Answer
Wa `alaykum as-salamu wa rahmatullahi wa barakatuh.
In the Name of Allah, Most Gracious, Most Merciful.
All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.
In this fatwa:
In fact, paper money is neither lying nor interest. It is just a convention people agree on.
In his response to your question, Prof. Dr. Monzer Kahf, Professor of Islamic Finance and Economics at Qatar Faculty of Islamic Studies, states:
Paper money is neither lying nor interest. It is just a convention we agree on because we are cultured and can read and distinguish between a bill written on it 1 and another written on it 10 or 100.
You are thinking of a barter system. In a barter system, you exchange things for each other and they must be equivalent.
By using money, you need to have a medium that facilitates each transaction by splitting it in two; one of sale and the other of buy.
And to do this we only need something that we agree on accepting conventionally, so that the seller can use that medium for his/her buys from other persons.
Should this medium be costly to produce? There is no reason for it to be costly. Rather the cheaper it is the more efficient the economy is.
Let us ask the question: why should we spend human and other resources to produce gold if its only use is to exchange hands as a medium purely?
Can’t we save all these resources to produce other things we consume if we can agree on say selling always on debt without any medium and have someone holding the accounts for all members of the economy, free of charge, so that at the end of the day each one can exchange fairly with each other at no cost?
This is what now paper money as well as in the future electronic money is doing; save resources to produce other goods, thanks God that we invented these mediums of exchange.
Allah Almighty knows best.
Editor’s note: This fatwa is from Ask the Scholar’s archive and was originally published at an earlier date.