Fiat Money and Zakah

Question:

The following came in the book of Funds, in the second paragraph of p. 174 “and these reliable (covered with gold) banknotes consider the covered ratio of them as representative banknotes ……… ….. (and it says at the end of the paragraph) …..if they did not amount to forty dinars, then there is no Zakat in them”

The question is: Is it not possible to view the reliable banknotes in terms of considering the covered part of them as representative banknotes, where Zakat of gold or silver applies to them according to their coverage? While the  percentage which is not covered is considered fiat “mandatory” money, where they fulfill the reason (‘illah) of money and price like the fiat money, and thus they will be covered by the ahadeeth that oblige Zakat in the two currencies of gold and silver?

Answer:

Currency is as follows:

1 – The substance of gold and silver, whose Zakat is clear.

2 – Paper currency that represents all that which is written on it. If it was written on it the word of Islamic dinar, 4.25 gm gold, this paper of “dinar” is treated as if it were a golden dinar, ie a tangible substance. So, this banknote is subject to Zakat according to what is written on it on condition that the banknote can be substituted by gold at any time. This means if you had twenty banknotes of “85” gm of gold, thus reaching the minimum amount (nisaab), then Zakat is taken from them. This is the meaning of the representative banknotes, which means they can be substituted at any time at the State Bank for their full value.

3 – A representative paper money/banknote, but what is written on it is not exchanged for the gold value written on it, but rather for a ratio of it. As an example, dinar is written on it (it is called dinar among people during transactions), but when you take this banknote to the State Bank they give you 2.125 gm gold, ie a half of gold dinar This means the nisaab will be met when you have forty banknotes of them (40 × 2.125 = 85). In this case, it is incorrect to say that this banknote on which dinar is written is divided into two parts: half of it is representative, while the other half is fiat (mandatory). This is incorrect, because it is the same banknote, and it is used in the market dealings with the trading power of the amount of 2.125 gm of gold, and nothing else.

In other words, its trading value is not 2.125 gm of gold + something else!

So, its reality is that it is a banknote whose value is 2.125 gm of gold, and nothing more.

4 – As for the mandatory banknote, it is not exchanged for gold as it is written on it. In other words, whether a dinar or ten dinars was written on it, there is no point in that because it is not exchanged for gold at all. It is incorrect to say you can purchase a quantity of gold with it, so why this is not considered to be a cover, and accordingly the mandatory banknote is a reliable banknote for an amount of gold.

This is not the case, because in order to consider the full representative banknote, or the reliable banknote, which is proportionally representative (ie not fully covered), their value in gold must be known and fixed, and it can also be exchanged in the State Bank, at any time. The absence of these two conditions: “the known golden value and the replacement of this value at any time” excludes it of the representative banknote.

It is clear that the mandatory banknote is not like that, for it has no fixed and known cover which is subject to exchange at the State Bank of gold at the desired time. Rather, it is not more than a banknote subject to exchange for a known ratio since America’s declaration in 1971 of the abolition of exchanging the dollar with gold.

Accordingly, regarding the mandatory banknote it is treated as a currency in the divine provisions because of the reason (‘illah) of being a currency; and Zakat is taken of it after knowing of its value in the market, in gold or silver. If its total purchase value reached twenty dinars of “85 gm gold” it would have reached the nisaab, or if it reached two hundred dirhams “595 gm silver” it would have reached the nisaab. If this amount remained after paying the debt…, and one year has passed, then the Zakat is obliged. I tend in this issue to consider the lower nisaab enough to oblige the Zakat . So, if it reached the nisaab of the silver, which is the lower at these days, its owner would be subject to Zakat.