Fiat Currency Halal?

Are the dollar bills we hold actually halal? What can we do about it?

Assalamualaikum Dear Brother/Sister,

I am sure a lot of us have done research and asked scholars regarding what our shariah has to say about getting mortgages for buying a home through Islamic financing, investing in stocks etc. But have we stepped back to think about how halal our currencies actually are? We earn money in fiat currency, whether we call it Dollar, Euro, Pound Sterling, Yen, Dirham etc. (at least the vast majority of us, I know a small fraction of people are now getting paid in crypto or in gold). I am sure you just asked the question: "If I earn in dollars and spend in dollars without earning/paying interest on it, how does the question of halal or haram come in?"

Its not you, its the system. The banking system is set up such that interest is a major pillar of how money is created. The central banks around the world stimulate economic growth through a "healthy" inflation which is typically controlled by interest rates. Inflation results in your savings loosing value with time and this encourages people to spend their money and not save. This is how velocity, i.e. money movement between people and business, is encouraged. i.e. in times of "healthy" growth, your savings money is always loosing value. For non-muslims, earning interest on the savings offset the loss to a great extent. So if your retirement plan revolves around hitting a certain goal for your savings account without any gold and silver savings, stock market investments, real estate yielding positive cashflows etc., I have some bad news for you. You are at the mercy of the banking system. Good news is that you can still make some adjustments.

At the time of writing this article, the economy is nothing but healthy. The Gross Domestic Product (GDP) growth of many economies around the world are now negative. Many people who have lost their jobs, still haven't been able to find one yet. However, the governments around the world are stimulating the economy by announcing trillions of dollars of stimulus paid to businesses, people who have lost their jobs etc. What this ridiculous amounts of money printing is doing is its devaluing your savings at a much faster rate than you and I can comprehend. This may not get reflected in commodity pricing at one go, there is a lag time. By commodities I mean anything that has intrinsic value and can range from precious metals to food. The other thing this stimulus money is doing is it's increasing the debt of the governments at unprecedented rates. The US national debt is now more than $26 trillion. The US debt/GDP ratio went from 106% in 2019 to 136% in 2020. For perspective, it took about 19 years for the US debt/GDP ratio to grow 30% from what it was in 1990. Meanwhile, it only took a few months in 2020, this is unsustainable levels of increase in debt.

US Federal Debt by year (Source TradingEconomics.com)

The higher the debt/GDP ratio, the less likely the country is to pay back its debt. Also, now the government is incentivized to debase the currency, as then the value of the debt would go down and thus they can pay back in dollars which are a lot less valued. Now in order to demonstrate that it is not just the United States that is experiencing really high debt/GDP ratios, please see figure below looking at countries around the world. Sudan (304%) and Japan (248%) are currently leading in this unwanted category.

Debt/GDP Ratio by Country (April 2020 - Source International Monetary Fund)

Why should we care? Fiat currency is tied directly to the government debt. In essence owning US Dollar (as an example) is similar to owning stocks in a company which has a very high debt to equity ratio. To give this some perspective, some Islamic scholars consider investing in stocks with debt to equity ratio less than 33% halal (not endorsing any opinion here). But unlike owning stocks, which is an investment decision, living without dealing with owning fiat currency is nearly impossible in today's world. As such, fiat currency becomes halal due to necessity.

Another point that I would like to bring forth is that the money that is deposited in the banks are under their ownership by law which means bail-ins are legal (refer to the article https://www.muslimprepper.com/post/an-incoming-economic-tsunami). The banks then use this money to leverage loans which is of course given out at a certain interest percentage. In essence the money that we have deposited in banks is being used to given out loans and is leveraged at a ratio called leverage ratio. The leverage ratio for major US banks currently sit anywhere between 8 and 12, for the sake of discussion we will say 10. Meaning, if you have $1,000 sitting in a bank, the bank can issue a loan of $10,000 because of presence of this $1,000. Meaning we are enabling the banks to give loans to the tune of 10X of the amount of money that is saved in the bank.

I will wrap up my case by presenting a hadeeth that does not require any commentary beyond what I have already explain above:

Abu Huraira reported: The Messenger of Allah, peace and blessings be upon him, said, “A time will come upon people in which they will consume usury.” It was said, “All of the people?” The Prophet said, “Whoever does not consume it will be affected by its dust.” (Musnad Ahmad 10191)

What can we do about this? We should try to maximize the savings outside fiat currency. From my understanding, the following are options that can be considered for your savings (not meant to be all inclusive), in the order of being more halal to least halal. This is not investment advice, please do your own due diligence before you make any financial decision.

1. Own gold and silver (https://www.muslimprepper.com/post/case-for-gold-and-silver)

2. Own real estate (buying with cash)

3. Own cryptocurrency

4. Investing in halal businesses

5. Own real estate (buying with Islamic financing)

6. Own stocks with zero or very low debt

7. Cash in hand

8. Cash in the bank

The actual order between these will change depending on many factors such as the type of business that is being invested in and how they handle their finances, the investor's financial situation etc. However, in my opinion the worst among the one's listed above is cash in the bank. My advice, is consider reducing your cash positions, especially in the banks to what you absolutely need, close to minimum balance for your day-to-day transactions. Again, this is my opinion. Please do your own research before you decide to go one way or the other. Give lots of sadaqa that can offset any percentages of interest that would creep into your wealth. May Allah help us keep riba out of our wealth and forgive us of our shortcomings.

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Wassalamualaikum

#fiatcurrency #banks