Developing a fair currency system

Hanif, Muhammad Article Developing a fair currency system ISRA International Journal of Islamic Finance Provided in Cooperation with: International Shari'ah Research Academy for Islamic Finance (ISRA), Kuala Lumpur Suggested Citation: Hanif, Muhammad (2020) : Developing a fair currency system, ISRA International Journal of Islamic Finance, ISSN 2289-4365, Emerald, Bingley, Vol. 12, Iss. 3, pp. 325-345, https://doi.org/10.1108/IJIF-02-2019-0024 This Version is available at: https://hdl.handle.net/10419/236971 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by/4.0/ Developing a fair currency system Muhammad Hanif Ajman University, Ajman, United Arab Emirates and Bahria University, Islamabad, Pakistan Abstract Purpose –This study aims to evaluate the role of the prevailing currency systems in achieving (or departing from) the socio-economic objectives of a progressive and just society; i.e. featuring stability and equitable distribution of wealth. Design/methodology/approach –After documenting historical developments in currency systems, the study reviews the Islamic perspective on the matter. Features of an ideal currency system are listed and then a critical evaluation of existing currency systems –fiat, banking and cryptocurrency –is undertaken. Findings –It is found that existing currency systems –fiat, banking and cryptocurrency –are not compatible with the socio-economic objectives of a forward-looking, progressive society, which upholds transparency and justice as its core values. The study documents that Sharīʿah norms have no preference or dislike for any of the existing currency systems. Any prudent currency system compatible with the objectives of the Islamic financial system (i.e. stability and equitable distribution of wealth) is acceptable. A single international reserve currency (with country-specific legal tendering) is subject to the risk of destabilisation across global markets. Practical implications –This paper recommends autonomy of central banking, the spending of seigniorage for the welfare of community members, development of asset-backed currencies (following  sukūk structures), as well as multiple international reserve currencies and joining of hands by professionals and Sharīʿah scholars to design a currency system compatible with the Islamic financial system. This paper’s recommendation is against the adoption of cryptocurrency that lacks the backing of real assets. Originality/value –The study contributes to the literature by evaluating the compatibility of existing currency systems in the achievement of socio-economic objectives of a welfare state which seeks to uphold justice and equitable resource distribution as core values in the financial system. Keywords Cryptocurrency, Fiat currency, International currency, Islamic currency Paper type Research paper Introduction Economic matters of human beings occupy an essential place in the short span of life. A significant productive time of an average human being is spent on the generation of resources to meet the demand for goods and services –essential for survival, as well as quality living. Generally, economic theories revolve around the classical concept of scarcity of resources, with alternative uses and choices by consumers with unlimited wants [1]. Hence, the economic issue is efficiency, i.e. maximisation of utility by prudent utilisation of limited resources. The utility is maximised through consumption of goods and services. Hence, under Western economic settings, rational behaviour would be to increase command © Muhammad Hanif. Published in ISRA International Journal of Islamic Finance. Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence maybe seen at http://creativecommons.org/licences/by/4.0/legalcode The author is thankful to Editorial team at ISRA International Journal of Islamic Finance, anonymous reviewers and Dr Salma Sairally for their cooperation and feedback in improving the article. Fair currency system 325 Received 10 February 2019 Revised 14 June 2019 19 July 2020 20 August 2020 Accepted 20 August 2020 ISRA International Journal of Islamic Finance Vol. 12 No. 3, 2020 pp. 325-345 Emerald Publishing Limited 0128-1976 DOI 10.1108/IJIF-02-2019-0024 The current issue and full text archive of this journal is available on Emerald Insight at: https://www.emerald.com/insight/0128-1976.htm over goods and services to improve the quality of life and happiness –an essential goal of life (Chapra, 1992). The Islamic worldview differs from Western economic theories, primarily on the front of the objective of life. Under the Islamic worldview, the goal of life is to be successful here and in the hereafter (see Qurʾ an, 59:18, 20). How is such success achieved? The answer lies in being more humane and compassionate and taking care of oneself and others too. To be modest in the consumption of resources is preferred over increased command over goods and services in pursuit of material happiness. Therefore, under the Islamic way of life, wants are filtered through the specific code of Islamic ethics. As regard the scarcity of resources, the Islamic worldview is again different from Western economic theories. Resources are in abundance, created by Allah (SWT) and sufficient to meet the needs and wants of humanity and other creatures (Qurʾ an, 11:6, 53:3). In spite of an agreement with the underlying philosophy of prudent utilisation of resources, the economic issue under the Islamic financial system is not about limited resources versus unlimited wants. Exploitation (of resources) and equitable distribution of resources is an economic issue, which needs due consideration of scholars and practitioners alike. Differences between Western and Islamic economic theories/systems are documented in the literature (Zaman,2010, 2015). For instance, Zaman (2015) mentions explicitly 10 dimensions of contrast between Islamic and conventional economics methodologies. However, unlike the Islamic economic system, Western economic theories have been practised in the modern era. Hence, we have results, which facilitate an evaluation of the suitability and achievements of such theories. Although the Islamic economic system is yet to be tested in modern institutional settings, support for such an experiment exists. For example, Selim and Hassan (2019) compare the results of interest-free and interest-based monetary policies in 23 developed countries and conclude that the group of countries with interest-free monetary policy performed better on the misery index (sum of the unemployment rate and inflation rate). Moreover, resource exploitation is on the rise in the form of scientific discoveries in different aspects of science. Every next discovery contributes to wealth creation and uplifting living standards. However, at the same time, billions of people live under the poverty line. Published data provide evidence about the inequitable distribution of wealth. According to an estimate, out of the total global wealth of US$360.6tn, the top 1% of the adult population owns 45% (US$162.27tn) of global wealth, the richest 10% own 82% and the bottom half (50%) of adults own less than 1% of global wealth (Shorrocks et al., 2018). These empirics justify the urgent response of scholars and people in power to contribute to solving the real economic problem of the masses globally, i. e. the inequitable distribution of wealth. Justice is a cherished feature of society in all spheres of life, and the political economy is no exception. Islam advocates fairness, justice and transparency in society. The Qurʾ an states “surely! Allah does not wrong anyone by as much as the weight of a speck of dust [...]”(4:40) (also, see 4:58, 5:8, 6:152 and 7:29). At another place, it is stated “you who believe, uphold justice and bear witness to Allah, even if it is against yourselves, your parents or your close relatives or the rich or the poor [...]”(4:135). Compatibility with justice is a key Islamic criterion for designing systems and building institutions, and for evaluating them. Money management has a central place in the daily activities of individuals and societies. Modern economic systems and institutions have been developed under capitalistic principles. The underlying philosophy of modern institutions and instruments contradicts Islamic law in many areas (Zaman, 2010). One of these systems is monetary policy, which impacts the lives of every person, irrespective of class (poor/rich, Muslim/non-Muslim, etc.). Movements in the money supply have broader implications for stability in prices and IJIF 12,3 326 purchasing power of holders of the currency. Wealth transfer and storage take place in currency, and earnings and spending are also measured in currency. Another dimension of currency is international trade and payments. Over the centuries, the currency system has passed through multiple stages of bimetallism, gold standard and fiat currency. An emerging concept of the 21st century is that of decentralised cryptocurrencies, which has begun taking root in the financial system. In an era of paper money lacking inherent value, quantitative management of money becomes very crucial and leads to multiple implications for the economic conditions (prosperity/poverty) of a nation. Mismatch in the quantity of money and output has implications for an economy in the areas of inflation, gross domestic product (GDP) growth and employment. This study is an attempt to evaluate existing money supply systems developed under capitalism and their contribution towards the achievement of or departure from, economic objectives of a just and progressive economy, featuring stability, protection of wealth and equitable distribution of wealth. It is important on account of multiple reasons: Firstly, after a long span of slavery and ignorance, Muslim communities have started a movement towards the implementation of Islamic code of life, primarily in the area of the financial system. The modern Islamic banking and finance industry has completed about 40 years of its experience, and an increasing number of institutions are found globally, with an enhanced interest of the masses in the Islamic financial system. Hence, it is important to assess the compatibility of the prevailing monetary system with the Islamic financial system. Secondly, the gap between “haves and have-nots”is on the rise, signifying the insufficiency of the prevailing system and the need to overhaul or replace it. Thirdly, there are voices amongst financial experts to re-switch the currency system to the gold standard for the sake of stability in markets (IFA, 2000;Meera, 2002; Meera and Larbani, 2004;Yaacob, 2012;Santoso, 2012). Finally, a new decentralised currency system is emerging in the form of cryptocurrencies. There are about 3,000 different cryptocurrencies, with a market capitalisation of US$273.56bn (Investing.com, 2020). Certain significant efforts (Khan and Mirakhor, 1994;Chapra, 1996;Meera and Larbani, 2006, 2009;Hassan, 2007; and Werner, 2014) have been made to elaborate on the issue and offer recommendations. However, the debate is yet to be settled, especially in the presence of economic ills and the emergence of this new cryptocurrency system. The study proceeds in the following order. The next section presents a brief historical overview of the currency systems, covering progress from bimetallism to the gold standard and the paper currency regime, followed by a discussion on whether there is any Islamic currency (with a focus on whether Islamic teachings favour or oppose any currency system). Desired features of a currency system are summarised in the following section, and an account of the existing money management system (including power currency and banking currency), encompassing related issues and problems, is then presented. The next section presents an introductory note on cryptocurrencies with a focus on Bitcoin (including testing it on desired currency features). The conclusion is offered in the last section. Historical overview Humanity has progressed through multiple currency systems during the course of history. We do not have much information about the prehistoric era. However, in ancient Egypt, Babylon, Greece, Israel and Rome, multiple items including gold, silver, grains, copper, Fair currency system 327 brass, steel, iron and tin have been used as money (Xinwei, 1993). At the times of Prophet Muhammad (peace be upon him) (570–632), two types of currencies were in circulation, notably dinars and dirhams. The prevailing exchange ratio was 1:10, during the period of the Rashidun caliphate (632–661 CE) (Chapra, 1996). Neither dinars nor dirhams were minted in Arabian Peninsula at the time of Prophet Muhammad (peace be upon him). The “denarius”, known to the Arabs as the dinar, was the gold coin used as currency by the Roman-Byzantine empire, while the “drachma”(dirham), a silver coin, was the currency of the Persian empire (Meera and Larbani, 2006). The quantity theory of money postulates that expansion in economic activities dictates an increase in currency. Hence, multiple items have served as currency over the period in recorded human history. For example, Caliph Umar (may Allah be pleased with him) has been quoted as suggesting that camel skin might be used as currency (Chapra, 1996). However, the idea was dropped on account of uncontrollability and the expected scarcity of camels (Chapra, 1996). The first coin minted under Muslim rule was issued by Caliph Abd al-Malik in 696–97 CE (Pamuk, 2000). In the Ottoman Empire (1299–1922/1923), coins of gold (sikke), silver (akce), copper (mangir) and the paper currency remained in circulation (Pamuk, 2000;Hurriyet Daily News, 2012). During the 19 th century, the Ottoman Empire initially adopted a bimetallic standard (gold lira and silver kurus) but later (1880) shifted to the gold standard (Pamuk, 2000). Paper currency (kaime) was introduced in 1862 in the Ottoman Empire. In Muslim India, dam (copper coin), mohur (gold coin) and rupiya (silver coin) remained in circulation during the rule of Sher Shah Suri (1538–1545) and onward during the Mughal empire (RBI, 2008). In pre-Ottoman Egypt (1517), three types of currency, including dinars, dirhams (silver) and fulus (copper) remained in circulation (Abdullah, 2016). Silver and gold have served as a measure of value in England’s monetary history. In Anglo-Saxon England (775 CE), the pound was a unit of currency equal to a one-pound weight of silver. Sterling’s value was defined in terms of gold in 1717, with an equation of one ounce of gold priced at 4.25 sterling (World Economic Forum, 2016). In China, multiple items including cowry, gold, silver, copper, grains, clothes, iron and paper performed the function of money (Xinwei, 1993). The paper currency became popular in the 19th century; however, initially, it was backed by gold, i.e. the gold standard. The US dollar was declared as the international reserve currency, fully convertible to gold and other currencies were pegged to the US dollar’s value under a monetary agreement known as the Bretton Woods agreement (1944). In addition, the World Bank and International Monetary Fund (IMF) were established. However, in 1973, the Bretton Woods agreement ended and a floating system (free and managed) dominated the international arena. Nowadays, nations are free to issue as much currency as they wish and the volume of international trade, GDP and money supply determines the exchange rate between two currencies, i.e. a pure mechanism of demand and supply. Islamic currency Is there any currency system that we can term as Islamic currency? To answer the question, we have to look into the sources of Islamic law and the history of monetary management in Muslim states. Original sources of Islamic law (i.e. Qurʾ an and Sunnah) do not specify any currency system. During the period of Prophet Muhammad (peace be upon him), the gold and silver coins that were circulating in Arabia were not even minted domestically. Dinars were coming from the Roman Empire and dirhams were minted in the Persian Empire. Prophet Muhammad (peace be upon him) did not object to the use of these metals as currency. The use of gold and silver as a currency is mentioned in the Qurʾ an neutrally (i.e. without showing any reservation or persuasion for these metals) (3:75; 12:20; 18:19). A mention of the dinar is found in the Qurʾ an: IJIF 12,3 328 There are People of the Book who, if you [Prophet] entrust them with a heap of gold, will return it to you intact, but there are others of them who, if you entrust them with a single dinar, will not return it to you unless you keep standing over them (Qurʾ an, 3:75). At another place, the word dirham is mentioned, while expression of the story of Prophet Yusuf (peace and blessings be upon him) has been made: [...] and they sold him for a small price, for a few pieces of silver (dirhams): so little did they value him (Qurʾ an, 12:20). In the story of the People of the Cave, it is mentioned that after awakening from a long deep sleep they said: [...] So send one of you with this silver coin (wariq) of yours to the town, and let him find out which is the good lawful food and bring some of that to you [...] (Qurʾ an, 18:19). Chapra (1996) and Meera and Larbani (2006) mention that the dinar was made of gold and the dirham was a silver coin. Mention of gold and silver (as a source of wealth) is found in the Qurʾ an at various places (e.g. 3:14; 3:91; 4:20; 9:34; 7:93; 18:31; 22:23; 35:33; 43:33 and 35; 43:53; 43:71; 76:15,16 and 21) (Searchtruth.com, 2018). During later Islamic history, Muslim Governments have used at least four types of currency officially, including gold, silver, copper and paper money (Pamuk, 2000;RBI, 2008;Hurriyet Daily News, 2012). The prevailing monetary system globally is based on fiat money, i.e. currency is issued by the central bank (government), which mandates its use in that country. This money supply is further increased by the credit creation process of commercial banks. No real goods and services back these instruments of money, unlike in the gold standard (Werner, 2014). Meera and Larbani (2009) reject the prevailing monetary system (fiat money) and declare the creation of money –currency and bank money –  har am (unlawful). Their basic argument for declaring the system  har am revolves around the creation of purchasing power out of thin air by the central bank (government) and commercial banks. They further question the legitimacy of the Islamic financial system operating under the prevalent monetary system. In another article, Meera and Larbani (2006) document the incompatibility of the fiat currency system with the establishment of Islamic socio-economic and political order in society. The authors argue that under the fiat monetary system wealth is transferred to money creators, resulting in socio-economic problems including inflation, fall in real incomes, increased property prices and inequitable distribution of wealth, amongst others. All of these results conflict with the objectives of the Sharīʿah regarding wealth. On the transnational front, the monopoly of one nation’s currency as the international reserve currency is a threat to other nations’sovereignty. Loss of sovereignty would affect the achievement of other objectives of Sharīʿah including faith, life, intellect and lineage (Meera and Larbani, 2006). Santoso (2012) argues for the bimetallic system being preferable on the grounds of fairness and stability. However, he suggests a step-by-step approach towards switching to the bimetallic system, as opposed to an abrupt change, taking into account international agreements and the adequacy of gold reserves. Yaacob (2012) documents the currency system in place during the Muslim rule and concludes that re-switching to gold dinar is not a baseless proposal; however, implementation needs due diligence. Nevertheless, as opposed to the position of rejecters of the fiat currency system, support for the system with certain modifications/reforms is found in the literature. Chapra (1996) highlights that there are no specific instructions for Muslims to stick to gold and silver as currency (prevailing at the time of Prophet Muhammad (peace be upon him)). Apparently, it seems that there is no alternative to the managed money system for Muslim countries. However, its management should be consistent with the socio-economic goals of the Islamic Fair currency system 329 financial system, and such an objective might be achieved through monetary intermediation based on profit-and-loss sharing. The idea of fiduciary money (other than gold and silver) has remained under consideration from the period of Caliph Umar (may Allah be pleased with him). Chapra (1996) argues that a currency system other than gold and silver was supported by Ahmad ibn Hanbal (d. 241/855), Ibn Hazm (d. 456/1064) and Ibn Taymiyyah (d. 505/1328). Al-Ghazali (1058–1111 CE) endorsed the use of silver and gold coins mixed with other metals as money if they are issued by the state (Islahi, 2001). Hassan (2007) builds convincing arguments against the use of gold currency for Muslim countries under prevailing circumstances and cites the example of China for the achievement of growth and development. He further argues that price stability and exchange rate stability is attainable under a fiat money system through proper economic management. Mohamad and Sifat (2017) argue against metallic money because of stated reasons including lack of juristic support for metallic money only, price of metallic money (more than fiat), debasement of metallic money, volatility in metallic prices, limited supply of gold in traditional Muslim communities and the issue of gharar (uncertainty). On the status of fiat currency, the Islamic Fiqh Academy (IFA) (1986) resolves that “paper money is real money, possessing all characteristics of value and subject to Shari’a rules governing gold and silver vis-à-vis usury, zakat, salam and all other transactions”(Resolution no. 21). However, the IFA (2000) recognises the problem of inflation under the fiat monetary system and recommends multiple measures to deal with it. These include proper checks on the quantity of money, reduction in budgetary deficits and discouragement of inflationary (usurious) financing by governments, development of an inflation accounting standard and independence of central banks in monetary management. It also recommends a feasibility study regarding a gold standard. Hence, it can be concluded that no currency could be termed as Islamic currency. Any prudent currency system would be acceptable in an Islamic economy. However, a currency system must be able to meet the specific criterion of the Islamic socio-economic system and contribute to the enhancement of the welfare agenda as envisaged by the Islamic financial system. In the next section, the features of an ideal currency system are elaborated. Desired features of a currency A currency system suitable to a modern Islamic economy (welfare economy) is expected to meet the following requirements: Acceptability: The currency should be generally acceptable by the masses. Anything that is considered  har am (non-permissible) and which Muslim masses would not like to keep or use is not recommended to be used as currency (e.g. currency made from the skin of pork or any other material which is  har am for utilisation by Muslims). Acceptability comes through either the intrinsic value of the product used as currency (e.g. goods which are used for satisfying needs) or by the legal process (currencies are legal tender within the jurisdiction of issuing states). In the case of inherent value (like gold and silver), acceptability is free from any legal compulsion and geographical boundaries; hence, ideally, a currency should have inherent value. Measure and store of value: Money is expected to serve as the measuring rod for the value of goods and services, as well as the store of value. Al-Ghazali (1058-1111 CE) has depicted the feature of the storability of money in a very convincing manner: “when one owns the money, one owns about everything, not like the one who owns cloth, as he owns cloth and nothing else”(quoted by Islahi, 2001). IJIF 12,3 330 Durability: Another feature of a sound currency is its ability to be storable and longlasting. Anything with a lesser amount of life and that requires huge space and expenses for storage is not recommended to be used as currency (e.g. perishable items such as fruits and vegetables cannot be used as currency). Divisibility: A currency should carry the feature of divisibility to the minimum level for the exchange of daily consumption of goods and services. Nothing can be used as currency which cannot be divided into smaller denominations (e.g. horses, cars, buildings, etc.). Stability: Stability in the prices of an item which is used as currency is a necessary feature. It is crucial because money is a source of wealth transfer and an unstable currency with frequent fluctuations in price will not serve the purpose (e.g. equity shares of the companies traded on stock exchanges cannot be used as currency because of extended variation in prices). Transferability: Another essential feature of a sound currency is easy transferability from person to person and place to place. Hence, immoveable goods such as buildings and lands cannot be used as currency. This feature of money is required due to the mobility of people for business, education, health, tourism, a pilgrimage to sacred places and international trade. Flexibility: A sound currency system needs to be flexible enough to cater to seasonal needs and the currency supply required for the desired output level in the economy. Currency can be increased/decreased as per the demand of macroeconomics of a nation. When there is more production of goods and services, there should be more currency available to measure the output and facilitate payments. Likewise, when economic activities are slow, the quantity of currency may be reduced. Otherwise, based on the established theory of money quantity, prices of output will increase and decrease merely due to the supply of money. Security: An added feature of a currency system is built-in security, given the threats of losses due to theft, fire, floods and accidents, etc., and available resources to secure the money. Additionally, an ideal currency system should be capable of enhancing (or at least not undermining) the agenda of socio-economic reforms and the achievement of cherished objectives of financial stability and equitable distribution of wealth. Existing currency systems Fiat currency At present, the global money supply is based on paper currency, i.e. the fiat currency system. Under the fiat currency system, the central bank of a nation determines the need for currency in circulation within the economy based on the national output (goods and services). A certain amount of currency notes with different denominations is floated in circulation to be used by the residents for measuring the output and settlement of payments. Unlike the gold standard, such a currency is not backed by any real asset. Its legitimacy and general acceptability come by the declaration of a currency as legal tender. Hence, it is a tool for wealth creation by central banks. It is a system under which the central bank issues billions of currency by spending a paltry amount on the printing of paper notes. These paper notes carry wealth/purchasing power and are used in the purchase of real assets (goods and services). Here lies the issue that a central bank (effectively government in most cases) becomes wealthy without doing the required amount of work or exchanging wealth to earn Fair currency system 331 such purchasing power. One entity with the entrusted power of note printing has got the position of wealth creator out of thin air. Meera and Larbani (2006) rightly categorise it as seigniorage (difference in par value of a currency note and its cost). This point needs deliberation by scholars, taking into account a holistic view of the modern economic system: whether such a power can be entrusted to an institution, effectively the government of a country, to create wealth out of nothing and to control resources? A probable answer can be yes, given the requirement of currency in the financial system. It is preferable to entrust the job to a central institution instead of any private sector player, however, with certain terms and conditions. For example, such wealth may be spent for the general welfare by categorising the needs of the society in the area of education, health and poverty alleviation instead of spending on the lavish lifestyle of government functionaries. It is the wealth of all residents. Hence, spending for the benefit of all, especially the destitute, would justify the system. Such a justification is based on the principle that the poor have a right in the wealth of a nation and taking into account socioeconomic objectives of the Islamic economy including equitable distribution of wealth. The Qurʾ an commands for the distribution of wealth to less privileged segments of the society in many verses (e.g. 2:43; 2:83; 2:110; 2:177; 2:184; 2:271; 2:273; 2:277; and numerous other verses) (Searchtruth.com, 2018). The fiat currency system meets many of the desirable features of a currency system including divisibility, storability, transferability and flexibility. However, its flexibility poses a challenge for stability. Any mismatch in currency and output can pose the problem of inflation or deflation, neither of which is desirable. Also, on the front of acceptability, it is legal tender within the economy. However, it cannot make the global appeal of acceptability as it is not backed by real assets. One way to address the issue of “backing currency by real assets”is to use government properties as security in issuing currencies; and holders may be given the right to recourse in case of a crisis, similar to the  sukūk(Islamic investment certificates) structure under the Islamic financial system.  Sukūk(asset-backed) currency may help in maintaining the stability of currency value and pose a hurdle in the way of irresponsible money management including deficit financing by issuing new currency notes. Banking currency Three theories explain modern banking functions including credit creation theory, financial intermediation theory and fractional reserve banking theory. Credit creation theory contends that banks create money and increase the money supply in the economy by issuing loans. McLeay et al. (2014) document that banks create money by extending loans. When a bank makes a loan to a customer, the bank credits his (customer’s) bank account with a bank deposit of the size of the loan. That is the moment of new money creation. Werner (2014) proves empirically that each bank has the power to create money, individually, out of thin air. “Thus, it can now be said with confidence for the first time –possibly in the 5,000 years” history of banking –that it has been empirically demonstrated that each individual bank creates credit and money out of nothing when it extends what is called a “bank loan”. The bank does not loan any existing money but instead creates new money. The money supply is created as “fairy dust”produced by the banks out of thin air’(p. 16). Proponents of fractional reserve banking do not accept the credit creation theory entirely; however, they agree on the power of credit creation by the banking system as a whole. Intermediation theorists, on the other hand, believe that a bank acts as an intermediate between savers and users of funds. Bank credit and plastic money is another important IJIF 12,3 332 transactions intended for financing illegal activities poses serious challenges for law enforcement agencies (Raeesi, 2015). Unless certain developments take place to address these concerns, it would be appropriate to wait and see before making any conclusion about cryptocurrencies. However, the conceptualisation of Sharīʿah-compliant precious-metal-backed cryptocurrency (PMBC) by Ajouz et al. (2020) needs consideration by money management authorities in Muslim societies, on account of achieving efficiency through information technology (IT) applications. The concept of PMBC may be further extended to asset-backed cryptocurrency (ABC) following  sukūkstructures in cases where metals are not sufficient to match the currency demand of an economy. ABC following  sukūkstructures has the potential to address the questions (e.g. shortage of gold and higher cost of metallic money) raised about the adoption of the gold standard. Conclusion In this research, an evaluation of prevailing currency systems has been made, covering multiple aspects including domestic and international. The findings lead to a “reappraisal of existing money management system”and call for a new/reformed currency system development, as argued by Abdullah (2016) and others. There are some specific expectations from a just financial system including financial stability and equitability in wealth distribution (Chapra, 2008). Furthermore, social, economic, political and financial goals (inter-related goals) are to be achieved jointly, as concluded by Choudhury and Hussain (2005) after examining the precepts of Sharīʿah in the financial field (including social security, property rights and the rights of progeny). The findings indicate numerous hurdles in the achievement of these goals under the prevailing monetary management system. The existing monetary system has failed in achieving the desired objectives (equitable distribution of resources, stability in the financial system and protection of wealth, etc.). Hence, reconsideration and development of a fair currency system is the need of the time. The following important points are reiterated: Firstly, there is no liking or disliking for any currency system under the Islamic financial system. Hence, any prudent currency system, taking into account the socio-economic objectives of the Islamic financial system, is acceptable. It puts the bar of designing such a fair and transparent currency system on Muslim finance professionals and Sharīʿah scholars. Given the knowledge gap (lack of Sharīʿah expertise amongst finance professionals and vice versa) between the two groups (Ahmad, 2016;Shahar et al.,2018), significant joint efforts are required. It is imperative that Muslim economists and finance professionals join hands with Sharīʿah scholars and come up with a currency system suitable for achieving the socio-economic goals of the Islamic financial system. Consideration may be given to bimetallism, gold coins, the gold standard, fiat currency, cryptocurrency and proposed asset-backed currency systems. Secondly, under prevailing settings, seigniorage is a major issue. It is not justified even for the government, let alone the private sector (commercial banks). It is suggested that unless a new system comes into operation, the benefit of such a bonus purchasing power may be spent on the general welfare of members of the society with a focus on poverty alleviation, education and health sectors. Government spending may be restricted to tax collection or financing through an open financial market, ideally based on profit-and-loss sharing modes of financing. A formula may be developed for the determination and collection of seigniorage from commercial banks, generated in the process of credit creation. Fair currency system 339 Thirdly, fractional reserve banking contributes directly to enhancing the quantity of money supply, resulting in inflation. Furthermore, the issue of new notes to finance budgetary deficits of governments plays a similar role. Generation of inflation through an undue increase in money supply is a hidden tax (Meera and Larbani, 2006), resulting in loss of purchasing power and wealth of holders of such currency. It is tantamount to theft, clearly violating the objective of the Sharīʿah regarding the protection of wealth. Capacity building and independence of central banks in carrying out a monetary policy may reduce this problem. Multiple tools of monetary management including cash reserve ratio are at the disposal of the central banks under conventional wisdom. It is suggested that real assets owned by the government may back fiat currency, following the  sukūkstructure developed under Islamic finance. Fourthly, having a single international reserve currency without the backing of any real asset poses threats to the stability of the global financial system. Such a single currency is legal tender within the jurisdiction of the issuing country. Hence, trouble in the issuing country will lead to trouble internationally (e.g. the US financial crisis of 2007–2008). Zhou Xiaochuan, ex-governor of the Chinese central bank suggested an international reserve currency under the International Monetary Fund (IMF) that is disconnected from any individual nation, ensuring long-term stability (Financial Times, 2009). It is prudent to have more reserve currencies available for international transactions. The European zone has managed the issue to an extent. Multiple reserve currencies for other regions and economic cooperation unions would contribute to stability in the global financial system (given the GDP volume, share in international trade and population). Although OIC countries have the platform of the Islamic Development Bank for the issuance of a reserve currency to be used in international payments (at least within the OIC-region), the potential is yet to be realised. Finally, the cryptocurrency system (Bitcoin) lacks features of acceptability and flexibility. It neither carries inherent value nor is legitimised by legal tendering. Hence, this system poses severe threats in the area of loss of wealth on account of acceptability, in addition to the in-built limitation of flexibility and stability. It is prudent to wait and see before jumping to a conclusion. A just and transparent currency system is expected to contribute to stability and equitable distribution of wealth. Hence, it is the prime duty of the actors (government, economists and Sharīʿah scholars) to join hands for the development of such a system. Such a system would further help in reducing crime, alleviating poverty and achieving harmony within the geographical borders of society, as well as internationally. Future research agenda includes evaluation of the fractional reserve banking regarding fairness (or its opposite) in resource allocations, poverty alleviation and achievement of other socioeconomic objectives. Note 1. Robins (1932) states “economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses”(p. 15). References Abdullah, A. (2016), “An Islamic monetary theory of value and equation of exchange: evidence from Egypt (696-1517)”,Humanomics, Vol. 32 No. 2, pp. 121-150. Abraham, I., Malkhi, D., Nayak, K., Ren, L. and Spiegelman, A. (2016), “Solidus: an incentive-compatible cryptocurrency based on permissionless byzantine consensus”, Cornell University Library, available at: https://128.84.21.199/abs/1612.02916v1 (accessed 2 December 2018). IJIF 12,3 340 Abubakar, Y.S., Ogunbado, A.F. and Saidi, M.A. (2018), “Bitcoin and its legality from Shariah point of view”,SEISENSE Journal of Management, Vol. 1 No. 4, pp. 13-21. Abubakar, N., Rosbi, S. and Uzaki, K. (2017), “Cryptocurrency framework diagnostics from Islamic finance perspective: a new insight of bitcoin system transaction”,International Journal of Management Science and Business Administration, Vol. 4 No. 1, pp. 19-28. Ahmad, I. (2016), “Operational challenges in the Shari’ah governance of Islamic financial institutions (IFIs) in Nigeria: issues and solutions”,Journal of Islamic Economics Banking and Finance, Vol. 12 No. 3, pp. 216-235. Ajouz, M., Abdullah, A. and Kassim, S. (2020), “Developing a Shari’ah-compliant precious metal backed cryptocurrency”,JKAU: Islamic Economics, Vol. 33 No. 1, pp. 3-20. Bitcoin.org (2018), “Frequently asked questions”, available at: https://bitcoin.org/en/faq#general (accessed 6 December 2018). Chapra, M.U. (2008), “Innovation and authenticity in Islamic finance”, paper presented at the Eighth Harvard University Forum on Islamic Finance on Innovation and Authenticity, 19-20 April, Harvard Law School, Islamic Legal Studies Program Islamic Finance Project. Chapra, M.U. (1992), “Islam and the economic challenges”,The Islamic Foundation, Leicester. Chapra, M.U. (1996), “Monetary management in an Islamic economy”,Islamic Economic Studies, Vol. 4 No. 1, pp. 1-35. Choudhury, M.A. and Hussain, M.M. (2005), “A paradigm of Islamic money and banking”,International Journal of Social Economics, Vol. 32 No. 3, pp. 203-217. Eurostat (2019), “EU and main world traders”, available at: https://ec.europa.eu/eurostat/statisticsexplained/index.php/EU_and_main_world_traders (accessed 12 July 2020). Financial Times (2009), “China calls for new reserve currency”, available at: www.ft.com/content/ 7851925a-17a2-11de-8c9d-0000779fd2ac (accessed 19 January 2019). Financial Times (2018), “Definition of M0, M1, M2, M3, M4”, available at: http://lexicon.ft.com/Term? term=m0,-m1,-m2,-m3,-m4 (accessed 27 November 2018). Gayomali, C. (2013), “Want to make money off bitcoin mining? Hint: don’tmine”, available at: https:// theweek.com/articles/465541/want-make-money-bitcoin-mining-hint-dont-mine (accessed 28 November 2018). Greenberg, A. (2011), “Crypto currency”, available at: www.forbes.com/forbes/2011/0509/technologypsilocybin-bitcoins-gavin-andresen-crypto-currency.html#20448248353e (accessed 28 November 2018). Hasbi, A.H. and Mahzam, R. (2018), “Cryptocurrencies: potential for terror financing?”,RSIS Commentaries No. 075, Nanyang Technological University, Singapore. Hassan, Z. (2007), “Ensuring exchange rate stability: is return to gold (dinar) possible?”, available at: https://mpra.ub.uni-muenchen.de/8134/ (accessed 24 November 2018). Hayes, A. (2015), “Cryptocurrency value formation: an empirical analysis leading to a cost of production model for valuing bitcoin”, available at: http://aisel.aisnet.org/mcis2015/4 (accessed 5 May 2019). Hurriyet Daily News (2012), “Money in ottoman empire”, available at: www.hurriyetdailynews.com/ money-in-the-ottoman-empire-30163 (accessed 24 November 2018). IFA (1986), “Shari’ah rules governing paper money”,Resolution #21, Third Session (11-16 October), Islamic Fiqh Academy, Jeddah. IFA (2000), “On inflation and change of currency value”,Resolution #115, Twelfth Session (23-28 September), Islamic Fiqh Academy, Jeddah. IMF (2020), “Monetary and financial statistics: monetary base to broad money ratio”, available at: https://data.imf.org/regular.aspx?key=61545868 (accessed 12 July 2020). Investing.com (2020), “All cryptocurrencies”, available at: www.investing.com/crypto/currencies (accessed 12 July 2020). Fair currency system 341 Islahi, A.A. (2001), “An analytical study of al-Ghazali’s thought on money and interest”, available at: http://mpra.ub.uni-muenchen.de/41438/ (accessed 15 December 2018). Khan, M. and Mirakhor, A. (1994), “Monetary management in an Islamic economy”,Journal of King Abdulaziz University-Islamic Economics, Vol. 6 No. 1, pp. 3-21. Law, L., Sabett, S. and Solinas, J. (1997), “How to make a mint: the cryptography of anonymous electronic cash”,The American University Law Review, Vol. 46, pp. 1131-1162. Li, X. and Wang, C.A. (2017), “The technology and economic determinants of cryptocurrency exchange rates: the case of bitcoin”,Decision Support Systems, Vol. 95, pp. 49-60. McCandless, G.T. and Weber, W.E. (1995), “Some monetary facts”,Federal Reserve Bank of Minneapolis Quarterly Review, Vol. 19 No. 3, pp. 2-11. McLeay, M., Radia, A. and Thomas, R. (2014), “Money creation in the modern economy”,Bank of England Quarterly Bulletin, available at: www.bankofengland.co.uk/publications/Pages/ quarterlybulletin/2014/qb14q1.aspx (accessed 15 August 2020). Meera, A.K.M. (2002), The Islamic Gold Dinar, Pelanduk Publications, Petaling Jaya. Meera, A.K.M. and Larbani, M. (2004), “The gold dinar: the next component in Islamic economics, banking and finance”,Review of Islamic Economics, Vol. 8 No. 1, pp. 5-34. Meera, A.K.M. and Larbani, M. (2006), “Part I: seigniorage of fiat money and the maqasid al-Shari’ah: the unattainableness of the maqasid”,Humanomics, Vol. 22 No. 1, pp. 17-33. Meera, A.K.M. and Larbani, M. (2009), “Ownership effects of fractional reserve banking: an Islamic perspective”,Humanomics, Vol. 25 No. 2, pp. 101-116. Mohamad, A. and Sifat, I.M. (2017), “Gold vis-à-vis money in Islam: the case against dinarist movement”,International Journal of Law and Management, Vol. 59 No. 6, pp. 977-992. Muedini, F. (2018), “The compatibility of cryptocurrencies and Islamic finance”,European Journal of Islamic Finance, Vol. 10, pp. 1-10. Nakamoto, S. (2008), “Bitcoin: a peer-to-peer electronic cash system”, available at: https://bitcoin.org/ bitcoin.pdf (accessed 6 December 2018). Oziev, G. and Yandiev, M. (2018), “Cryptocurrency from Shari’ah perspective”, available at: 10.2139/ ssrn.3101981 (accessed 9 January 2019). Pamuk, S. (2000), A Monetary History of the Ottoman Empire, Cambridge University Press, Cambridge. Rabbani, M.R., Khan, S. and Thalassinos, E.I. (2020), “FinTech, blockchain and Islamic finance: an extensive literature review”,International Journal of Economics and Business Administration, Vol. 8 No. 2, pp. 65-86. Raeesi, R. (2015), “The silk road, bitcoins and the global prohibition regime on the international trade in illicit drugs: can this storm be weathered?”,Glendon Journal of International Studies, Vol. 8 Nos 1/2. RBI (2008), “Mughal coinage”, available at: https://web.archive.org/web/20080516085855/www.rbi.org. in/currency/museum/c-mogul.html (accessed 24 November 2018). Robins, L. (1932), An Essay on the Nature and Significance of Economic Science, Macmillan and Co. Limited, London. Rushe, D. (2014), “Bitcoin to be treated as property instead of currency by IRS”,The Guardian. Santoso, B. (2012), “Money in Islam: the Siyasah Shar‘iyyah’perspective and implementation strategy”, Tazkia Islamic Finance and Business Review, Vol. 7 No. 2, pp. 200-233. SBP (2018), “Financial statements analysis of financial sector”, available at: www.sbp.org.pk/ departments/stats/FSA-2014-18.pdf (accessed 13 July 2019). SBP (2018a), “Financial statements analysis of companies (non-financial) listed on Karachi stock exchange 2013-18”, available at: www.sbp.org.pk/departments/stats/FSA(Non).pdf (accessed 13 July 2020). IJIF 12,3 342 Scott, B. (2016), “How can cryptocurrency and blockchain technology play a role in building social and solidarity finance?”, Working Paper 2016-1, United Nations’Research Institute for Social Development. Searchtruth.com (2018), “Search in Qur’an”, available at: www.searchtruth.com/search.php (accessed 1 December 2018). Selim, M. and Hassan, M.K. (2019), “Interest-free monetary policy and its impact on inflation and unemployment rates”,ISRA International Journal of Islamic Finance, Vol. 11 No. 1, pp. 46-61. Shahar, W., Hassin, W. and Zan, U. (2018), “Shariah audit for Islamic financial institutions (IFI’s): issues and challenges”,Reports on Economics and Finance, Vol. 4 No. 4, pp. 151-158. Shorrocks, A. Davies, J. and Lluberas, R. (2018), “Credit Suisse global wealth report 2018”, available at: http://publications.credit-suisse.com/index.cfm/publikationen-shop/research-institute/globalwealth-report-2018-en/ (accessed 1 December 2018). Siswantoro, D., Handika, R. and Mita, A.F. (2020), “The requirements of cryptocurrency for money: an Islamic view”,Heliyon, Vol. 6 No. 1, pp. 1-9. Statista (2020), “Number of bitcoins in circulation worldwide from 4th quarter 2012 to 2nd quarter 2020 (in millions)”, available at: www.statista.com/statistics/247280/number-of-bitcoins-incirculation/ (accessed 12 July 2020). Stophel, S.K. (2013), “Bitcoin 101: How to get started with the new trend in virtual currencies”, White Paper, Thomson Reuters. The Guardian (2018), “How Iceland became the miners’paradise”, available at: www.theguardian.com/ world/2018/feb/13/how-iceland-became-the-bitcoin-miners-paradise (accessed 28 November 2018). Werner, R.A. (2014), “Can banks individually create money out of nothing? –The theories and the empirical evidence”,International Review of Financial Analysis, Vol. 36, pp. 1-19. Windiastuti, F.C. and Athief, F.H.N. (2019), “Inacoin cryptocurrency analysis: an Islamic law perspective”,Journal of Islamic Economic Laws, Vol. 2 No. 2, pp. 152-177. World Economic Forum (2016), “A short history of the British pound”, available at: www.weforum.org/ agenda/2016/06/a-short-history-of-the-british-pound/ (accessed 5 June 2019). Xinwei, P. (1993), A Monetary History of China, Western Washington, DC University, Bellingham WA. Yaacob, S.E. (2012), “Superiority of the gold dinar as currency: study based on the history of Islamic civilization”,Islamiyyat, Vol. 34, pp. 119-129. Yu, Q. (1997), “Economic fluctuation, macro control, and monetary policy in the transitional Chinese economy”,Journal of Comparative Economics, Vol. 25 No. 2, pp. 180-195. Zaman, A. (2010), “On islamic economics”,The Express Tribune, available at: https://tribune.com.pk/ story/19985/on-islamic-economics/ (accessed 5 June 2019). Zaman, A. (2015), “Re-Defining Islamic economics”, in Egri, T. and Kizilkaya, N. (Eds), Islamic Economics: Basic Concepts, New Thinking and Future Directions, Cambridge Scholars Publishing, Newcastle Upon Tyne, pp. 58-76. Fair currency system 343 Appendix # Transactions Deposit Reserve Loan Interest paid Interest earned 1 1,000,000.00 150,000.00 850,000.00 30,000.00 51,000.00 2 850,000.00 127,500.00 722,500.00 25,500.00 43,350.00 3 722,500.00 108,375.00 614,125.00 21,675.00 36,847.50 4 614,125.00 92,118.75 522,006.25 18,423.75 31,320.38 5 522,006.25 78,300.94 443,705.31 15,660.19 26,622.32 6 443,705.31 66,555.80 377,149.52 13,311.16 22,628.97 7 377,149.52 56,572.43 320,577.09 11,314.49 19,234.63 8 320,577.09 48,086.56 272,490.53 9,617.31 16,349.43 9 272,490.53 40,873.58 231,616.95 8,174.72 13,897.02 10 231,616.95 34,742.54 196,874.40 6,948.51 11,812.46 11 196,874.40 29,531.16 167,343.24 5,906.23 10,040.59 12 167,343.24 25,101.49 142,241.76 5,020.30 8,534.51 13 142,241.76 21,336.26 120,905.49 4,267.25 7,254.33 14 120,905.49 18,135.82 102,769.67 3,627.16 6,166.18 15 102,769.67 15,415.45 87,354.22 3,083.09 5,241.25 16 87,354.22 13,103.13 74,251.09 2,620.63 4,455.07 17 74,251.09 11,137.66 63,113.42 2,227.53 3,786.81 18 63,113.42 9,467.01 53,646.41 1,893.40 3,218.78 19 53,646.41 8,046.96 45,599.45 1,609.39 2,735.97 20 45,599.45 6,839.92 38,759.53 1,367.98 2,325.57 21 38,759.53 5,813.93 32,945.60 1,162.79 1,976.74 22 32,945.60 4,941.84 28,003.76 988.37 1,680.23 23 28,003.76 4,200.56 23,803.20 840.11 1,428.19 24 23,803.20 3,570.48 20,232.72 714.10 1,213.96 25 20,232.72 3,034.91 17,197.81 606.98 1,031.87 26 17,197.81 2,579.67 14,618.14 515.93 877.09 27 14,618.14 2,192.72 12,425.42 438.54 745.53 28 12,425.42 1,863.81 10,561.60 372.76 633.70 29 10,561.60 1,584.24 8,977.36 316.85 538.64 30 8,977.36 1,346.60 7,630.76 269.32 457.85 31 7,630.76 1,144.61 6,486.15 228.92 389.17 32 6,486.15 972.92 5,513.22 194.58 330.79 33 5,513.22 826.98 4,686.24 165.40 281.17 34 4,686.24 702.94 3,983.30 140.59 239.00 35 3,983.30 597.50 3,385.81 119.50 203.15 36 3,385.81 507.87 2,877.94 101.57 172.68 37 2,877.94 431.69 2,446.25 86.34 146.77 38 2,446.25 366.94 2,079.31 73.39 124.76 39 2,079.31 311.90 1,767.41 62.38 106.04 40 1,767.41 265.11 1,502.30 53.02 90.14 41 1,502.30 225.35 1,276.96 45.07 76.62 42 1,276.96 191.54 1,085.41 38.31 65.12 43 1,085.41 162.81 922.60 32.56 55.36 44 922.60 138.39 784.21 27.68 47.05 45 784.21 117.63 666.58 23.53 39.99 (continued) Table A1. Credit creation process IJIF 12,3 344 About the author Muhammad Hanif, PhD, holds the Noor professorship in Islamic banking and finance at College of Business Administration, Ajman University, United Arab Emirates. He has delivered seminars, conference presentations and conducted training and workshops across the world including the USA, the UK, the UAE, the Netherlands and Pakistan. His articles have been published in multiple international refereed journals. His research areas include international trade, financial markets, asset valuation and Islamic financing. Muhammad Hanif can be contacted at: [email protected] For instructions on how to order reprints of this article, please visit our website: www.emeraldgrouppublishing.com/licensing/reprints.htm Or contact us for further details: [email protected] # Transactions Deposit Reserve Loan Interest paid Interest earned 46 666.58 99.99 566.59 20.00 34.00 47 566.59 84.99 481.60 17.00 28.90 48 481.60 72.24 409.36 14.45 24.56 49 409.36 61.40 347.96 12.28 20.88 50 347.96 52.19 295.76 10.44 17.75 Sum 6,664,695 999,704 5,664,991 199,941 339,899 Capital 566,499 0 33,990 Net interest income 173,949 Return on equity 0.31 Notes: This table presents the credit creation process of the modern fractional reserve banking system. A deposit of 1 million is converted into a loan of above 5 million, assuming a 15% cash reserve ratio and a 10% capital adequacy ratio. Finally, the bank earns a 31% return on equity, which is 6% otherwise (lending interest rate). However, this can happen to this degree only if none withdraws cash Table A1. Fair currency system 345