The following is an interview organised by the Islamic Council of Europe (ICE) with Shaykh Dr Sajid Umar, one of its Standing Shariah Committee members. He was interviewed by Usman Malik, who is also part of ICE’s Islamic Finance Services panel. This interview is an extended version of ICE’s webinar, embedded below.
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Why does your research focus so much on finance?
USMAN: Māshā’Allāh, you have a specialisation in Comparative Islamic Law and Judiciary, and have completed research in English and Arabic on a range of topics covering several fields, such as Contemporary Medicine from an Islamic Jurisprudence perspective, Quranic Sciences, Theology, Judiciary, and several Fiqh-related subjects. In terms of the financial topics from an Islamic jurisprudence perspective, your Master’s thesis was related to reserve bank functions in managing liquidity and Shariah solutions to replace repurchase and reverse repurchase agreements at the treasury level, and at the PhD level, your dissertation—which is in the process of being published—was dedicated to the topic of Financial Risk Management with a focus on the ISDA and IIFM standardised agreements from an Islamic perspective. In addition to this, other subjects you have completed on the subject of Finance include: Riba – a system of debt creation at the expense of wealth creation; Bay’ alWafaa’, its operational framework and Ruling; Bay’ alEenah, its Technical reality and Ruling; Secured Interest Bearing Loans; Reciprocal Lending (Both Qardh & Wadee’ah based); Tawarruk and Reverse Tawarruk; Investment Agreements via Proxies (Agency or Power of Attorney); A Sale with a Promise to sell-back based on the Market Price; A study of the Reserve Bank of Sudan’s Central Bank Liquidity management scheme; Profit Rate Swaps and the protection of financial positions of Islamic Banks at the Treasury Level; Mudharabah Standards for Muslim Minorities; and last year you completed a study of the UK offering of Student Loans.
How come so much of your research is on financial topics? It is to the extent that many consider you have a PhD in Islamic Finance as opposed to Comparative Islamic Law and Judiciary.
SH SAJID: Bismillāh, as always we begin in the name of Allah. We praise Him and seek from Him praises and blessings upon the final Messenger ﷺ. From the outset I would like to thank the Finance Advisory and Consultancy Division at ICE for running this webinar and hosting me, and thank everyone in attendance for affording me their time this evening.
I ask Allah Almighty to purify our intentions and make this gathering for His sake alone, and ask Allah to make us a gathering that hears a good word and then follows it.
I also begin by reciting: ‘Alḥamdulillāh awwalan wa ākhiran’, and ‘Alḥamdulillāh bi niʿmatihi tatimm al- ṣāliḥāt’. We praise Allah both at the beginning and continue praising Him till the end. Likewise, we praise Allah, for it is with His blessings good deeds are completed.
In response to your questions, I would say there are 3 reasons for this:
- Firstly, my vision, which entails a world of ignited communities that benefit humanity. To achieve this goal, ribā has to be fought, and non-ribā alternatives to help our communities realise their financial potential have to be sought.
- Secondly, as part of my three-year training as a judge in the Higher Institute of Judiciary, you are obliged to review the fiqh aspects pertaining to the most common issues with disputants. In our era, the bulk of issues relate to family, financial, and commercial law.
- Thirdly, and this is an extension of the first reason really, my desire is to write on topics that would actually be read due to their propensity to provide transformative benefit.
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What is the relationship between liquidity management and repurchase agreements?
USMAN: In terms of your research, it was interesting for me that your Master’s Thesis was on the topic of Liquidity Management, and on your website it states that it was written in connection to repurchase agreements. I am informed that this research was read by an International Standards Body in Islamic Finance, who then based their standards on repurchase agreements from an Islamic perspective on your research māshā’Allāh. So I see how your reasoning and vision came into fruition there. However, the question I always had was: what is the relationship between liquidity management and repurchase agreements?
SH SAJID: Bārakallāhu fīkum. The relationship is at the monetary policy level, which at an executive level is executed by the reserve banks. At a policy level, Repos or Repurchase Agreements are a liquidity management tool used by reserve banks internationally to manage liquidity at the commercial banks’ sector. This is done to ensure that an equilibrium is achieved with regards to buying power. As you are aware, if commercial banks have too much liquidity and then opt to lend it out, this means that an excess of money will sit in the hands of the public. Ultimately, this means that the notion of buying power goes up. When buying power goes up, prices will ultimately rise as well.
Furthermore, the opposite is likewise true. If the commercial banks have too little liquidity and cannot lend at the required level, then buying power weakens. This in turn forces prices to go down…
So it is principally through repurchase agreements that reserve banks work towards implementing the monetary policy of a country in this area of finance.
Now, in my review of this financial instrument, I concluded that it is a ribā-based instrument and synonymous to an interest-based loan dressed as a transaction from a fiqh perspective. Naturally, this will have consequences for how Muslim countries operate their functions of liquidity management if Repos are used, especially with the presence of Islamic banks; ultimately, my task was to list plausible shariah compliant alternatives.
But there is one more point which relates to this topic that further bolstered a desire to research the topic. I wish to add it, since it is connected to the 2008 financial crisis, which has a relationship to our topic today…
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How would the Shariah have prevented the 2008 financial crisis?
USMAN: Please go ahead, and perhaps also summarise for us how the Shariah would have prevented it.
SH SAJID: In my following of the 2008 crisis I saw – at an investment level – that Repos were a vehicle for cheap financing to be traded in the secondary financial markets. They accordingly became a player, or perhaps even a main vehicle for the extent of the 2008 global financial crisis. This is because that crisis was not primarily at the commercial banking sector, but rather in the securitised banking sector, which was a term coined by Yale economist Gary Gorton. This then was eventually exploited by the commercial sector through workarounds like shadow banking, and with what some called ‘a run on the repo’. This was different from the ‘run on the banks’ which happened a century prior. Thereafter a domino effect of events occurred, and the rest is history.
In any case, the point is that strangely enough for me, a lot of commentators were peddling securitised subprime mortgages to be the cause for the crisis. But hardly anyone spoke about Repos, especially given their role in amplifying the extent of the crisis.
As for the preventative measures within Islam, then they are found in the form of a few rules, such as:
- The prohibition of ribā in both its sale and debt based forms, as stipulated in the Qur’an and many narrations in the Sunnah. These include the hadith of the Final Sermon, in which the Messenger ﷺ abolished debt based ribā. The same ruling is expressed in the hadiths of Ubādah b. al-Ṣāmit, Abū Saʿīd al-Khudrī رضي الله عنهما , and others.
- The prohibition of selling debt in a specific sense; this is a matter of consensus between the scholars.
- Insurance or any form of trade which resembles gambling is barred, as confirmed in the hadith of Abū Hurayrah رضي الله عنه .
- Speculative trading is also proscribed, due to a range of issues listed in the hadith of ʿAbd Allāh b. ʿUmar رضي الله عنه.
- The prohibition of selling that which you do not own, which is customary in short selling. This is where one sells a borrowed security at a higher price, believing that it will fall in price, only to then purchase it again later when it falls in value. Finally, they return it and keep the excess made for oneself.
- Finally, there is a prohibition of making a profit on the sale of an item not guaranteed by the seller. This also falls under the ambit of the hadith of ʿAbd Allāh b. ʿUmar رضي الله عنه and other narrations as well.
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Are cryptocurrencies going to solve our current financial ills?
USMAN: SubānAllāh! Alhamdulillāh for Islam. It is mind boggling how with all the regulation and financial accords at the financial sector and policy level millions of people ended up becoming homeless and jobless and trillions just disappeared.
Based on what you have mentioned, are cryptocurrencies going to solve our current financial ills?
SH SAJID: Whilst block-chain does prevent double spending, in order to fix the current ills much more is needed indeed.
In terms of the last crisis, it was really deregulation which was the catalyst for allowing this oppression to occur. Such is the paradigm of liberal capitalism in its unregulated form; winning at the expense of systemic risk somehow becomes perfectly okay. This is so as long as you are safe when disaster strikes, and you do not have to experience the turbulence of it. It is unfortunately a selfish system, with ribā at its epicentre…
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What is the history of money?
USMAN: Before we get into the fiqh of cryptocurrencies, we would like for you to summarise some important preliminary concepts, to have a better understanding of the topic at hand.
The first of these preliminaries relates to the history of money, especially from the perspective of Islamic thought: how was money considered money historically? Was it always gold and silver?
SH SAJID: From the universal laws of Allah Almighty is that He made us inter-dependent beings, with varied levels of ability, needs, financial standing, and material well-being. This in turn naturally makes us in need of each other, in order for us to achieve our essentials suitably and sustainably. And since mankind by design has been created to survive the terrain of its environment, this idea of inter-dependency is a mercy from Allah upon us.
This reality also naturally makes us closer with one another on a human level despite our differences, because our worldly requirements would be more closely aligned to a degree.
This idea of us being inter-dependent by design has been taught to us by Allah in the Qur’an. For Allah Almighty says:
أَهُمۡ يَقۡسِمُونَ رَحۡمَتَ رَبِّكَۚ نَحۡنُ قَسَمۡنَا بَيۡنَهُم مَّعِيشَتَهُمۡ فِي ٱلۡحَيَوٰةِ ٱلدُّنۡيَاۚ وَرَفَعۡنَا بَعۡضَهُمۡ فَوۡقَ بَعۡضٖ دَرَجَٰتٖ لِّيَتَّخِذَ بَعۡضُهُم بَعۡضٗا سُخۡرِيّٗاۗ وَرَحۡمَتُ رَبِّكَ خَيۡرٞ مِّمَّا يَجۡمَعُونَ
“Do they distribute the mercy of your Lord? It is We who have apportioned among them their livelihood in the life of this world and have raised some of them above others in degrees [of rank] that they may make use of one another for service. But the mercy of your Lord is better than whatever they accumulate.” (al-Qurʼan, 43:32)
Accordingly, we see that before the advent of money, as it came to be over time, a barter system of exchange was used. In such a system, people could just trade back and forth ‘in kind’, because they all had similar possessions and aligned needs due to their circumstances…
….So by way of example, if a person had more berries than required, and a fellow citizen happened to have more chickens, they would make a transaction between these two ‘counter-values’. Ultimately, both would eat what was desired on that day. This was known as the BARTER trade system…
Now, given that our preferred exchange-based practices are naturally linked to our norms, it is important to note that a barter system for trade thrived in its time for two important reasons:
- People were mainly hunters and gatherers, and as a footnote, it is worth noting that this process of hunting and gathering happened in groups. Generally speaking, people had the same food range preferences and thus hunted and gathered similar items. This entailed that people were kept together by the design of their norms, which eventually led to them being more connected as a people.
- Instead of being sedentary and settled, people were predominantly nomadic, which was the norm for hunters and gatherers. As a result, storing possessions would naturally be an unwelcomed logistical burden, as we can imagine…
So people never stored their food, as opposed to what we see with civilizations which came after, due to their circumstances evolving.
Now, with the passage of time and the transformation of society, life naturally evolved further, and accordingly, we find cultivators becoming a prominent part of society and the system.
So now you had 1) hunters and gatherers, and 2) cultivators. This new dynamic naturally instigated changes in two areas:
- The first pertained to transactions and exchange.
- The second related to the social element of society due to cultivation being a more localised and specialised process, as opposed to hunting and gathering.
Accordingly, two resulting scenarios occurred, which were as follows:
- Groups of people naturally spent less time with other groups, as opposed to how things were before cultivators arrived on the scene. For now you had a situation whereby some stayed local and cultivated their gardens, whilst others went out and hunted and gathered…
- For the first time, the problem of excess arrived…how was that so?
This was due to the collective group of cultivators having more vegetables than required, and the collective group of hunters and gatherers having more meat and berries than required.
USMAN: On top of this you can imagine that this experience of excess was further complicated economically by the fact that the harvests from successful cultivations were confined to only a couple of times of the year, whilst meat was available throughout the year.
SH SAJID: Yes, you are right. And due to these issues, an upgrade to the scope of the barter trade system was needed, in the form of someone now needing to widen the scope of their search. This was in order to find other individuals who may be interested in the excess of meat or vegetables available. This resulted in further issues, such as:
- Suitability issues, given that this process was time consuming, and also resource intensive in that it required more energy…
- Practicality issues, as once the people who were in need of our excess were found, we had to make sure that they had a conducive counter-value offering which we required. Obviously, we would not want to exchange our excess for something we would not benefit from, or something that will only create a different logistical burden upon us!
Along with these issues, mankind recognised other niggling concerns with the barter trade system, such as:
- – The inability for these counter-values to be broken down into parts, along with the incapability of easily determining the value of each broken part in light of the exchange…
- – The difficulty of storing the exchanged product, in order to use it when a person wanted to acquire something else in the future.
So due to all of these issues, the evolution of society was required to meet the new needs of mankind. Hence, we see the idea of money being born…
By the way, these complexities have been documented in Islamic literature long before Western literature, or the writings of the 18th century CE Scottish economist Adam Smith, who is known as the father of modern economics. So for instance, we can find this information and treatment of the ideas I have just shared in the eloquent writings of Jaʿfar b. ʿAlī al-Dimashqī, a scholar living in the 6th century AH.
In any case, due to everything we see in terms of societal changes and the presence of need, money was adopted as a means of taking care of exchange requirements. And this happened in different forms:
So we find the commodity money system introduced first, where different forms of selected merchandise – or النقود السلعية – were being used as money…
So as some direct examples, we see those who lived near the seas adopt certain types of shells or fish as money…
Those who were more land based took certain types of animal hides as money.
In central Asia certain types of tea were used as money.
In Japan, rice was considered to be a medium of exchange.
In northern Europe, fur was a major trading good.
Now, as we can see here, commodity money did a better job than the barter system and immediately provided a massive upgrade to events. As this ‘money’ was standardised within society, a variety of different things could be purchased, and thus it became:
- A means of exchange.
- A means through which the pricing of things were understood…
- Over time, commodity money naturally developed for itself an ability to store value. Eventually over time it was considered valuable, and people were comfortable to store it for the sake of using it in the future.
That said, mankind and society continued to evolve, and commodity money developed. But another issue arose as a result; it was jurisdictive in nature…
If I went to another place, my ‘money’ would be worthless. This is just like the case of the Zimbabwean dollar bearer bond notes, which were introduced in 2003 after the Zimbabwean dollar crashed in an unprecedented manner.
The bearer bond note was used for trade within the borders of Zimbabwe, but was totally worthless beyond its borders…
And by the way, I lived through that period between 1994 and 2003 when the Zimbabwean economy collapsed, which lead to the demise of their own currency.
In the early noughties, I opened my own IT business – MicroWhiz– which was the business I had made dormant in 2003, when I first came to Saudi Arabia to study Arabic. During that time, in order to balance the books, I had to store money overnight in the form of merchandise and not cash…why though?
Because the currency was devaluing as we would breath. And with merchandise, I could sell the product the next day by basing its price on stable currencies like the US dollar, and through it hedge any losses.
In any case, coming back to the case of commodity money, society did away with it due to it increasingly being jurisdictive by nature. And the result of this was the birth of the metallic money system, which started in the form of copper and bronze metals. It then evolved into gold and silver forms of money. And then eventually, we find the fals or fulūs being introduced when the price of gold and silver had elevated. This was done to facilitate the purchase of products considered miniscule in value.
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What about the idea of Money from an Islamic Perspective?
USMAN: What about the idea of Money from an Islamic Perspective?
SH SAJID: When he ﷺ became a Prophet and was sent as a Messenger, the people of the region would conduct trade using the Roman gold coin known as the dinār, and the Persian silver coin known as the dirham. And at that time, these metals were used for exchange in accordance with their weight. Some sources highlight that for this period, 7 gold coins were equal to 10 silver coins in terms of value. This exchange rule was based on the amounts of each respected metal in weight that was present in those coins.
And accordingly, the Messenger ﷺ tacitly approved peoples’ trade based on the currency of the time, and things remained like this. This was with the exception of a few framing rules in relation to the exchange of gold and silver, when ribā became prohibited.
In terms of currency use, however, this practice continued until the time of ʿUmar رضي الله عنه. For at his time, he minted a coin upon the style of the Roman dinār, but with a metal other than gold and silver. This was called the fals. Sometimes he wrote on these coins his name, and on others phrases like (Alḥamdulillāh), (Bismillāh), and (Allāh Rabbī). As a footnote, we can see here how societies of old recognised the intrinsic nature of money to meet the needs of mankind, and how through money, ideas and identities can be shared. This is because it was the easiest way to get messages across on a mass scale to all of society because of its function in the lives of people. Today we use media!
But coming back to ʿUmar رضي الله عنه, he introduced the fals, and in addition to this he considered making the leather of camels (camel skin) as a form of money. But he was advised against it, after he did shūrā, as he was told that if he went ahead with this, there was a real fear that camels would become scarce…
Then things remained like this after the introduction of the fals until the caliphate of ʿAbd al-Malik b. Marwān. He was the 5th Umayyad Caliph, and came into power around 65 AH. During his time, he minted an Islamic gold and silver coin for the first time.
USMAN: There is an interesting story which explains his reasoning for doing this. It is said that ʿAbd al-Malik b. Marwān sent a letter to the Roman emperor mentioning the virtues of the Messenger of Allah ﷺ, along with some verses from the Qur’an, including Sūrah al-Ikhlās. This angered the emperor who responded with a letter saying that if these types of messages did not stop he would mint coins with insults against the Messenger of Allah ﷺ on them.
So ʿAbd al-Malik then commanded the Muslims to leave their coins and use the new Islamic ones.
SH SAJID: Yes, Taqī al-Dīn al-Maqrīzī, who is an 8th century Egyptian historian, mentions this story.
Now I might as well highlight this here, and it is related to the wider discussion regarding whether crypto-currencies can be a genuine currency…
…This act by ʿAbd al-Malik was seen from the perspective of Islamic fiqh as a paradigm shifter. This is insofar as we find for the first time a worldview among Islamic scholarship regarding money and its issuance, in the form of it being from the rights of the state! And perhaps we will discuss this more later, as it is connected to the view of the scholars who say crypto-currencies are ḥarām.
So this is the summary of the history of money before the paper money phenomenon, and I think this is a good point in our discussion to summarise things:
So from the beginning of mankind and trade, we see that the idea of money surrounded having something that would be a means towards the achievement of something else, not an end in and of itself…
We see that its birth and evolution was based on what facilitated trade and fostered mankind’s ability to leverage off the strengths of each other in a better and more sustainable way…
And we learn that Allah Almighty left this matter to be formalised by mankind based on what they considered suitable, and as such we do not find a verse or hadith defining for us what money is.
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What are the characteristics of money in Islam?
USMAN: Shaykh, you mentioned that we do not have a verse or hadith about what money is, but we see the scholars of fiqh setting boundaries to understand what constitutes a currency—which you discussed in your recent video on the ruling of cryptocurrencies. Where does this understanding then come from?
SH SAJID: Good question. The fuqahā’ discuss the characteristics of money (وظائف النقود) , and for that matter they also discuss something else too, which is known as the characteristics of wealth (وظائف المال). And I make this distinction, as I have noticed some students of knowledge conflate wealth for money in this discussion and vice versa. Whilst this is appropriate when discussing wealth as a whole, this is not a precise approach from the perspective of Islamic fiqh when discussing money. Nor is it true to the texts of the fuqahā’, as there are subtle distinctions…
USMAN: So we see aspects like al-māliyyah, al-taqawwum and al-thamaniyyah discussed.
SH SAJID: Yes, with them being connected to wealth generally and the third being connected to currencies specifically…
- In terms of the first term, māliyyah refers to an item of need or want which provides a benefit considered permissible in Islam. So this would exclude musical instruments and alcohol, for example. As is clear from this simple explanation, the idea of māliyyah is not specific to money.
- In terms of taqawwum – the second term – it refers to something that can be legally exchanged per Islamic law. This is a term used by the scholars of the Hanafi madhhab predominantly, though its prevailing idea is present in all the fiqh schools of thought. This criterion would exclude a forbidden product being traded, such as musical instruments or alcohol, or a permissible item – like a vehicle – from being traded if it was stolen. Again, this is not something specific to currencies.
- In terms of thamaniyyah – the third term – then this is specific to currencies. We see the fuqahā’ using this terminology in the chapters pertaining to sale-based ribā and the exchange of gold and silver particularly, as they discuss the underlying cause for the rules of sales-based ribā applying to gold and silver.
When one observes the collective discussion of the fuqahā’ regarding thamaniyyah and gold and silver, we find predominantly two characteristics highlighted, and I say predominantly since through observation, some fuqahā’ have listed – and correctly so – other characteristics which advance the idea about what thamaniyyah entails…
In terms of the two predominant characteristics, they are:
- Something which society agrees to be a standard through which the price of other forms of wealth are determined. So for example we say that a car costs x amount of silver coins, while a house is worth x amount of gold coins.
- Something which society agrees would be a means of facilitating exchange, or buying something, on both a specific and mass level. Now, I highlight ‘mass level’ here to exclude what some fuqahā’ have called customary money or النقد العرفي, which would facilitate something being a means of exchange in a specific confined space.
So this second characteristic means that a far greater amount of wealth can be acquired through money. So societies consider it valuable and a means for them to purchase through it a variety of their needs, due to it being widely accepted.
Now from these two characteristics, you can see that money being money, in the minds of the fuqahā’, is not connected to the fact that it purely possesses intrinsic value…
…And that is why when we look at the collective views of the scholars across the madhāhib over the centuries of Islam, we see a far larger group of scholars highlight that gold and silver were considered money. This was not purely because of their weight, but rather due to the fact that societies considered them to be a standard of value and a means of exchange…
Now before we discuss the other characteristics of money, we must also take note of the topic of sales-based ribā discussed by the fuqahā’ in terms of gold and silver and the idea of thamaniyyah.…
Why? Because if gold and silver are money and the rules of ribā apply to them both, is it possible to find other things which the rules of ribā here also apply to, and as such we can also consider those things money as well?
So for example, today we have fiat money in the form of pounds, dollars, dirhams, riyals, etc. We consider all of these things to be money. On what grounds do we do so? And you can see where I am going with this; as soon as we discuss crypto-currencies, the question which will be asked is: are they considered money in Islam?
So when we look at the discussion of the fuqahā’, we find 2 views:
The approach of ghalabah al-thamaniyyah, which is the famous view within the madhhabs of Imam Mālik and Imam al-Shāfiʿī, and a reported view of Imam Aḥmad. I say here reported view, as he has more than one reported opinion on the matter.
So what does this approach entail? It entails that gold and silver can be used for jewellery, armour, and weapons, and even for sealing other metals. However, the main usage of gold and silver, as per the consideration of societies, is to be a means of exchange and a standard of measure (or thamaniyyah). And because of this, ribā is prohibited in gold and silver.
And by the way, gold and silver are often referred to as naqdayn, or the two forms of money, as seen in the chapters of zakāh and ribā in the books of fiqh.
According to the scholars who hold this view, they argue that the reason for why ribā is prohibited in gold and silver (or naqdayn) is due to the fact that they are gold and silver in and of themselves and not for any other reason…
And this line of expressing the underlying cause for why a ruling applies to something else in Islamic theory is known as العلة القاصرة, which refers to an exclusive restrictive reason for something to have a ruling…
To make this clear, I will share another example…Take, the example of wine, for instance.
We know that it is ḥarām. But why is it ḥarām? Is it ḥarām because it is wine, which would entail العلة القاصرة?
Or is it ḥarām because it intoxicates?
If it is the latter – that it intoxicates – and that is considered the underlying causative effect for why wine is ḥarām, then we can likewise extend the ruling of ḥarām to anything else that intoxicates…this is as the ruling will no longer be specific to wine per se, but anything that intoxicates.
So coming back to our discussion on gold and silver, do the rules of ribā apply to it because despite its other uses, the main consideration is that it is money due to it being a standard of measure and a unit of exchange (i.e. thamaniyyah)? If that is the case, the rulings of sales-based ribā can only ever apply to it, as nothing else can play the role of gold and silver, which naturally would mean that nothing else besides gold and silver could be money…
There are a group of scholars who held this view. They say: Yes, only gold and silver can be money…
So what does this mean in terms of the fals which was introduced at the time of ʿUmar?
These scholars were of the view that ribā did not apply to them, as the metals used for the fals were more famous for being used in other forms of wealth. They thus would never reach a level of being a standard through which the prices of other things would be determined, except in items of miniscule value.
So whilst the fals was a means of exchange for items of miniscule value, it did not ascertain the concept of thamaniyyah to the required level. Thus, whilst it was a means of exchange, it cannot be considered money…
Now upon this view – and purely upon it, without any other fiqhi discussions such as al-iṣṭilāḥ, which we can discuss later – what would this view mean in terms of Bitcoin and Altcoins today? They are not money and cannot ever be money.
So here we see a second reason why something can be viewed as impermissible if it is considered to be money…
The first reason was related to the issuance of money being the right of the state! This is something we already discussed, when we spoke about the monetary event at the time of ʿAbd al-Malik b. Marwān.
And this reason of ghalabah al-thamaniyyah would be the second.
Now before we question the suitability of this line of reasoning from within the field of Islamic law, let us not forget that these scholars are not saying that we cannot have other things that can be used as a means of exchange. They are just highlighting that nothing else can circulate as money besides gold and silver.
With that in mind, let us move onto the the second approach, which is the view of muṭlaq al-thamaniyyah…
This view is a minority opinion in the Mālikī madhhab, one of the reported views of Imam Aḥmad, as well as a view supported by specialists in Islamic law like Ibn Taymiyyah and others. It is also a view reported by scholars from the period of the Tābiʿūn , and the view of the majority of the later and contemporary scholars today, not to mention fiqh councils. Accordingly, fiat money has been deemed as money from a fiqhī perspective today!
So what does this approach entail? It entails that anything used on a mass scale as a thaman – that is, a standard of value and a means of exchange – would be considered money. Subsequently, the rules of ribā would apply, even if that thing is well known to have other uses. So as long as society does not batter an eyelid when it is used as a standard of measure and a means of exchange, and through it people’s monetary and wealth aspirations are achieved without any over-riding harm, then it will be considered as money. Thus, the rules of ribā and zakāh would both apply. Based on this view, fals would be considered money. This is just like how fiat money today is considered money from a fiqh perspective at the level of gold and silver, when it was considered money in its day.
Now what about the Ḥanafī madhhab? We did not mention them yet in this discussion! And we must for the sake of completion.
The Ḥanafī madhhab would be placed in this same category we are currently discussing; as such fals will be considered to be money. And the reason for this is that whilst they have a different treatment regarding why the rules of ribā apply to gold and silver, Imam Muḥammad b. al-Ḥasan al-Shaybānī specifically and the Ḥanafī madhhab generally permit the concept of al-iṣṭilāḥ when it comes to money being considered money. This means that if a class of people come together and agree upon something being a measure of value and means of exchange – meaning they confer it the notion of thamaniyyah – then it will be considered money from a fiqhī perspective and the rules of sales-based ribā would apply to it…
And I hope through this presentation both you and the attendees can see the complexity of the minds of the fuqahā’ here and their quest for precision in these discussions. And I also hope you can see today how deep the scholars of today have to go before they can pass their rulings on crypto-currencies, for example, and why having more than one view on the matter is possible. Their rulings do not stem from a void or vacuum.
Now, let us consider the muṭlaq al-thamaniyyah paradigm, which is the second discussion we just had. What would this mean in terms of Bitcoin and Altcoins?
Well, theoretically it would mean that if crypto coins achieve the threshold for thamaniyyah from this perspective of fiqh, then they can be considered to be money. This is because money is not confined to gold and silver…
However, there is an important caveat here. And this is not a disclaimer, but a fact worthy of being mentioned. In a practical sense, a scholar can hold the view of muṭlaq al-thamaniyyah, but also hold the view that the issuance of money is the right of the state, for example. Or they may determine that the harms of a new idea of money outweighs the benefits, and accordingly still rule it to be ḥarām!
Again, we should note from this discussion how substantial our tradition is…
USMAN: You mentioned earlier that aside from money being a standardised measure of value and a means of exchange, there are other characteristics mentioned by the fuqahā.
SH SAJID: Yes, it is true that Imam al-Ghazālī famously mentions for instance the idea of: أن يكون مخزونا للقيم والثروة
This means that money should be something that has a stable value over a long period of time, such that it can be used when needed in the future, like on a rainy day, as they say…
And other scholars have also added another condition: أن يكون معيارا للمدفوعات الآجل
This means that money should be a means towards successfully pricing deferred trade. So for example, if I sell something to someone with an arrangement that they pay you after a year for example, you should be able to price that trade successfully using money.
…Again, all these are based on the observations of the fuqahā’ of how money is used and how the characteristics of money are discerned… and if we look at gold and silver, then we see that it fulfils all these characteristics. Likewise, fiat money today does the same, although not at the same level of efficiency as gold and silver…
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Is there a difference between money and currency?
USMAN: Shaykh, in your Feb 2018 community guidance on bitcoin on your website, you framed it in a way never done by anyone to my knowledge. You concluded that it was a ‘distorted currency’, and just now you spoke about the characteristics of ‘money’. Do you use the terms interchangeably? Or is there a difference between money and a currency?
SH SAJID: Good question, to be honest it was not done intentionally. On a public level the two terms are used interchangeably.
However, from an economics perspective I suppose it would depend on what is actually being referred to. This is because in the past economists would refer to something called “good money” and “bad money”. Upon contemplation, this distinction arose as a reaction to currencies becoming unpegged from gold in 1971 during US President Nixon’s time in power. As economists put it, good money is gold, and bad money is fiat money (currency). This is because gold has intrinsic value.
Also, economists discuss the characteristics of money, and mention that it must be a standard of value and a store of it, a unit of exchange, divisible, durable, and portable. These enumerated factors are quite similar to what the fuqahā’ have discussed and mentioned. This is not strange, as both sides are highlighting characteristics of money based on observation, that is, how mankind developed and used money as an idea and what it sought to achieve…
But the point here is that economists were most likely describing ‘money in action’, and not money as an idea. This is because as a concept it would not need to be durable, portable, or physically divisible. Interestingly, economists have opined that from the viewpoint of their science, money is the store of value, whilst a currency allows that value – which money holds – to become tangibly realised. This is because on the exchange level buying and selling happens, and that is when the currency is exchanged.
Anyway, there was a bit of mental gymnastics there. Without sounding too philosophical, I hope that answers the question.
There is one point though that comes to mind, and it is connected to this discussion of money and currency at a policy level. This is as some policy makers have weighed into the discussion and said that money is something through which the liability of debt becomes dissolved. This means that if I owe you money and pay you back, the liability that was upon me towards you ceases to exist.
So from this perspective, and in accordance with this school of thought, currencies at a policy level would have to be something recognised by the state, which would then place money in the general realm and currencies in the specific realm. Money would ultimately entail currencies recognised by the state, as well as anything that people use as a unit of value and means of exchange, like gold and silver today, or crypto-money if deemed legal. Ultimately, currencies would only entail mediums of exchange recognised by the state.
USMAN: So then we would have to say crypto-money and not cryptocurrency?
SH SAJID: That is a possibility. But like we said, on a public level the terms are used interchangeably. And from a shariah perspective, terminologies are not binding; what matters is the meaning…
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What about blockchain?
USMAN: Shaykh, before we get to the ruling of cryptos, let us move to the 2nd preliminary, and that is block-chain. We always hear about it especially when bitcoin is discussed, and it refers to a digital database containing information (such as records of financial transactions) that can be simultaneously used and shared within a large decentralised, publicly accessible network, and provides benefits in the form of peer to peer transactions, reduced costs, speed, immutability, and so on.
SH SAJID: Yes, Blockchain is not Bitcoin, and a lot of the positives that cryptos can offer are because of the efficiency and ability of blockchain technology.
As an idea, Blockchain was born in the early nineties by Stuart Haber and Dr. Stornetta. It was then brought to life in 2009 by Satoshi Nakamoto, when he successfully mined the first block of Bitcoin, which he called the ‘genesis block’.
USMAN: Have you figured out who ‘Satoshi Nakamoto’ is?
SH SAJID: As for who I lean towards the name representing, I suggest it is possibly a group. For if you read the 2008 Whitepaper written by Satoshi, it has in places the UK standard of English, and in other areas the US standard of English. Of course, this is not conclusive evidence in validating any position.…
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What are the Islamic rulings on bitcoin and altcoins?
USMAN: With the preliminary concepts covered, moving on now to the fiqh of cryptocurrencies, tokens and NFTs, let us start with bitcoin and altcoins. In a recent video you mentioned four views of contemporary Islamic scholarship: (1) Haram; (2) Permissible as a currency; (3) Haram as a means but not as ends; (4) Permissible as an asset but not a currency. Could you take us through these views in more detail?
SH SAJID: Bārakallāhu fīkum. Before we discuss these rulings, it is important to understand what exactly these rulings entail as well…
What I mean by this is the following. Let us say a scholar rules that crypto-coins are allowed. What are they actually saying? Are they saying that short-selling cryptos is allowed? Or are they suggesting that day trading – despite its propensity towards volatility – is allowed? Or are they saying it is something allowed to own, with certain conditions?
In the same breath, regarding the scholars who say it is ḥarām: are they saying the idea is ḥarām? Or are they saying it being used as a currency is ḥarām (for whatever reasoning they have), which could be because they view the matter to be the right of the state, or because it has no legal recourse or regulation? Or it may be because the masses have intentions with it which do not conform to the values of Islamic law. All of these are really valid concerns, and could also make anything we all agree to be permissible in normal circumstances forbidden…
So it is important that these matters are ironed out so that the rulings are not shared by the general public prematurely.
In terms of the different views, then you are correct:
- Some have concluded it to be ḥarām, and this conclusion is due to it being viewed as a currency. And to my knowledge, we have reputable scholarly councils in Palestine, South Africa, and the UK adopting this view. There are also some scholars in the Middle East who share this opinion. In terms of Turkey, their official fatwā body ruled trading with them to be incompatible with the shariah during the time the fatwā was released. It is interesting though how they worded their response.
- Some have concluded that they do not have a view on it per se. Included in this camp are some of my teachers, who are fiqh specialists and have a recognised voice in Islamic Finance internationally. However in terms of trading them, they have ruled short selling and day trading – where the ambiguity is too high – as being forbidden, and this would be the ruling with anything traded in a contradictory manner to the laws of the shariah.
- Some have said it is permissible as a currency. This is if people take it as a currency between themselves through the concept of iṣṭilāḥ – whereby a group unites upon something being a medium of exchange and a standard of value. So upon this view, as long as the crypto-coin achieves the threshold of thamaniyyah intersubjectively, then it can be purchased, sold, and used, and the rules of zakāh and ribā apply….
- Some have said it is forbidden as a currency, but only as a means, and not an ends…and this is because the notion of ḥarām is of 2 categories. The first is that which is ḥarām in and of itself, like alcohol and ribā. The second is that which is ḥarām because of its high propensity to lead to that which is ḥarām in and of itself. The benefit of this distinction is appreciated by students of legal theory, in that the second category of ḥarām can become permissible temporarily during abnormal circumstances. So during abnormal and exceptional circumstances, crypto-currencies can be used as money, and when things return back to normal, they cannot. This view is held by some scholars in the Middle East, and as you can see, it is based on the understanding of cryptos being money.
- Some have said it is permissible, but as an asset, and not a currency. They say this because they are of the view that in this day and age cryptos meet the requirements of māliyyah, which we discussed earlier. This means that it is considered a form of wealth today; if it is not illegal, then it meets the requirements of taqawwum, which we also discussed earlier, and this means that it can be traded. But again, I have no doubt that these scholars are not saying that it can be traded unconditionally. This view is held by some scholars in the Middle East as well.
- And then there is the view that I mentioned in my 2018 guidance on crypto-currency, which can be found on my website. I also have a recent video on the topic, where I have said that it is a distorted currency. In essence, the outcome of this view will be the same as the 5th view, along with many conditions…and the reason why I highlight it in passing is for the sake of precision and because:
- a) The crypto-arena itself separates between cryptos that were issued to act as coins, and other units which were released to be a token representation of an asset or service, for example…
- b) Furthermore, scholars within Islamic law have spoken about the concept of customary money (النقد العرفي), which is different from النقد الرسمي أو العام. And we observe today that over 10,000 companies accept cryptos as a form of payment customarily…
So from this angle it carries the traits of a form of money. This is because none of these companies consider themselves to be engaged in barter trade or offsetting the price of the transaction via the receipt of an asset when they accept crypto as a counter value during a transaction. Rather they consider themselves to have sold something, and having received the payment for it in the form of a crypto…
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Why do you call it a distorted currency?
USMAN: Why do you call it a distorted currency?
SH SAJID: For several reasons, from among them are:
1) Thamaniyyah has not been achieved yet, at least not at the required level for me for these currencies to assume the appropriate characteristics of money from a fiqh perspective.
So, for example, money should be a standard through which the value of other things are determined, like the price of your home and car, not to mention the cost of your school fees, bills, taxes, etc…but do we see trade today occurring in a manner which is based and priced upon crypto-currency as a norm? Not to my knowledge…
Now you could say that over 10,000 companies accept crypto in the form of payments, and I considered this during my deliberation. But in reality what percentage does this make up in terms of the aggregate percentage of companies world-wide?
And then there is another reality which must be considered with regards to these companies listed as firms that trade in crypto-currencies: are they basing the price of their service or product with crypto-currency or actual fiat money? The vast majority price their product in fiat currency and simply take the equivalent in crypto…
-Furthermore, some of these companies advertise that they accept crypto, but they do not mean bitcoin, but rather stable coins, which are a type of crypto that is supposed to be pegged to actual fiat money. These units are supposed to be the crypto representation of an actual dollar, riyal, dirham, or pound. And the idea of a stable coin is diametrically different to the idea of bitcoin and other altcoins like lightcoin, etherium, dogecoin, and so on…this is because they are not just supposed to represent actual fiat money, but also provide the resource efficiency of the blockchain during transactions.
I would like to make a verbal footnote here please. I read something recently regarding stable coins sold on the coin base platform, where users were promised that each stable coin represented an actual dollar. However, this promise ended up not being true, as some of the stable coins were representations of commercial paper and corporate bonds! So here is another reason why we must exercise caution and not to lose balance on this whole crypto discussion; we must not prematurely exercise harshness towards the scholars if they hold the view that these cryptos are impermissible…
– Another point is that regarding the countries which recognise bitcoin (aside from el-Salvador, as I have not looked into the details of the press release today), we must ask: do they recognise this crypto as a currency or a financial instrument which can be taxed? Something being recognised as a financial instrument does not make it a currency, especially from an Islamic perspective. So if we see trends on social media that a country has recognised a form of crypto, for example, and see its price going up, we should be cautious. Before becoming a victim of fear of missing out syndrome (FOMO), do the necessary research and see exactly what is being said!
2) Volatility is another issue. And this is connected to the earlier point regarding thamaniyyah, because from the characteristics of money is that within its environment, the value it represents should not be subject to constant spikes and crashes…For this reason we do not see deferred transactions being priced with crypto-currencies yet, which shows their deficiency in being a means for the preservation of wealth and maintaining the financial positions of transacting parties in an adequate way. And this is an important function of money – not just in the present – but especially today.
3) Currencies cannot be something available to a few people, or at amounts not suitable to take care of the transaction needs of the human race. This was another factor in deeming it to be a distorted currency, and not a currency…
4) In addition to this, I also call it a distorted currency because the notion of money needs to incorporate other fundamental concepts today. As we now live in a global age with different values and systems in domination, having poor regulation with no to little legal recourse regarding what people consider today the base of their livelihood (money) can lead to much harm on a mass scale. Undoubtedly, a faqīh or muftī has to look at matters from all angles, and ensure that the objectives of the shariah with regards to the preservation of wealth and the economy are preserved…
With poor regulation, a problem arises, namely how society can control the problem of excess liquidity. This problem has been compounded with cryptos being released at a dime a dozen now, and should be a major concern if they are to be considered money. At the opening of our webinar we spoke about how dangerous too much buying power can be to the marketplace and the livelihood of society…
And with no legal recourse currently available, much of constitutional law with regards to trade and commutative contracts would need to be reinterpreted or changed. How sustainable is that?
So these ideas collectively are behind the idea of crypto currencies being a distorted currency…
USMAN: What would you say to those who point out that volatility—to varying degrees—exists in fiat currency as well?
SH SAJID: This is something I have contemplated after considering bitcoin to be a distorted currency.
But first, allow me to say that fiat money cannot be the only benchmark for us when looking at innovation in the financial domain. This is because when President Nixon unpegged the dollar from its equivalent in actual gold, that was not ideal either. Even those who consider these cryptos to be forbidden say it was not ideal…
We have to look at this discussion anew and base our ideas regarding it using better benchmarks, like the gold standard, which prevented currencies from being created from nothing and kept them dependent on a source of supply…
However, in answering your question, in terms of unacceptable volatility; then I am talking about it in light of the entire ecosystem. Yes, currencies experience change in price daily, and that is because people trade in it. This is not something supported by the values of the shariah with regards to money quite frankly, as money should never be treated as an asset …Yes, the shariah allows the exchange of currencies due to need, but it does not endorse trading it in this way. And please note that I did not say it is ḥarām in my representation of the shariah on the matter… Again, perhaps we can sit down in the future to discuss forex trading and its legal ruling. The Financial Advisory and Consultancy at ICE has already asked for convening a discussion on pensions, and in shā’ Allāh we can add this topic to the list.
But in terms of this point, yes, fluctuation (or volatility) does happen to the pricing of these currencies. However, we do not see the overall ecosystem being affected due to this on a daily basis. If prices of different forms of wealth change due to currency volatility, then it is rare; alterations may occur yearly, bi-yearly, or even quarterly in abnormal circumstances, such as when Brexit happened and trust was lost in the pound. Thus, prices do change, especially if the wealth being priced is something imported.
The point is that these daily changes in the price of the currency do not remove the currency from the circle of stability, if that makes sense…
And if it does actually for prolonged periods, then that currency loses its credibility as a currency, as we said with the Zimbabwean dollar in the early nineties…
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What is your view on buying cryptocurrencies?
USMAN: You have offered an academic analysis of important parts of the discussion with great insights, but what is your personal view on this matter?
SH SAJID: I answered this question previously and the video is online…
USMAN: Please share the answer for those who did not view that video…
SH SAJID: Okay firstly, as a disclaimer: this view is not the view of ICE, as ICE does not have an official view on the topic. In fact, among my esteemed colleagues on the ICE Scholarly panel are those who disagree with me on this…
In terms of my view, then I say that based on it being a ‘distorted currency’ and not a currency; I do not see it as Islamically prohibited for someone to go ahead and satisfying their purchase needs if the following conditions are strictly adhered to: 1) a person studies the value proposition of a crypto-currency well, has a confident understanding of what it actually is by reading and understanding its white-paper or via any other acceptable means of learning, and then studies diligently how it is purchased and sold appropriately; 2) through their financial acumen sincerely reaches a conclusion that the crypto will entail a beneficial investment in the long term, or be the standard of choice for payments in the future, or present a value proposition which the purchaser considers important to their unique world view or needs, despite any possible value crashes in between; 3) they have excess funds over and above their financial obligations and requirements towards their Lord, themselves, their family, and their community, and finally 4) the purchase is considered legal, and they have no intention of using it for anything illegal (such as money laundering). The permission stands on the condition that the rules of financial transactions from an Islamic perspective are followed in their entirety and the transaction does not fall within the category of isrāf (excess). And Allah knows best.
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What do you think about the public reaction to differing views?
USMAN: JazākAllāhu khayran, Shaykh, that is a very comprehensive answer. I have not seen the ruling being covered like this and I hope the viewers are following and benefitting from this. Let us move onto the view of those who say bitcoin and altcoins are haram to purchase. Perhaps it is the brevity in the explanation of these rulings that has led to much confusion, but this is where the main reservation is with those in the Islamic Finance space, with some actually disagreeing so strongly with this fatwa, sometimes in an unbefitting manner.
SH SAJID: Bārakallāhu fīkum. Firstly, if these comments are being said by the laymen of society regarding their scholars and scholarly councils, then it is really unfortunate, and we ask Allah to correct our affairs. I know we live in a world of opinions and freedom of expression, but with this we also need to realise that our testimonies are recorded and we will be questioned about them on the day of Qiyāmah…
Also, and I do not say this intending to put anyone down, but sadly it must be said: having a certification in Islamic Finance does not permit anyone to sign on behalf of Allah by saying something is ḥalāl or ḥarām.
Saying something is ḥalāl and ḥarām is part of the field of Islamic law, which is built upon a base known as legal theory…
Knowing Islamic banking standards or fiqh principles such as “from the outset everything is permissible until proven otherwise” does not make you a faqīh…And it is well known in the field of fatwā that something can be permissible for one person, yet that same thing will be impermissible for another…
Thus, I caution those in the industry against prematurely assuming the role of the scholars, and using terms such as “in my view this is ḥalāl or compliant from a Shariah perspective”. Instead, you should rather quote a scholar that you have personally discussed the matter with and agree with, and then share all their reservations with the opposing view.
Allah the Almighty says:
وَلَا تَقُولُواْ لِمَا تَصِفُ أَلۡسِنَتُكُمُ ٱلۡكَذِبَ هَٰذَا حَلَٰلٞ وَهَٰذَا حَرَامٞ لِّتَفۡتَرُواْ عَلَى ٱللَّهِ ٱلۡكَذِبَۚ إِنَّ ٱلَّذِينَ يَفۡتَرُونَ عَلَى ٱللَّهِ ٱلۡكَذِبَ لَا يُفۡلِحُونَ
“And do not say about what your tongues assert of untruth, ‘This is lawful and this is unlawful,’ to invent falsehood about Allah. Indeed, those who invent falsehood about Allah will not succeed.” (al-Qurʼān, 16:116)
In fact, in Surah al-Aʿrāf there is a verse through which – based on the explanation of some of the tafsīr scholars of this verse – one can infer that talking about Allah without knowledge is even more severe than shirk. This is because the harms of shirk are specific to you, whilst the harms of your fatwā surpass you, as when you preach misguidance, others follow it.
And like I said, sometimes something can be permissible in one environment, and not in another. This is as there is a difference between the ruling of something in isolation, and its applied ruling…so for example, sometimes leaving a sunnah act is a must if by doing so it will lead to a more harmful outcome. And this is discussed under the chapters of al-ijtihād al-tanẓīrī (abstract and theoretical ijtihād) and al-ijtihād al-taṭbīqī (applied ijtihād) in Islamic legal theory.
Also, before a scholar can pass the ruling of ḥalāl or ḥarām the shariah instructs the scholar to look at the consequences of the ruling once it is pronounced…
So my message to my brothers and sisters is to attach yourself to responsible and knowledgeable Islamic scholarship, and check with them before you buy or earn. This is because Allah will ask you two questions on the Day of Judgement with regards to your wealth: 1) how you earned it, and 2) how you spent it. Taking your Islamic rulings from blog posts by Islamic finance experts or Islamic economists will only create upon you and them regret on the Day of Judgement. And if they are following a scholar, they should directly quote the scholar by name. And I can tell you that at the scholarly level, you will not find them being dismissive of each other on this topic, despite their differences of opinion…
That said, this is not an attempt to belittle the importance of Islamic finance experts and Islamic economists, but a call for better management of the rules of engagement.
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Islamic arguments against cryptocurrencies
USMAN: Thank you for that reminder, Shaykh. I think this concept of Tarbiyah is important especially when we talk about Islamic Finance, as it does have the name ‘Islam’ in it. In terms of the evidences of the scholars who say cryptos are haram, they offer a few justifications, and based on my reading, some are auxiliary evidences or arguments, and some are primary.
In terms of the auxiliary evidences, then we have the following: Cryptocurrencies are currencies and not a form of asset, and currencies are the right of the state.
What are your thoughts?
SH SAJID: …while the second premise may be true, as that is a strong premise from a fiqhī perspective and many of the fuqahā’ highlight this, the first premise may not necessarily be true. And I shared my reasons earlier as to why it is a distorted currency at this stage of its development today and not a currency; and thus if it is not a currency, the ‘right of the state discussion’ would not apply currently. Accordingly, it can be traded as any form of wealth is bought and sold – with the list of conditions shared earlier – if the conditions for it to be considered wealth (the conditions of māliyyah) apply. Again, we discussed the idea of this term earlier.
USMAN: It is also said that the objective of crypto is to go against the system of the central bank, and this will lead to harm on a mass scale.
SH SAJID: This reasoning is respectable, and would be applicable if these currencies were viewed to be purely currencies at this stage of their development, and if they did indeed unsettle the monetary policies which ensure a stable economy. In the absence of this harm though, the scope for discussion from a fiqhī perspective would remain open.
USMAN: Another justification used is that the idea of Thamaniyya has not been realised in cryptocurrencies, so they are forbidden.
SH SAJID: We spoke about this earlier, and in this case it would be forbidden for it to be exchanged and used as a currency. But would this include it being forbidden from being exchanged as a form of wealth as well? If the other conditions of māliyyah apply, and it not being illegal, at the transaction level the rules of exchange are fulfilled. Then from a fiqhī perspective this would not entail a closed case, as there would be further room for discussion…
USMAN: Those who say it is ḥarām mention as a reason that Crypto currencies have no physical real presence.
SH SAJID: Yes, this has been said, and this reasoning is subjective in terms of perspective even from a fiqhī paradigm; today we consider things to have a tangible physical presence in the real sense (or ḥaqīqī, in the Arabic language), and tangible in the constructive sense (or ḥukmī, in the Arabic language)…it is because of this idea of something being tangible in a constructive sense that scholars have extended the concept of wealth to things that are not physically tangible, like intellectual property, rights to claims, and so on…
As we discussed earlier, based on the current stage of the life of these crypto currencies, whilst thamaniyyah may not apply, the idea of it possessing the characteristics of wealth can be argued effectively…
And even from a fiqhī perspective, if we look at the discussion of the fuqahā’ (scholars of fiqh), we see that the majority of them considered a usufruct (right to an amenity) as a form of wealth, even though it is not something physical. Yes, the Ḥanafī madhhab differed with the majority of the scholars on this, in that they said that wealth can only be wealth if it is physical. However, if you look at the discussion of Ibn Nujaym al-Ḥanafī for example, and other later specialists of the madhhab and their treatment of the definition of wealth you will find that whilst they did stipulate wealth as being something physical, they left enough room in their wordings to include something considered to be physical in a constructive sense (ḥukman). Thus, we see the Ḥanafī scholars from Syria, Iraq, Turkey, and the Indian subcontinent permitting the sale of non-tangible items of value today…
Also, we must not forget that upon the view that a currency must be physical, this evidence would apply if it is said that bitcoin and altcoins were actual currencies from a fiqhī perspective.
USMAN: Those who view them as forbidden have also said as part of their reasoning that they are used for money laundering and illegal activity.
SH SAJID: In this case, the ruling of ḥarām would then apply to the transactional activity and not the crypto itself. For it to be applied to the crypto itself, it would need to be proven that the majority intend it based on illegal intentions from a shariah perspective. And accordingly, sadd al-dharā’iʿ, or the idea of ruling something as forbidden as a preventative measure would apply, as per the fiqh processes of the Mālikī and Ḥanbalī madhhabs.
That said, the treatment of sadd al-dharā’iʿ has a different framework of application in the Ḥanafī and Shāfiʿī madhhabs, which would make the discussion of this point more intricate. Perhaps I can complete a writing on this for the Financial Arbitrations Division at ICE in shā’ Allāh.
USMAN: In terms of currencies falling under the jurisdiction of the state, talk us through this briefly – as this seems to be the strongest argument for cryptocurrency being impermissible in the event of it being viewed as a currency.
SH SAJID: If we look at the discussion of the fuqahā’, we see that from a fiqh perspective, the reasoning for this is based on the achievement of maṣlaḥah (communal benefit and success) and prevention of mafsadah (communal harm). In terms of the fiqhī discussions and conclusions of the scholars of fiqh we can say that: a) all the scholars of Islam agree that currencies can be circulated by the state to be used as a standard of a measure and a means of exchange, and b) all the scholars agree that it is forbidden for a currency to be released by other than the state if it leads to the mass harm of consuming the economy and people of that society…
However, they differed with the idea of other than the state circulating currencies, if harmful outcomes are not feared. Their views are as follows:
The first view: there is no issue Islamically for circulating a currency without the permission of the state, on the condition that no harm on the economy or its people occurs. This is the reported view of Imam Abū Ḥanīfah, his student Muhammad b. al-Ḥasan, and Sufyān al-Thawrī.
However, in some other sources, their views have been restricted to the condition of it being minted in accordance with the criterion of the currency minting of the state…
The second view: this is the view of the majority of the scholars, including Imam Abū Yūsuf from the Ḥanafī madhhab. They say that this is not permissible, even if the currency circulates according to the mandates of the currency of the state…they added that a person who does this qualifies to be punished by the state. In fact, some of the Mālikī scholars went as far as saying that being punished by the state also applies to the one who damages the currencies released by the state, even if they are the owners of it.
This fiqhī discussion and perspective is a strong one. It would be applicable if these currencies were to be considered actual currencies, and not just a means of exchange, from a fiqhī perspective.
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Tokens from an Islamic perspective
USMAN: Let us move onto tokens. How would these be treated from an Islamic perspective?
SH SAJID: Okay, I will summarise. With the unit of tokens, there are 3 things to look at: 1) what it represents, 2) how it is bought and sold, and when it is bought and sold, and 3) how it is staked…if the token is staked, in fact even with crypto-currencies, they have to look at the staking mechanism and how the rewards for doing so come to be.
So with tokens, their base ruling would be connected to what they represent. If they represent ḥalāl wealth, then purchasing the token will be permissible, provided all the conditions I shared when purchasing a crypto-currency apply as well…
However, if a token represents something ḥarām, or something not considered wealth or legally tradable, etc. then acquiring it would be ḥarām as well.
In terms of trading them, their ruling would be dependent on the rules of transactions found in Islamic fiqh, which ensure that the prohibitions which render a transaction invalid, such as ribā, ambiguity, oppression, extravagance, etc. do not apply…
If they are staked, which is an umbrella term used to denote the act of pledging your cryptos to a cryptocurrency protocol to earn rewards in exchange, their ruling would be based on the staking operation, and the bases for which any gains are attained and then distributed amongst those who are staking… for example, if you stake it on a platform and then receive a percentage of the overall receivables made from that platform’s functions; that platform operates within the space of spreads, short selling, and derivatives, for example. Accordingly, the receivables would be ḥarām, and the staking process itself also would be forbidden.
Also, as another example, if a token represents actual gold, then the rules of buying and selling gold would apply. And if they represent a right to the purchase of gold, and not the actual gold, then along with the rulings of transactions a fiqh study is required regarding the value proposition of that right. It would be required to determine whether that (right) conforms to something being considered (wealth) from a fiqh perspective, and accordingly an abstract ruling can be applied to the idea. And then a physical ruling will be applied to any actual transaction that takes place based on fatwā rules and regulations.
USMAN: SubhānAllāh. Given how many of these token are coming into existence and the spread of their ideas and operations, it’s important for everyone to have scholar on hand to help them with the affairs of Halal and Haram on these matters. As Allah commands us to ask the people of knowledge before we engage in maters that the Shariah has a view on, I encourage all attendees to engage our ICE Financial Consultancy and Advisory panel, for we have a rich panel of scholars to help you with your requirements inshāAllāh.
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ICOs and ITOs from an Islamic perspective
USMAN: People are asking questions in relation to ICOs and ITOs. How compliant are these operations from an Islamic perspective?
SH SAJID: Initial Coin Offerings (ICOs), also known as Initial Token Offerings (ITOs) are a crowdfunding practice for blockchain projects, where a cryptocurrency or a token is offered to early investors before being listed on the wider marketplace…Now, from the outset I want to highlight that from an industry perspective, these are considered to be high risk investments, so it is fundamental to make sure that you conduct the necessary research around the project before putting your money in. This is especially so if you are going in from the perspective of investing, which is the norm really. I have not come across anyone yet who purely donates in order to find a token see the light of day…
Now, from a fiqh perspective I see two issues with the idea of ICOs and ITOs…
Firstly, are these tokens at this stage a form of wealth? And if so, then on what grounds? This is especially pressing given that at the early stage they do not normally possess a utility both within their ecosystem, as well as outside of their proposed ecosystem…
Secondly, if they do not possess a utility both within their proposed ecosystem, on what grounds are they being priced?
Now with this, we see that the issue of gharar (ambiguity) is naturally prominent, which makes the transaction at this stage closer to being forbidden than permissible…and let us not forget that through observation, we know of cases of people losing a lot of money jumping into these offerings before the actual idea matures…
And I use the term ‘matures’ here deliberately – as in relation to a tweet and LinkedIn message I put out around 6 months ago – regarding how the Messenger ﷺ forbade fruits from being sold before they showed signs of ripening. Then I compared it to the idea of ICOs…
Why did the Messenger ﷺ say and rule so? Because at that stage, the ambiguity is naturally high…and represents a gamble, in the event that the fruits are being purchased in order to be eaten and sold. Of course, if it was bought in as animal feed, then their price could be determined before they ripened, as they would have a purpose at that stage of existence. That would bring the gharar or ambiguity factor down…
And from this, we can derive an important precedent by ruling that the purchase of these tokens at the ICO stage for the sake of investment is impermissible. There may be exceptional circumstances, but those circumstances would need to be presented to me and the scholars for a more specific ruling. And Allah knows best.
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NFTs (Non-Fungible Tokens) from an Islamic perspective
USMAN: What about NFTs, or Non-Fungible Tokens, which represent a unit of data stored on the blockchain, which certifies a digital asset to be unique and therefore not interchangeable?
SH SAJID: To be honest it is a strange world out there, and value is seemingly being created from anything at record speed today…
USMAN: They say it is similar to a patent today and helps create scarcity.
SH SAJID: Well it depends really, because firstly patents are not given to everything and anything, and secondly, NFTs do not necessarily create scarcity. With digital images, for example, reproduction is possible and very easy as well…
From what you have described, I could deduce that NFTs can make the claim towards someone holding the original of something scarce…and that is different to it just making something scarce…
Also, patents have an executive authority governing them in the form of the worldwide patent system, which is based on patent registers and operated by global patent offices. I do not see NFTs providing this level of authentication as patents do…especially with matters related to the digital sphere, and especially with no regulation. I mean: let us assume that the original was duplicated and the duplicate became tokenised so that it could now claim itself to be the original!
I mean, just by looking at it in a cursory manner, the value that I can ascertain is in the form of tracking transactions related to actual patents that have been granted. So if one was to tokenise the actual patent portfolio, then you theoretically may transfer your interest in patents to a third party without having to involve the patent offices. So this would create speed, efficiency, and reduce the costs associated with it…I see value there.
USMAN: So what about tokenising things as NFTs and buying them?
SH SAJID: Similar to our discussion on tokens earlier, this would depend on a list of factors:
- What does the token represent: something ḥalāl or ḥarām?
- Is the right to the original being purchased true?
- Is this right to the claim being purchased considered an acceptable form of wealth from a shariah-based perspective?
- Is the value proposition one which the majority of sensible traders today consider a sensible transaction?
- Is the price acceptable in nature to the value proposition being advertised? Or is the transaction one of extravagance or a gamble?
All these questions need to be answered.
So with images for example, we have to consider what image the token represents…is it permissible to create, like an image of an unanimated object for example, or the image of something which one is allowed to look at from an Islamic perspective? If so, then we would go on and look at the other threshold questions I just mentioned in terms of token purchases and trade, such as value proposition and price, and determining if the transaction is a branch of isrāf and extravagance, which is ḥarām…
So assume, for example, if a .jpeg image normally sells for 10 US dollars on a stock website, but then after it is tokenised all of a sudden a bidding war happens on it and it sells for hundreds or thousands… given that the purchase of this token is not a requirement for one to take care of their living needs, and just represents a mere want, this would fall under isrāf, and would be forbidden from this angle…
If the fuqahā’ allowed a person to perform tayammum (dry ablution) due to water being sold above its normal price, on what grounds are they going to allow something of no important value in your life being bought for prices that the majority of sensible people consider abnormal and unnecessary?
Also, and Allah knows best, but it seems that people are trading in this space not for the patent claim predominantly, but for the chance to invest and make money…and they do this with no investment metrics to base their specific purchase on, but rather on a hunch. Again, I do not want to present a stereotyped opinion, but I am just speaking here from personal observation…
And if this is the case, then this form of trade would be closer to a form of gambling than an investment and thus would be forbidden.
In all cases – like we said with tokens – do not transact until a scholar has studied the proposition at hand from a shariah perspective and gives you the green light.
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Which opinion should we adopt if there are many?
USMAN: This brings us to the end and we have gone almost an hour over our original plan! Before we close: we have many from an industry background with us sharing their appreciation of your treatment of the topic today, and a recurring question is with regards to how to deal with the difference of opinion. If the views in this space are respectable and should not be quickly dismissed, and as you have presented there is so much more to the discussion, which view should a person adopt and follow?
SH SAJID: This is an important question. In matters such as these, the scholars of uṣūl al-fiqh lay a systematic process for the mustatftī – the one who is asking and requires an answer – to follow in the event of there being two Islamic views on a matter.
They say that a person should follow the view of a scholar that is known to be specialised on the subject matter, and thus considered to be more knowledgeable.
In the event of both being at the same level of knowledge, then the one who is considered to be the more pious between the two should be followed in that matter, as greater piety would entail them having a better chance to be guided to what is most correct in that matter in terms of the Islamic ruling.
And finally, in the event of both being considered to have the same level of piety, then the view of the scholar that matches the view of the majority of the scholars on the subject should be followed.
With this diligence, the person seeking knowledge and guidance on a matter would have absolved themselves from the liability that would have been upon them, had they acted based on their desires. And Allah knows best.
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USMAN: JazākAllāhu khayran, Shaykh. Before we end, would you like to share any closing comments?
SH SAJID: Jazāk Allāhu Khayran. In closing, I would just want to remind everyone that Islam is not against technology and innovation in our worldly matters. A scholar calling for restraint on Cryptos does not make them a supporter of fiat currencies and the banking system…These scholars like everyone else also want an upgrade and improvement to the system. But not just any improvement, but rather the right upgrade and improvement.
Also brothers and sisters: five out of the ten who were promised Jannah before they passed away were billionaires in today’s currencies. They did this without entering FOMO-based quick rich scheme opportunities. Rather, they did so by keeping their money in their hands and Allah in their hearts, without belittling stable opportunities which generated a little profit. So do not belittle little profit!
Everything correct said in this webinar is from Allah alone and He is perfect, and any mistakes are from me and Shayṭān, and I seek Allah’s forgiveness.
I love you all for the sake of Allah…
Sheikh Sajid Ahmed Umar initially pursued a first degree in IT. He went on to successfully open an IT business. Alongside his contemporary studies, Sheikh Sajid was a student of a Qur’an academy till the age of 18. Subsequently, he turned his attention towards Islamic Studies. He completed a 3-year University Diploma in Arabic language and Islamic Sciences at Imaam Muhammed bin Saud Islamic University, he later attained a Bachelors degree in Sharī’ah and thereafter a Masters degree in Judiciary (Qadha), with honours, from the Higher Institute for Judiciary Studies (Ma’had al-‘āli li’l-Qa’dhā). He trained as a judge and successfully completed a thesis on the topic of Liquidity Management using the famous Repurchase Agreement (REPO) contract, as well as its rulings and permitted alternatives. He then completed his PhD in the Higher Institute of Judiciary at Al-Imam University, and completed a thesis in relation to Shariah solutions in the area of Financial Risk Management. Sheikh Sajid has played an integral part in Islamic academic development worldwide. He has authored several articles and dissertations in both Arabic and English pertaining to the various Islamic Sciences; lectures at Knowledge International University; is the Director of Islamic Development for Mercy Mission World; lectures at AlKauthar Institute as well as heads the Institute’s Board, among various other commendable endeavours.