‘With the rise of colonialism and modern banking, the transition to paper money, detached from gold and silver, introduced vulnerabilities such as inflation.’

By MOGAMAT ALI SALIE

MONEY is an essential tool for trade, facilitating transactions and economic activity.

However, in Islam, money must possess intrinsic value and be based on commodities rather than arbitrary, fiat-based systems. This perspective aligns with the broader Islamic economic principles of justice, fairness and avoiding exploitation (zulm).

Historically, Islamic civilisation has upheld a commodity-based monetary system, using gold (dinar), silver (dirham), and other tangible goods like dates, wheat, barley and salt as mediums of exchange.

Intrinsic value in Islamic Finance

The Islamic concept of intrinsic value refers to the inherent worth of an object, independent of external manipulation, speculation or fiat decree. In contrast to modern fiat currency, which derives its value from government backing rather than an underlying asset, Islam encourages using money with tangible, inherent worth. This principle protects against inflation, wealth erosion and financial instability.

Gold and silver have historically been favoured as money in Islam because they do not decay, have universal acceptance and are limited in supply. The Prophet Muhammad (SAW) specified gold and silver as measures of value in trade, and they were widely used in early Islamic societies.

In addition to gold and silver, other commodities such as dates, wheat, barley and salt were also considered forms of currency, particularly in barter transactions. These items had real utility and were widely accepted in trade. The Prophet (SAW) warned against riba (usury) in these commodities, emphasising their importance as fair measures of exchange.

Historical use of gold and silver in Islam

Throughout Islamic history, the gold dinar and silver dirham served as the foundation of monetary transactions.

The first Islamic coinage was introduced during the Caliphate of Abd al-Malik ibn Marwan (685–705 CE), standardising currency across the Islamic world. These coins were minted with specific weight and purity, ensuring consistency and trust in trade.

Under this system, trade flourished, and economies remained stable. Unlike fiat currencies, which can be inflated at will by governments and central banks, the intrinsic value of gold and silver ensured that wealth retained its purchasing power over time.

However, with the rise of colonialism and modern banking, Islamic monetary principles were gradually replaced by fiat-based financial systems. The transition to paper money, detached from gold and silver, introduced vulnerabilities such as inflation, debt cycles, and economic crises – issues largely absent in traditional Islamic economies.

Gold and silver’s performance over the last 20 years

The last two decades have demonstrated the enduring value of gold and silver, especially in times of economic instability. Below is a comparison of gold and silver prices:

The data shows that gold has surged from $517.60 per ounce in 2005 to over $2,656.35 in 2024. Silver has similarly appreciated, reinforcing the Islamic view that real money should have intrinsic value. During financial crises, gold and silver have acted as safe havens, preserving wealth while fiat currencies suffered devaluation.

Gold’s purchasing power: Feeding a Family in 1950 vs. 2025

A practical way to evaluate the intrinsic value of gold is to compare how much food an ounce of gold could buy in different time periods.

1950:

• Gold was priced at approximately $40 per ounce.
• In South Africa, a family’s monthly food expenses were around £20 (roughly $56 at the time).
• An ounce of gold could easily feed a family for a month.

2025:

• Gold is currently priced at R53,651 per ounce.
• The average food expenditure for a South African family is around R7,000 per month.
• An ounce of gold today could cover food expenses for roughly seven months, proving that gold retains its purchasing power over time.

By contrast, the South African rand, like all fiat currencies, has lost significant value due to inflation. This demonstrates why Islam emphasises money with intrinsic value – such as gold and silver – to prevent wealth erosion and economic injustice.

Intrinsic value in modern Islamic Finance

In contemporary Islamic finance, the principle of intrinsic value remains a fundamental requirement for financial transactions. Islamic financial instruments must be tied to real assets, ensuring that money and investment activity are backed by tangible economic value rather than speculative or interest-based mechanisms.

Asset-backed transactions

Modern Islamic finance prohibits riba (interest) and speculative transactions (gharar), which means that all financial products must be based on real, productive assets. This principle ensures that investments contribute to economic growth rather than wealth concentration through debt accumulation.

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Gold and silver in the modern context

While fiat currency dominates global trade today, gold and silver continue to hold significance in Islamic finance. Many Islamic financial institutions still use gold-backed transactions, and some countries have explored integrating gold into their monetary systems.

Key areas where gold and silver are used in modern Islamic finance include:

• Gold-backed investment funds: Several Shariah-compliant funds invest in gold, offering a hedge against inflation while adhering to Islamic principles.
• Digital gold trading: Platforms now allow for gold ownership in a digital format, enabling transactions while maintaining asset backing.
• Gold-based savings and payment systems: Some initiatives, such as the issuance of gold dinars in select markets, aim to facilitate trade using gold as a medium of exchange.

Although a full-scale reintroduction of gold and silver as currency is not currently the focus of Islamic finance, the continued requirement for intrinsic value in financial transactions ensures that these metals remain relevant in the global Islamic economic system.

• This article was first published in the March 21, 2025 print edition of Muslim Views.