Paper money in Islam
In the name of Allah, the most Beneficent, the most Merciful.
Scholars of the past considered paper currency to be representing gold and silver; hence they did not regard it to be something that had a value in of itself. Paper money was merely thought to be a certificate indicating that its holder owns gold and silver to the value of the note.
When one gave another a paper note, he was not giving any money that had a value in of itself, rather one was merely delivering a certificate that enabled the receiver to recover its amount in gold or silver.
However, most contemporary scholars such as Mufti Taqi Usmani (DB) and others declared that paper currency has now become a medium of transaction in of itself; hence it is considered to be in place of gold and silver.
They state that the promise to pay gold and silver which appears on these paper notes is now meaningless and of no significance. The notes cannot be converted into gold, and they are accepted as money throughout the world. One cannot legally demand the one paying in notes that he must pay in gold or silver.
Paper currency no longer represents gold or silver, because in reality there is no guarantee of gold being on the back of every note. It is considered to be a legal tender and is considered as fulus. (Mufti Muhammad Ibn Adam (DB) www.daruliftaa.com and Mufti Taqi Usmani’s Fiqhi Maqalaat p.13 – p.41 v.1)
In view of the above, currency trading will be permissible as the genus (jins) of both currencies is different. It is stated in Hidayah that when exchanging items of varied nature, it is permitted to have excess on one side. (Vol 3, P105)
However for the transaction to be valid, it would be necessary that the transaction is either completed on a spot basis or at least one party takes possession of the currency at the time of the transaction. Separating with debt on both sides (deferred to a future date) is not permitted.
Only Allah Knows Best
Mohammed Tosir Miah
Darul Ifta Birmingham