tribe of people somewhere in Western Turkey. A coin was simply made of small, precisely measured flattened pieces of precious metal that had a stamp of animals on it. Due to its durability and mobility, coinage began to replace other types of money in Europe and elsewhere but it was still heavy to carry around, easily stolen and chipped.
As a solution, through Chinese ingenuity, paper money was invented around 600 After Death of Christ (AD), leading to the advent of representative money. Paper became another material that has been used as a medium of exchange, akin to how people had accepted seashells and stones as money in earlier times.
In fact, when coins became scarce in Europe due to hoarding by some rich merchants, the King of England decided to use “tally stick” made of woods as money because it was readily available, sturdy, durable and mobile.
Money is only as valuable as peoples’ faith in it, and without that faith even today’s money is just paper. Since tally stick was identified as money by the king, it made it easier for people to agree to use it.
Following which, the Bank of England (which at that time was privately owned) opted to just use coins and paper as money. The rest of the world slowly followed the standard adoption of coins and papers and as they say the rest is history.
Let’s now touch on the politics around the control of money and its circulation centred on the different theories of money, which had confused everyone on what money is really all about. There is the Credit Theory of Money and the Metallist Theory of Money. The former was supposedly idealised by Plato while the latter was idealised by Aristotle.
The Credit Theory of Money says that money is debt and debt is money or money derived its value from a corres-ponding debt issuance, while the Metallist Theory of Money says money is commodity or derived its value from commodity. With all due respect to their respective proponents, both in my opinion, are off tangent from the real essence of money.
What is the value of a wampum or whales’ teeth? Nothing if it is seen in its original form. Most people don’t care for either. However, when it is accepted as money, it carries value in the eyes of everyone as a medium of exchange. It is essentially something that has value as a medium of exchange even without fiat. Let’s call this the forgotten original or basic theory of money, in that money is what people accept as having value as a medium of exchange.
Knowing the basics of what money is will make one conclude that money is just money which is different from debt. The great debate between the Credit Theory of Money and the Metallist Theory of Money are just noises. Money is neither debt nor it is something that derived a value from the underlying object for example seashells, salts, and so on. The proponent of the two theories may disagree with me but I have always preferred to go back to the basics when I look at any subject matter isolating the irrelevant from what is relevant.
The whole confusion that debt is money or money is debt became more pronounced in the battle royale between the proponent of the Credit Theory of Money and the Metallist Theory of Money, when former US President Richard Nixon supposedly took the side of the former by suspending the link between money and gold in 1971. The latter seems to have lost the battle but they are not out yet because now there is talk of bringing back the gold standard.
Since Nixon’s act, debt creation and the creation of money increasingly takes place at once on a back to back basis. People call this fractional banking, which created more confusion on the real relationship between debt and money. If bankers themselves are confused, what more for Shariah scholars.
It is always important to remember that debt may be described in monetary terms but it is very distinct from money. A debt does not exist because money exists. A debt exists only when an indebtedness is created. There is no mysterious immaculate conception here.
Debt must be consummated in a tangible contractual relationship for it to exist. It is created separately from money. Even under the Credit Theory of Money, debt and money creation is done back to back connoting two distinct subject matters.
Indebtedness can arise or be created under a loan transaction (interest free or with interest) or under trade transactions. Money exists when people accept it as a medium of exchange. Until today, there has never been a point in time that debt has been accepted as a medium of exchange.
At the end of the day, we must always put things in the right perspective. The whole of our wealth is also referred to in monetary terms. Does that mean our wealth is money? In reality, only part of our wealth comprises money that we either keep in banks or under our pillows. The rest of our wealth i.e. our house, clothes, art collections, shares in company, investments and so on can’t be said to be money, though they are referred to in monetary terms. If they are, then are we doing riba when we sell our house at a premium? The illogical act of equating debt with money (i.e. cash or currency) by analogy or by whatever means becomes clear and visible when we start looking at things in the right perspective.
Lastly, Shariah is very clear already on the treatment of money and the treatment of debt. There is a specific written prohibition on trading money other than at par while there is no specific written prohibition on the trading of debt. Which means debt trading at whatever value is fine. Let’s stop complicating Shariah further.
***
Badlisyah Abdul Ghani is ED and CEO of CIMB Islamic Bank Bhd.
It was an honour to have had the opportunity to interact with him especially in the early days of my career. May Allah bless him to be among the faithful in Jannah.
Last month, I wrote about the fact that there is no prohibition in the trading of debt at discount or premium under Shariah. I also said the argument prohibiting it is weak because it is based on an indirect Hadith on the trading of money. I received interesting feedback and queries on what I wrote, mostly centred on the difference between debt and money.
As such, in today’s article I will try to shed some light on what money is.
We know that money has been used by human beings as a medium of exchange for thousands of years Before Christ (BC). Money was invented because bartering system became difficult to operate. Money is simply an object that is agreed by people as having value as a medium of exchange in a trade.
Throughout the annals of human history, we know that many things have been used at one point or another in different cultures and civilisations as money, and they included things like precious stones and metals, salts, cattle, wood, tobacco, spices, leather, seashells, manillas, whales’ teeth and even wampum.
Metallurgy became a known skill and subsequently, the first official coinage was introduced in the Western world around 600BC-700BC by a tribe of people somewhere in Western Turkey. A coin was simply made of small, precisely measured flattened pieces of precious metal that had a stamp of animals on it. Due to its durability and mobility, coinage began to replace other types of money in Europe and elsewhere but it was still heavy to carry around, easily stolen and chipped.
As a solution, through Chinese ingenuity, paper money was invented around 600 After Death of Christ (AD), leading to the advent of representative money. Paper became another material that has been used as a medium of exchange, akin to how people had accepted seashells and stones as money in earlier times.
In fact, when coins became scarce in Europe due to hoarding by some rich merchants, the King of England decided to use “tally stick” made of woods as money because it was readily available, sturdy, durable and mobile.
Money is only as valuable as peoples’ faith in it, and without that faith even today’s money is just paper. Since tally stick was identified as money by the king, it made it easier for people to agree to use it.
Following which, the Bank of England (which at that time was privately owned) opted to just use coins and paper as money. The rest of the world slowly followed the standard adoption of coins and papers and as they say the rest is history.
Let’s now touch on the politics around the control of money and its circulation centred on the different theories of money, which had confused everyone on what money is really all about. There is the Credit Theory of Money and the Metallist Theory of Money. The former was supposedly idealised by Plato while the latter was idealised by Aristotle.
The Credit Theory of Money says that money is debt and debt is money or money derived its value from a corres-ponding debt issuance, while the Metallist Theory of Money says money is commodity or derived its value from commodity. With all due respect to their respective proponents, both in my opinion, are off tangent from the real essence of money.
What is the value of a wampum or whales’ teeth? Nothing if it is seen in its original form. Most people don’t care for either. However, when it is accepted as money, it carries value in the eyes of everyone as a medium of exchange. It is essentially something that has value as a medium of exchange even without fiat. Let’s call this the forgotten original or basic theory of money, in that money is what people accept as having value as a medium of exchange.
Knowing the basics of what money is will make one conclude that money is just money which is different from debt. The great debate between the Credit Theory of Money and the Metallist Theory of Money are just noises. Money is neither debt nor it is something that derived a value from the underlying object for example seashells, salts, and so on. The proponent of the two theories may disagree with me but I have always preferred to go back to the basics when I look at any subject matter isolating the irrelevant from what is relevant.
The whole confusion that debt is money or money is debt became more pronounced in the battle royale between the proponent of the Credit Theory of Money and the Metallist Theory of Money, when former US President Richard Nixon supposedly took the side of the former by suspending the link between money and gold in 1971. The latter seems to have lost the battle but they are not out yet because now there is talk of bringing back the gold standard.
Since Nixon’s act, debt creation and the creation of money increasingly takes place at once on a back to back basis. People call this fractional banking, which created more confusion on the real relationship between debt and money. If bankers themselves are confused, what more for Shariah scholars.
It is always important to remember that debt may be described in monetary terms but it is very distinct from money. A debt does not exist because money exists. A debt exists only when an indebtedness is created. There is no mysterious immaculate conception here.
Debt must be consummated in a tangible contractual relationship for it to exist. It is created separately from money. Even under the Credit Theory of Money, debt and money creation is done back to back connoting two distinct subject matters.
Indebtedness can arise or be created under a loan transaction (interest free or with interest) or under trade transactions. Money exists when people accept it as a medium of exchange. Until today, there has never been a point in time that debt has been accepted as a medium of exchange.
At the end of the day, we must always put things in the right perspective. The whole of our wealth is also referred to in monetary terms. Does that mean our wealth is money? In reality, only part of our wealth comprises money that we either keep in banks or under our pillows. The rest of our wealth i.e. our house, clothes, art collections, shares in company, investments and so on can’t be said to be money, though they are referred to in monetary terms. If they are, then are we doing riba when we sell our house at a premium? The illogical act of equating debt with money (i.e. cash or currency) by analogy or by whatever means becomes clear and visible when we start looking at things in the right perspective.
Lastly, Shariah is very clear already on the treatment of money and the treatment of debt. There is a specific written prohibition on trading money other than at par while there is no specific written prohibition on the trading of debt. Which means debt trading at whatever value is fine. Let’s stop complicating Shariah further.
***
Badlisyah Abdul Ghani is ED and CEO of CIMB Islamic Bank Bhd.
http://themalaysianreserve.com/main/sectorial/islamic-finance/4323--perception-of-money-as-a-medium-of-exchange
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