The Role Of Money As A Medium Of Exchange And Price Of Goods Sold According To Islamic Law Of Transactions

Ezry Fahmy Bin Eddy Yusof

The Role of Money as a Medium of Exchange and price of goods sold (thaman al‐mabi’) according to Islamic law of Transactions Ezry Fahmy Bin Eddy Yusof1

Abstract

Money is a commodity or token that everyone will accept in exchange for the things they have to sell. Different societies have different monies. The purpose of money is to facilitate the transfer of value over space and time. In other words, we use it to exchange wealth geographically, and to provide for future payment. Without money, which is in effect an intermediate good used for trading, it would become very difficult to have a division of labor, such as specialization, and everyone’s standard of living would suffer. In this paper we will try to re-evaluate the arguments on the types and functions of money according to the previous and modern literatures wrote by the Muslim scholars. Then the paper continues analyzing various fiqhi opinions about type of money according to Islamic scholars and compares it with the existing monetary framework. Lastly, the paper discusses on the idea of just price according to history Islamic economic thought.

1

Degree in Bachelor of Economics (Honours) from International University Malaysia. Currently pursuing Charted Islamic Finance Profesional (CIFP) program at the International Centre for Education in Islamic Finance (INCEIF).

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1.0

Introduction

The real nature of money is obscured by the vocabulary of finance, which is doublespeak. We use the term "investors" for speculators, whose gambling destabilizes global financial markets. We use the terms "money," "capital," "assets," and "wealth" interchangeably-leaving no simple means to differentiate money from real wealth. Money is a number. Real wealth is in food, fertile land, buildings, or other things that sustain us. Lacking language to see this difference, we accept the speculators' claim to "create wealth," when they expropriate it.

The classical legal scholars do not develop a concise theory of money, thus many question rises about the role of money and its functions in pricing matter especially in Islamic law of transactions. The classical texts highlight three questions: is there a difference between raw metal as a good and struck coins as a medium of exchange? What is the exchange rate between gold and silver? And what is the basis for using conventional (or fiat) money, which has an exchange value that exceeds the intrinsic value?

To answer all above questions modern Muslim scholars of law have draw heavily on the classic opinions discussed in the previous question. However, contemporary Muslim scholars explicitly draw on sources from various schools of law, about the legal status of role of money and it functions in pricing. We will discuss further some of the question rises and analyze it according to some literatures and try to comprehend both the classical and modern Muslim scholars regarding this issue.

2.0

Issues in Type of Money

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2.1

Gold and Silver (Dinar and Dirham)

Primitive peoples used shells, beads, elephant tusks, furs, skins, and livestock and during ancient time they used gold, silver, copper, iron and bronze as a medium of exchange. However, the chronology changes as the time passed by. The Muslims have used the dinar and dirham since the era of Prophet Muhammad (pbuh) and the Khulafa’Ar-Rasyidin. The dinar is specified having weight of 22-carat gold equivalent to 4.25 grams with a parameter of 23 millimetres. The other currency that inherited from the Islamic tradition is the silver Dirham which is specific in weight of silver equivalent to 3 grams (Nik Norzrul et. al., 2003).

We have noticed that the history have shown us the world are changing its medium of exchange and units of account from the barter system until it become monetary system. Throughout the history we could not denied the fascinating facts when the civilization from time to time using gold as their medium of exchange.

2.1.1 Advantages of Gold as Money

There are several factors that the civilizations are using gold and silver as their money, mainly as medium of exchange, it is because several factors that will be explains below. (i)

High density and value-Gold is a mineral that is hard to obtain and desired by all races all over the world. This make gold is high in value. Because of its high density, small quantities of gold have a high value.

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(ii)

Stable and to last in a long term-From the chemistry view, gold is a metal that seldom react with another element. It is inactive and because of that it is mine as gold itself from the soil (not as oxide iron). Gold is also not corroded. It is also indestructible by heat and extreme pressure.

(iii)

Homogenous and divisible to smaller part-This characteristic is important to able the valuation of gold from small to large according to its weight. If the gold is cut to two, it has the same contains. One part is not better than the other part. This characteristic makes the division is able to delicate parts. Gold from this part of the world is same as gold that mined from the other part of the world.

(iv)

Keep able-Gold is an ideal value keeper. It can be kept for future use even though it is a time consuming. It will not be obsolete like fiat money.

(v)

Portable -Gold is portable so it can be a currency at all places. Even it is deem to be practical in terms of bullion or coins. Some misconception that gold is heavy and not portable is wrong since the gold and silver has been use for centuries as medium of exchange. It can be in form of coins or bullion.

(vi)

Cannot easily been created and indestructible -Fiat money derive a lot of socioeconomic problems because of it’s easy to create and easy to destroy. Inflation will arise if it’s created and problem like economic slump, unemployment, will arise if it’s destroyed. But gold can’t be created and can’t be destroyed. It makes gold is suitable as currency. The intrinsic value is very desired by everyone.

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Therefore it is obviously that the gold is the most stable currency the world has ever seen. Being rare, beautiful and unique, gold is treasured as a store of value for thousands of years, and it is considered as an important and secure asset. Paper currencies may come and go, but gold endures. Despite fluctuating in price, gold is still preferred to currency because it of its real value or what is known as intrinsic value. Last but not least, gold have had value in all civilizations, have survived all financial crises, and can be expected to do the same in the future.

2.2

Fiat Money

Fiat money is money declared by a government to be legal tender. Fiat money achieves value because a government demands it in payment of taxes and says it should be used within the country as a "tender" (offering) to pay all debts. Where fiat money is used as currency, the term fiat currency is used. Fiat money according to Nik Norzrul et. al.(2003) has major differences between dinar and dirham, the differences are as follows: (i) Is based on supply and demand and has no intrinsic value. (ii) Issues and managed by governments by means of the political and economic process. Thus it can be expanded and contracted at will, and as such as it can be inflated to complement the tax income. (iii)The fiat money only recognised within the boundary of the issuing government. It may lose its value totally upon collapse of the government or crisis in the economy. (iv)All forms of paper assets: bonds, shares and even bank deposits, are promise to repay, money borrowed. Their value is dependent upon the investor’s belief that

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the promise that the promises to repay money borrowed. Their value is dependent upon the investor’s belief that the promise will be fulfilled (p.243).

Umar Vandillo (2004), one of the renowned dinarist explains paper money has evolved in nature through history. What we know today as paper money is not what it used to be. This evolution has passed through basically three stages: (i) A promissory note backed by gold or silver. (ii) A process of unilateral devaluation leading to a complete revocation of the contractual agreement. (iii) A piece of paper not backed by any specie, whose legal value is determined by the compulsion of the State Law.

Therefore, in other words, the fiat and even credit forms of money are generally made acceptable through a government decree that all creditors must take the money in settlement of debts; the money is then referred to as legal tender.

3.0

Functions of Money: Reappraisal

It is been accepted all this while from western perspective that money has three main function which are medium of exchange, unit of account and store of value. These are the three functions of money. Medium of exchange is defined when money is used as an intermediary for trade, in order to avoid the inefficiencies of a barter system. Such usage is termed a medium of exchange. While unit of account is a standard numerical unit of measurement of the market value of goods, services, and other transactions. Also known as a "measure" or "standard" of relative worth

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and deferred payment, a unit of account is a necessary prerequisite for the formulation of commercial agreements that involve debt. Lastly store of value is known as an act as a store of value like must be able to be reliably saved, stored, and retrieved — and be predictably useful when it is so retrieved.

All these three functions of money have been discussed thoroughly by economists as well as Muslim scholars. Some of them agreed how Western economists viewed it, while some others disagree that the money is used as mean of store of value for their specific arguments. Some may disagree especially on functions of money as store of value since the use of fiat currency like paper or electronic currency no longer backed by gold in most countries, hence it is not considered by some Western and Islamic economists to be a store of value.

Taqi Usmani (2001) discussed on the nature of money on his judgement against riba by quoting Imam Al-Ghazzali (d.505 A.H.) the renowned jurist and philosopher of the Islamic history that already has discussed the nature of money in an early period when the Western theories of money were non-existent. He says:

“The creation of dirhams and dinars (money) is one of the blessings of Allah…. They are stones having no intrinsic usufruct or utility, but all human beings need them, because everybody needs a large number of commodities for his eating, wearing etc, and often he does not have what he needs and does have what he needs not. Therefore, the transactions of exchange are inevitable. But there must be a measure on the basis of which price can be determined, because the exchanged commodities are neither of the same type, nor of the same measure which can determine how much quantity of one

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commodity is a just price for another. Therefore, all these commodities need a mediator to judge their exact value…. Allah Almighty has, therefore, created dirhams and dinars (money) as judges and mediators between all commodities so that all objects of wealth are measured through them… and their being the measure of the value of all commodities is based on the fact that they are not an objective in themselves. Had they been an objective in themselves, one could have a specific purpose for keeping them which might have given them more importance according to his intention while the one who had no such purpose would have not given them such importance and thus the whole system would have been disturbed. That is why Allah has created them, so that they may be circulated between hands and act as a fair judge between different commodities and work as a medium to acquire other things…. So, the one who owns them is as he owns everything, unlike the one who owns a cloth, because he owns only a cloth, therefore, if he needs food, the owner of the food may not be interested in exchanging his food for cloth, because he may need an animal for example. Therefore, there was needed a thing which in its appearance is nothing, but in its essence is everything. The thing which has no particular form may have different forms in relation to other things like a mirror which has no color, but it reflects every color. The same is the case of money. It is not an objective in itself, but it is an instrument to lead to all objectives…So, the one who is using money in a manner contrary to its basic purpose is, in fact, disregarding the blessings of Allah. Consequently, whoever hoards money is doing injustice to it and is defeating their actual purpose. He is like the one who detains a ruler in a prison…And whoever effects the transactions of interest on money is, in fact, discarding the blessing of Allah and is committing injustice, because money is created for some other things, not for itself. So,

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the one who has started trading in money itself has made it an objective contrary to the original wisdom behind its creation, because it is injustice to use money for a purpose other than what it was created for…. If it is allowed for him to trade in money itself, money will become his ultimate goal and will remain detained with him like hoarded money. And imprisoning a ruler or restricting a postman from conveying messages is nothing but injustice.”

This brief, yet comprehensive, analysis of the nature of money, undertaken by Imam AlGhazzali about nine hundred years ago, is admitted to be true by the economists who came centuries after him. That money is only a medium of exchange and a measure of value is universally accepted by almost all the economists of the world. Before Al-Ghazali, Ibn Taimiyyah, a prominent scholar touches on these as well, the two important functions of money -measurement of value and medium of exchange -are especially mentioned by Ibn Taimiyyah in his discussion of the nature and functions of money. According to Ibn Taimiyyah: "Athman (singular of thaman, that is, price or that which is paid as price, money, etcetera) are meant to be measurement of objects of value (mi'yar al-amwal), through which the quantities of objects of value (maqadir al-amwal) are known,..and they are never meant to be consumed"2.

By this statement he clearly means that the essential function of money is to measure the value of goods and to be paid in exchange for different quantities of goods. His disciple, Ibn alQayyim, states the same fact more clearly:

2

Ibn Taimiyyah, (1963). Majmu al-Fatawa. Riyad: Matabiál-Riyad Vol.29, p.472.

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"Money and coins are not meant for themselves but they are meant to be used for acquiring goods (that is, they are a medium of exchange only)"3.

Since Ibn Taimiyyah considers the main function of money to be a medium of exchange, he is against trade in money because it diverts money from doing what it is meant to do. If money must be changed for money, the exchange must be completed simultaneously (taqabud) and without any delay (hulul). In this way a man will be able to use money as a means for obtaining his requirements. If two persons exchanged money for money, with one of them paying cash while the other promises to pay later, then the first person will not be able to use the promised money for transaction till he is actually paid. This means a loss of opportunity. In Ibn Taimiyyah's opinion this is the reason why the Prophet forbade such transactions that clearly stated in the hadith that narrated in numerous sources. Muslim narrated on the authority of ’Abu Sa‘id Al-Khudriy; The Prophet (pbuh) said: “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt; like for like, hand to hand, in equal amounts; and any increase is Riba.”

Taqi Usmani (2001) and Iraj (2009) both agreed that money is only a medium of exchange and a measure of value is universally accepted by almost all the economists of the world, but unfortunately a large number of these economists failed to recognize the logical outcome of this concept.

Iraj (2009) quoted Keynes in his discussion of equivalence between functions of and demand for money saying that “Only in the event of money being used solely for transactions and

3

Ibn Qayyim, (1955), I’lamul Muwaqiin (trans.). Darul Fajr. Vol. 2. p.137.

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never as a store of value, would a different theory come appropriate”(p.65). He furthers the discussion by showing a simple diagram in explaining the courses of store of value. The triangular trap shows below:

Hoarding

Speculative demand for money Store of value

Liquidity Preference Diagram 1. The triangular trap

The diagram above shows how the store of value makes a triangular trap whose equal sides are hoarding, liquidity preference, and speculative demand for money. The string that ties these concepts in a systematic manner is nothing but the rate of interest. Iraj (2009) quoted Professor D. Fisher statement whereby he said “ money is clearly a stock. Money, however, is also an economic good”(p.69). Thus controlling money as store of value is same as hoarding and lead speculation to occur. He then defines speculation as an act of buying and selling stock or a commodity with the hope that the buying price is the lowest and selling price the highest expected. The Arabic word for hoarding is Ihtikar. It means storing or withholding them in expectation of: a. Rise in their prices b. Draw maximum profit out of it

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Islam prohibits the act of hoarding because the Prophet (pbuh) says: “No one hoards but the traitors (i.e. the sinners)”4.The store of value has nothing to do with savings. Interesting statement made by Auckley included by Iraj (2009) to remove any doubt of his arguments in store of value stating that “..there is no necessary connection between saving and hoarding; I can save without hoarding, hoarding without saving, or even save and dishoard, hoard and dissave” (p.78).

By allowing interest to prevail in the economy, speculators are given the opportunity to hunt the most profitable chances. However, the gains are enjoyed by a few but the losses are borne by the rest of society. The clear intention of speculators in both buying and selling “commodities” is not to hold and consume them but to make profit through the exchange of money for money. This is summarize then that the interest will lead to the occurrence of speculation, then lead to unemployment and bubble that direct to disaster.

4.0

Should Money be in Gold and Silver?

The discussion on whether should money should be in gold and silver is grouped into several types of views among the scholars.  Those scholars of the idea to return back the existing money to gold and silver according to shari’ah.  Those who implicitly accepted the existing monetary system based on fiat money provided it is backed by gold.

Referring to the first views of some modern scholars such as Umar Ibrahim Vadillo, Imran

4

Hadith Narrated in Sunan Abu Da’ud, hadith no. 2990.

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Hussain, Nik Mahani, and Ahamed Kameel Mydin Meera and so forth, they propose to create a gold dinar which can have specific value in the currencies of different Islamic countries. All the Islamic countries must have a share in the international Islamic dinar as a trade currency and as national reserves. The dinar must be in gold and not paper. How practical this will have to be dealt with later when the volume of trade becomes big (Umar, 2004; Nuradli Ridzwan et al. 2004;Ahamed Kameel, 2004; Nik Mahani, 2009).

Effectively the use of the Islamic dinar will create an Islamic trading bloc. Such a trading bloc will be a powerful voice in International trading regimes and the shaping of the new financial architecture. In the beginning the Muslims used gold and silver by weight and the dinar and dirhams that they used were made by the Persians. As what Allah says in the Holy Quran:Alluring unto man is the enjoyment of worldly desires through women, and children, and heaped-up treasures of gold and silver, and horses of high mark, and cattle, and lands. All this may be enjoyed in the life of this world - but the most beauteous of all goals is with God.5

The economic culture in Islam is based on Dinar and Dirham.The usage of word Dinar and Dirham also stated in the Holy Quran when Allah mentions: And amongst the People of the Book there are those who, if you were to entrust them with a treasure (qintar), he would return it to you. And amongst them is he who, if you were to entrust him with a dinar would not return it to you, unless you kept standing over him.6 And they sold him for a paltry price - mere few silver coins: thus low did they 5 6

Surah Ali-imran 3:14 Surah Ali-Imran 3:75

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value him.7

These two verses from the Holy Quran tell us that the usage of Dinar and Dirham is already occurred since thousand years ago, before the era of the Prophet Muhammad (PBUH).Besides the verses from then Holy Quran, there are also plenty of hadith from the Prophet (PBUH) regarding the usage of dinar and dirham as a currency such as: “Dinar that you spend for the sake of Allah,dinar that you spend to free the slave,dinar that you give to the poor people,and dinar that you spend for your family.the biggest reward (in the sight of Allah) is dinar that you spend for (fulfill the needs and increase the life potential) of your family”8

The evidence from the Holy Quran and the Hadith above clearly stated that the monetary system that being used throughout the human civilization, since the previous Prophet until the time of the last Prophet of all,Prophet Muhammad (PBUH),is in Dinar and Dirham.

Moreover, this system was being practiced throughout the rule of Khulafa' ar-Rasyidin until the end of the Khilafah Uthmaniyyah which is on 1924 Masihi. The first dated coins that can be assigned to the Muslims are copies of silver dirhams of the Sassanian Yezdigird III, struck during the Khalifate of Uthman, radiy'allahu anhu. These coins differ from the original ones in that an Arabic inscription is found in the obverse margins, normally reading "in the Name of Allah".

Since then the writing in Arabic of the Name of Allah and parts of Qur'an on the coins became a custom in all mintings made by Muslims. In the year 75 (695 CE) the Khalifah 7 8

Surah Yusuf 12:20 Hadith Narrated by Imam Muslim in Sahih Muslim,volume 5,page 160.

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Abdalmalik ordered Al-Hajjaj to mint the first dirhams, thus he established officially the standard of Umar Ibn al-Khattab. In the next year he ordered the dirhams to be minted in all the regions of the Dar al-Islam. He ordered that the coins be stamped with the sentence: "Allah is Unique, Allah is Eternal". He ordered the removal of human figures and animals from the coins and that they be replaced with letters (www.islamicmint.com, 2006).

As what stated in Muqaddimah of Ibn Khaldun by Ibn Khaldun when explaining about the measurement of the Dinar and Dirham,he wrote:“The Revelation undertook to mention them and attached many judgements to them, for example zakat, marriage, and hudud, etc., therefore within the Revelation they have to have a reality and specific measure for assessment of zakat, etc. upon which its judgements may be based rather than on the non-shari'i other coins. Know that there is consensus [ijma] since the beginning of Islam and the age of the Companions and the Followers that the dirham of the shari'ah is that of which ten weigh seven mithqals weight of the dinar of gold... The weight of a mithqal of gold is seventy-two grains of barley, so that the dirham which is seven-tenths of it is fifty and two-fifths grains. All these measurements are firmly established by consensus.”9

The urge of using gold dinar is not only among the Muslim but also from the Non-Muslim. In addition there are many Non-Muslim economists that wanted the medium of exchange is made from the gold or silver because of their understanding of the stability and so forth. Some of them argue that the major reason why they are some people did not want to use gold and silver as

9

Muqaddimah of Ibn Khaldun or the Prolegomena in Latin, records an early Muslim view of universal history. Many modern thinkers view it as one of the first works of sociology. The Arab historian Ibn Khaldun wrote the work in 1377 as the preface or first book of his planned world history.

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medium of exchange; it is not because lack of technical expertise but it is because the gold and silver could overtake the nowadays monetary system.

Therefore we should support the effort and attempt of the Muslim economist to bring back the usage of gold and silver as the medium of exchange and units of account so that the economic could be more just. The Malaysia consul at the Organization of the Islamic Conference (OIC) to bring back the usage of the gold and silver is not to raise popularity but it is the matter a fact of responsibilities of bringing back the understanding and realization regarding the usage of dinar and dirham towards the Muslims as an exchange from nowadays monetary system.

Umar Vadillo (2004) argues that Imam Malik said money is “any merchandise commonly accepted as a medium of exchange.” This implies two things: A) Money has to be merchandise. Therefore it could be paper. But fiat money is only for the value of the paper itself, not for what is written on it. Money must be something tangible (‘ayn). Money cannot be a liability of any kind. B) Money must be commonly accepted. Therefore it cannot be imposed. No-one can say it is obligatory on you. No-one can even make the Gold Dinar obligatory on the people. The Gold Dinar and the Silver Dirham become a currency out of free choice, not as the result of decree. Paper money is imposed on people. This obligation is not accepted in Islam for two further reasons: 1. The fraudulent nature of the offer: they oblige you to accept something above its value (its real value is zero). 2. The obligation of the offer: you are obliged to accept it whether you like it or not.

The dinarist concluded in many of their writings a simple statement whereby paper money is

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not valid money in Islamic Law, whether in its present form or in any of the forms in which it has existed in the past. The Shari‘ah money is the Gold Dinar and the Silver Dirham. Any merchandise commonly accepted as a medium of exchange is also accepted as a valid money in Islam.

If we look back in the early opinions of the Islamic jurist, among those who believes that limited the money to be in dinar and dirham are Abu Hanifah, Abu Yusuf, Ibn Nafi’, al-Nadwi, Syaikh ‘Alish or some scholars from Syafiíyyah school of thought like Al-Nawawi,Al-Suyuti and Al-Maqrizi, and Hanbali’s scholars like Mujahid and Nakha‘i. Despite these scholars writing in the early part of Muslim history were exposed to gold and silver as the main forms of money, although some limited amounts of copper based money were in circulation. Some of these scholars did not state directly that only gold and silver can be used as money. Later scholars, who support either view, base their position on their interpretation of certain writings of earlier scholars. Some contemporary scholars hold the same views are Syaikh Ahmad al-Khatib, ,Syaikh Abd Rahman AlSa’di, and Ibn Badran (Muhammad Aslam & Emad, 2006).

However, another group of Islamic scholars those hold the views otherwise (Views that do not limit money to only gold and silver) are Imam Shaybani, Al-Hattab, Al-Wansharisi, Ibn Taimiyyah, Ibn Qayyim, Laith Ibn Sa’ad and many more. Some contemporary scholars hold the same views are Syaikh Yusof Qardhawi, Syaikh Muhammad Taqi’ Usmani, dan Abd Allah Sulayman Al-Mani (Muhammad Aslam & Emad, 2006).

These group counter arguments basically can be summarized as what stated by Muhammad Aslam & Emad (2006) that: “The second group (Views that do not limit money to only gold and silver) does not

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reject gold and silver as money. However, they do not interpret the evidences as limiting money to only gold and silver. Also, based on general principles of legal maxims (qawa‘id fiqhiyyah) such as ‘the lifting of hardship’ and ‘the principle of ibahah’, they are of the opinion that it would not be beneficial to see money limited to only gold and silver. Therefore, gold and silver as money is acceptable but not obligatory. It is possible to accept other forms of money”(p.29).

The fiqhi opinions on the issue of money in Islam, especially the use of gold and silver lead to broad discussion that need to be analyze thoroughly in terms of its practicality from the legal framework

and sustainability towards the current monetary system. The fact that Islamic

scholarship has divergent views on money and the monetary system must be seen as strength, not a weakness. What it indicates is that Islamic scholarship is dynamic and able to address different situations and circumstances, provided the issue is not something that is fixed or determined directly in the Qur’an and/or Sunnah.

5.0

Malaysia’s current monetary legal framework

Malaysia Currency (Ringgit) Act 1975 ("MCRA") the currency used a medium of exchange in Malaysia is known as ringgit and sen. Section 2 of the MCRA amended the Central Bank of Malaysia Act 1958 ("CBMA") to the following effects:

1. The unit currency in the Federation shall be in the ringgit, which should be divided into one hundred sen.

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2. Upon coming into force of this action, every contrct, sale payment, bill, note, instrument, ad security for money and every transaction, dealing, matter and thing whatsoever realating to money or involving the payment of, or the liability to pay, any money whcihbut for this subsection would have been deemed to be made, executed, entered into, done aand had for, in and realation to Malaysia dollars shall be deemed instead to be made, executed, entered into, done and had for, in and in realtion to "Ringgit".

The CMBA clearly reflects that the Central Bank of Malaysia (Bank Negara Malaysia) is empowered to issue notes and coins in ringgit and sen denominations as been stated in the section 23 of CBMA. It follows by section 24 stated that such notes and coinsto be legal tenders in Malaysia at face value for payment of any amount.(CMBA, 1958). The ringgit is being used worldwide, not only in Malaysia but international, but it is depends on the power of supply and demand especially against Malaysia major trading partners.

The government is responsible for controlling currency expansion and for checking erosion of the value of money, both major causes of economics instability. The state is responsible for controlling currency expansion and for checking erosion of the value of money, both major causes of economics instability. The authority given by the government (in this case the CBM) must, so far as possible, avoid deficit financing and unrestricted monetary expansion, because doing so results in inflation and creates distrust in the currency. The authority (the CBM) should issue coins of just value, and never issue them as a form of business. That is the reason why it is importance for government to understand that money must be regards as a measure of value and a medium of exchange; any measure that upsets these functions of money is hazardous to the economy.

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6.0

The idea of just price in Islamic economic thought

The idea of just price was widely discussed by a renowned scholars namely Taqi Al-Din Ahmad Bin Abdul Halim, or known as Ibn Taimiyyah. Just price in simple terms can be explain as price of good ‘x’, which is paid for similar objects in a given time and place. This is being discussed most in his literatures and book called al-Hisbah. Though the notion of a just or fair price was present in Islamic jurisprudence since the earliest times, Ibn Taimiyyah seems to be the first Islamic scholar to have paid .it special attention.

According to Abulhasan and Aidit (1992), jurists who codified Islamic rules about business transactions, applied to concept in case a defective object is sold, in case of usurpation, forcing a hoarder to sell his goods, overcharging, disposal of the property of a trust, etcetera. Generally, they thought that the just price of something is that price which is paid for similar objects in a given time and place. Therefore, they preferred to call it the price of the equivalent (thaman al-mithl). Price is serious matters and being discuss thoroughly by scholars in these four aspects: 1)

Price is paid when an exchange takes place (buying and selling).

2)

Price involves market prices is determined by the forces of Demand and Supply.

3)

Price is variable and is subject to fluctuations due to changes in Demand and Supply.

4)

Concern on Economic Aspects of just price.

But interesting to note that two terms occurring very frequently in Ibn Taimiyyah's discussion on the issues related to prices: "compensation of the equivalent" (iwad al-mithl) and "price of the equivalent" (thaman al-mithl). Ibn Taimiyyah says: "The price of the equivalent is that rate (si'r) at which people sell their goods and which is commonly accepted as equivalent for it and

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for similar goods at that particular time and place."10

Other passages of al-Hisbah reveal that by the price of the equivalent he means, more precisely, that price which is established by the free play of market forces -of supply and demand. For example, describing a change in market price, he even writes: "If people are dealing their goods in the normal ways (al-wajh al-ma'ruf) without injustice on their part and the price rises either due to shortage of the goods (that is, decrease in supply) or due to increase in population (that is, increase in demand), then it is from Allah (SWT). In such cases, to force the sellers to sell their goods at a particular price is a wrongful pressure (ukrah bi ghair haqq)"11.

Ibn Taimiyyah in his writing distinguishes between two kinds of prices; unjust and prohibited prices and just and desired ones, and he then considers the price of the equivalent as the just price. Thus, the two words, “just” and “equivalent”, are used interchangeably. Thus price of goods sold (thaman al‐mabi’) according to Islamic law of transactions is discuss deeper will not just include the topic of pricing matter, but as well as the profit gained from the pricing value is taken into consideration. Just price is the core concept that needs to be realized by those who have the authority (it is also referring to the role of al-Hisbah institution).

It is reasonable that the price is determine by the demand and the supply of the market, but Islam allowed for the regulator to control the price whenever it is needed to avoid speculation, hoarding, monopoly and so forth. This shows how the Islam realize the imperfection of the market. Ibn Taimiyyah had a clear grasp of how, in a free market, prices are determined by the forces of 10 11

Ibn Taimiyyah, (1343H). Tafsir Surah An-Nur, Cairo:Idarah al-Taba’ah al-Muniriyah, p.103. Ibn Taimiyyah, (1976). al-Hisbah, Cairo:Dar al-Sha’b, p.34.

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demand and supply. He says: "Rise and fall in prices are not always due to an injustice (zulm) by certain individuals. Sometimes, the reason for it is deficiency in production or decline in import of the goods in demand. Thus if desire for it decreases, the price rises. On the other hand, if availability of the good increases and the desire for it decreases, the price comes down. This scarcity or abundance may not be caused by the action of any individuals, it may be due to a cause not involving any injustice, or sometimes, it may have a cause that does involve injustice. It is Almighty God who creates desires in the hearts of people"12.

The issue of fixing the price in the market has been discussed widely by the Muslim scholars. Price control may seem contradicting with the Western idea of laissez-faire, however in Islam consultation for price-fixing in all cases do not favour an authoritarian fixing of prices. The Muslim scholars only allow it after negotiation, discussion and consultation with the people concerned to avoid any self-interest in the decision made. This reflects that the price is not solely based on the Demand and Supply because the fluctuation of prices in the market may lead to speculation, hoarding, monopoly and so forth without proper intervention from the authorities.

Therefore the decision made must be appropriate and based on the current market situation. This is due to disadvantages and dangers of arbitrarily fixed prices which do not enjoy popular support -for example, black markets or grey markets, or surreptitious down-grading of the quality of the goods sold at the fixed price. The same dangers are discussed by modern Muslim economists and scholars. There is no doubt that these dangers can be reduced, even removed, if prices are fixed

12

Ibn Taimiyyah, (1963). Majmu al-Fatawa. Riyad: Matabiál-Riyad Vol.30, p.43.

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by mutual consultation and by creating a sense of moral obligation and dedication to the public interest.

Ibn Taimiyyah also have discussed on price control towards factors of production where he applied the same rule as in the goods market. He says: "If people are in need of the services of artisans and cultivators and they refuse to offer them or create some sort of imperfection in the market, the state should fix their prices. And the purpose of this price control is to protect the employers and employees from exploitation of each other".

Hence, the main objective of the just price and other related ideas brought forward by Ibn Taimiyyah and other scholars was mainly to maintain justice in commutative dealings and other relations among the members of the society. They were also meant to provide guidelines for the authorities to enable them to protect the people from exploitation. And in fulfilling these aims, they would make it easier for the people to meet their moral and financial obligations.

7.0

Conclusion

It is come to the conclusion that the author think that money should be restricted to the role of a medium of exchange rather than a store of value. Some modern scholars suggest preventing banks from creating credit at all since it impedes controlling the amount of money.

As for paper money, it should be assumes the prominent role in economic transactions, a new legal concept has to be developed, which incorporates this new form of money. Even in the

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nineteenth century paper money could still be regarded as a credit for gold reserves with the central bank. However, in the twentieth century this approach is less convincing since it does not reflect reality any more. The full coverage of currency in gold was given up in Britain in 1931 and in the US in 1971.

We should understand that the foundations for money have changed considerably whereby currently, paper money is issued without a real counter value and the social background for trade has changed. New aspects of using money, especially continuous inflation, call for new directions in Islamic legal thought. Islamic legal thinkers come to different conclusions in their attempt to embed paper money into Islamic legal theories.

Moreover, to discriminate among the legally acceptable alternatives for interpreting the role of paper money in an Islamic economy, legal scholars have combined historical developments with practical economic aspects. Since this problem will remain a constant topic among Islamic legal scholars for some time. It is advisable that Islamic legal thinkers and scholars could hand in hand bring on their ideas and solutions towards a healthy market economy.

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References Abulhasan M. Sadeq and Aidit Ghazali (1992). Readings in Islamic Economic Thought. Malaysia:Longman Malaysia Sdn Bhd. Central Bank of Malaysia Act 1958. Malaysia Currency (Ringgit) Act 1975. Meera, A.K.M. (2004), The Theft of Nations. Pelanduk Publications, Subang Jaya, Malaysia. Muhammad Aslam & Emad Rafiq Barakat. (2006). Must Money Be Limited to Only Gold and Silver?:A Survey of Fiqhi Opinions and Some Implications. JKAU: Islamic Economics. 19 (1). p, 21-34. Nik Norzzrul et. al. (2003). Law and Practice of Islamic Banking and Finance. Malaysia:Sweet & Maxwell Asia. Nik Mahani. (2009). Between Islamic Bank and the Gold Dinar-a Compilation of Paper & Articles. Malaysia: Saba Islamic Media Sdn Bhd. Nuradli Ridzwan et al. (2004). The Mechanism of Gold Dinar. Malaysia:A.S Noordeen. Ibn Taimiyyah, (1976). al-Hisbah, Cairo:Dar al-Sha’b. Ibn Taimiyyah, (1963). Majmu al-Fatawa. Riyad: Matabiál-Riyad Vol.30. Ibn Taimiyyah, (1343H). Tafsir Surah An-Nur, Cairo:Idarah al-Taba’ah al-Muniriyah. Ibn Qayyim, (1955), I’lamul Muwaqiin (trans.). Darul Fajr. Vol. 2. Iraj. Toutochian. (2009). Islamic Money & Banking; Integrating Money in Capital Theory. Singapore: John Wiley & Sons (Asia) Pte. Ltd. Islamicmint.com (2006) History dinar and dirham. Retrieved September 13, 2009 at www.islamicmint.com. Taqi Usmani. (2001). The Supream Court of Paksitan:The Text of the Historic Judgement on Riba 23 December 1999. Malaysia: The Other Press.

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Vadillo, U.I. (2002) “The Architecture of the Gold Dinar Economy: An Academic Perspective,” in Proceedings of 2002 International Conference on Stable and Just Global Monetary System, 19-20 August 2002, Kuala Lumpur, Malaysia, pp. 335-360.

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