Inflation and the Changing Value of Currency
In the Name of Allāh,
the Entirely Merciful, the Especially Merciful
Praise is due to Allāh, Lord of the worlds, may the blessings and peace be upon our master Muḥammad, the last of prophets, on his family, and all his companions.
Resolution No. 115 (9/12) Inflation and the Changing Value of Currency
The Council of the International Islamic Fiqh Academy of the Organization of the Islamic Conference, holding its 12th session in Riyadh, Kingdom of Saudi Arabia, on 25 Jumādā al-Ākhirah – 1 Rajab 1421h (23–28 September 2000),
Having reviewed the final statement, recommendations, and suggestions of the Economic Fiqh Sympoisum on Inflation Issues (in its three sessions at Jeddah, Kuala Lumpur, and Manama),
Having listened to the discussions of the Academy’s members and experts and other scholars,
First: Confirming the Academy resolution no. 42 (4/5), which stated that “The norm in the settlement of debt incurred in a specific currency is that it should be settled in the same (currency), rather than in value terms, for debts must be settled in an identical resource, and fixed debts, whatever their origin, are not permissible to be tied to the level of prices.”
Second: It is permissible for both parties, and as a precautionary measure against an expected inflation, to make the debt in terms of a medium other than the currency that will decline in value. In this case, debt can be contracted by one of the following means:
- Gold or silver
- A homogeneous commodity
- A homogeneous commodities basket
- Another more stable currency
- Currency basket
The amount repaid in the above forms should be exactly similar to the origi- nal debt (concerning the amount and type of currency), as the borrower should be indebted with no more than what he has received actually.
The aformentioned forms differ totally from the prohibited arrangement in which the two parties first specify the debt amount in a certain currency, and then agree that the settlement would be made in another stable currency or
basket of currencies (indexation). This latter arrangement has been strictly pro- hibited by the Academy resolution no. 75 (6/8) pararagraph (4).
Third: It is not permissible in Shariah, at the time of concluding the debt contract, to link the repayable amount to any of the following cases:
- An accounting
- Cost of living index or any other index.
- Gold or
- The price of a specific
- Growth rate of the Gross National Product (GNP).
- The price of a commodities
Indexation in this way is prohibited because it involves a great deal of Gharar and Jahālah (uncertainty and lack of information) since both parties will not be able to know what the commitment will be at the end. This lack of informa- tion violates one of the fundamental conditions for the validity of the contract. If the indicator used for indexation happens to show an increase, this will lead to discrepancy between the original debt amount and the amount to be repaid
i.e. commitment of usury.
Fourth: Indexation of Salaries and Rents
- Confirming the Academy resolution no. 75 (6/8) clause no. 1, which stipulates the permissibility of indexing salaries according to the change in the price rate.
- It is permissible to both contracting parties, in case of long period leasing of property, to specify the amount of rent of the first period and then agree in the contract on indexation of the rent for the forthcoming periods according to a specific indicator, provided that the rent amount becomes known at the beginning of every period.
- Since the main cause of inflation is the increase in the quantity of money issued by the relevant authorities for various well-known reasons, the Academy calls upon these authorities to make every effort to eliminate this underlying factor which causes great harm to society. Inflationary financing, whether to reduce the budget deficit or to finance develop- ment programs, should be At the same time, the Academy urges
Muslim societies to abide by Islamic values in matters of spending and to refrain from extravagance, wealth and profligacy that lead to inflation.
- Increasing economic cooperation among Muslim countries, particularly in trade and exerting efforts to substitute industrial imports from indus- trialized countries with similar products from Muslim countries. Efforts should also be made to strengthen the negotiative and competitive posi- tion of Muslim countries.
- Conducting studies at the level of Islamic banks to determine the effect of inflation on its assets and propose suitable measures for safeguarding depositors and investors against adverse effects of inflation; Also, con- ducting studies, at the level of Islamic financial institutions, to develop accounting standards that could be used during inflation.
- Conducting a study on the extensive use of Islamic financing and in- vestment instruments on inflation and their effect on the Shariah ruling relating to them.
- Study the possibility of returning to some form of linking currency with gold standard in order to avoid inflation.
- Considering that increasing production and the actual utilization of the production capacity are two of the main methods of fighting in- flation in the short and medium term, efforts should be made to im- prove the volume and quality of production in Muslim countries. This could be achieved by devising plans and measures that stimulate savings and investment levels and thus facilitate the attainment of sustainable
- The Council calls upon the governments of Muslim countries to exercise stricter control over their budgets (including current, development and independent budgets) that draw on public revenue sources. These crite- ria include minimizing and rationalizing public expenditures in light of the directives of Shariah. When it is absolutely necessary to find ways to meet the budget deficit, governments of Muslim countries should resort to common Islamic financial instruments based on partnership, sale and They should refrain from usurious borrowing, either from banks and financial institutions or through the issuance of debt bonds.
- Adherence to Shariah criteria on using fiscal policy instruments, whether in the manipulation of revenues or public expenditures. This could be done by establishing such policies on the principles of justice, public interest, helping the poor and distributing the tax burden fairly among
members of society so that each takes the share that corresponds to his or her financial capacity (measured in terms of income and wealth).
- It is necessary to use all the Shariah-accepted tools in fiscal and monetary policies as well as the methods of moral persuasion and economic and administrative policies to protect Muslim societies from the harms of These arrangements should aim towards reducing the rate of inflation to a minimum.
- Make the necessary arrangements to ensure the independence of central banks’ decision-making in monetary management and their commitment to achieving stability and combat against inflation. Moreover, arrange- ments shall be made to facilitate continuous cooperation between the central bank and the economic and financial authorities to achieve eco- nomic development, economic and monetary stability, and the elimina- tion of unemployment.
- Conducting in-depth studies of public enterprises to assess their econom- ic feasibility and to consider the possibility of privatizing them according to the Islamic method. Such arrangements are expected to improve the productivity of privatized enterprises, reduce the budgetary burden and thus mitigate the adverse effects of inflation.
- The Academy urges Muslims and Muslim governments to abide by the rulings of Shariah and respect its economic, educational, moral and social
- Solutions to inflation:
The Academy resolved to postpone the discussion on the proposed solu- tions to inflation to one of its forthcoming sessions.
Indeed, Allāh is the Giver of success.