Series of Answers by the Eminent Scholar Ata bin Khalil Abu al-Rashta, Amir of Hizb ut-Tahrir, to the Questions of the Visitors to his Facebook Page "Fiqhi"
Answer to Question
Zakat on Paper Money
To Muhammad Yusuf
Question:
Assalamu Alaikum Wa Rahmatullah Wa Barakatuh,
Since the six categories mentioned in Riba are fixed nouns (asma' jamidah), and since paper money took the ruling of gold and silver when it was backed by gold and silver, the ruling was clear. Now, paper money has no gold or silver backing; does the ruling remain the same? And likewise regarding the Zakat of wealth?
Please advise us, may Allah reward you with good and grant victory at your hands.
Answer:
Wa Alaikum Assalam Wa Rahmatullah Wa Barakatuh
We have clarified this in the book The Funds (Al-Amwal) – Chapter: Zakat on Paper Money:
[Paper money consists of banknotes issued by the state, which it establishes as its currency and money, through which the prices of purchases and the wages for services are valued. The Zakat on this paper money is the same as the Zakat on gold and silver. The rulings of Zakat apply to it according to its reality, which manifests in three types:
Representative Paper Money (Nuqud Waraqiyyah Na'ibah): These are banknotes issued by a state that follows a metallic currency system. They represent a specific amount of gold or silver, acting as a substitute for them in circulation, and are convertible upon demand. This representative money is considered gold or silver because it can be exchanged for them at any time. Its Zakat is the Zakat of gold and silver. If it represents gold and the amount it represents reaches twenty dinars—i.e., 85 grams—which is the nisab of gold, Zakat becomes obligatory on it when a lunar year (hawl) has passed, and 2.5% (rub' al-ushr) must be paid. If it represents silver and the amount it represents reaches two hundred dirhams—i.e., 595 grams—which is the nisab of silver, Zakat becomes obligatory when a lunar year has passed, and 2.5% must be paid. The evidence for the obligation of Zakat in this is the same previous Hadiths indicating the obligation of Zakat on gold and silver, because it represents and acts as a proxy for gold and silver, and the proxy takes the ruling of the principal.
Trusted Paper Money (Nuqud Waraqiyyah Wathiqah): These are banknotes issued by the state or a trusted bank authorized by the state to issue them. They have a specific backing of gold or silver at a certain percentage, which is less than the nominal value of these papers. This backing is kept by the state or the issuing bank as a guarantee. The issuer pledges to pay its value in gold or silver to the bearer upon demand. Its backing is not full, but a certain percentage of its value—it might be three-quarters, two-thirds, half, or another specific percentage.
These trusted papers are considered representative money (gold or silver) for the portion that is backed, because they can be exchanged for them at any time. Their Zakat is the Zakat of gold and silver. If they are backed by gold and the backing is half of their nominal value, for example, Zakat is obligatory if they reach forty dinars and a lunar year passes. The Zakat would be one dinar of the same type. If they do not reach forty dinars, there is no Zakat on them because they would be less than the nisab.
If they are backed by silver and the backing is half of their nominal value, for example, Zakat is obligatory if they reach four hundred dirhams and a lunar year passes. The Zakat would be ten dirhams of the same type. If they are less than four hundred dirhams, there is no Zakat on them because they would be less than the nisab of silver.
The evidence for the obligation of Zakat in this is the same Hadiths indicating the obligation of Zakat on gold and silver, because they represent and act as a proxy for gold and silver in the amount backed of their nominal value, upon which Zakat became obligatory; and the proxy takes the ruling of the principal.
- Inconvertible/Fiat Paper Money (Nuqud Waraqiyyah Ilzamiyyah): These are banknotes issued by the state by law and put into circulation. The state makes them valid currency to be the price for things and wages for services and benefits. However, they are not convertible into gold or silver, nor are they backed by gold or silver, nor are they guaranteed by a reserve of gold, silver, or backed banknotes. These banknotes only have a legal value.
However, since these fiat papers have been conventionally adopted as money and prices for things, and wages for benefits and services, and through them gold and silver are bought—just as all other goods and properties are bought—then they have realized the qualities of "monetariness" (nuqudiyyah) and "valuableness" (thamaniyyah) that are present in gold and silver minted into dinars and dirhams.
This is because the texts regarding the Zakat of gold and silver are of two types: First, evidences that stipulate Zakat on gold and silver as substance names (asma' jins), i.e., in the physical essence of gold and silver. These are fixed names (asma' jamidah) that do not allow for a legal reason (ta'lil), so no analogy (qiyas) can be made upon them. Therefore, there is no Zakat on other minerals like iron, copper, etc. Abu Hurairah narrated that the Messenger of Allah ﷺ said:
وَمَا مِنْ صَاحِبِ ذَهَب وَلَا فِضَّةٍ، لَا يُؤَدِّي مِنْهَا حَقَّهَا، إِلَّا إِذَا كَانَ يَوْمُ الْقِيَامَةِ، صُفِّحَتْ لَهُ صَفَائِحُ مِنْ نَارٍ...
"...There is no owner of gold or silver who does not pay what is due from them, but that on the Day of Resurrection, plates of fire will be prepared for him..." (Narrated by the Five except at-Tirmidhi). In this Hadith, the terms "gold and silver" appeared, and they are fixed nouns that are not reasoned (la tu'allal).
Second: Evidences that stipulate Zakat on gold and silver as currency (naqd) used by people as prices and wages. From these evidences, a legal reason ('illah) is derived, which is "monetariness" (nuqudiyyah). Thus, fiat paper money is measured against them by analogy because this reason is realized in them, and the rulings of Zakat on currency are applied to them, based on their market value in gold or silver. On the authority of Ali bin Abi Talib, from the Prophet ﷺ who said:
إذَا كَانَتْ لَك مِائَتَا دِرْهَمٍ، وَحَالَ عَلَيْهَا الْحَوْلُ، فَفِيهَا خَمْسَةُ دَرَاهِمَ، وَلَيْسَ عَلَيْك شَيْءٌ - يَعْنِي فِي الذَّهَبِ - حَتَّى يَكُونَ لَك عِشْرُونَ دِينَاراً، فَإِذَا كَانَتْ لَك عِشْرُونَ دِينَاراً، وَحَالَ عَلَيْهَا الْحَوْلُ، فَفِيهَا نِصْفُ دِينَارٍ
"If you have two hundred dirhams and a year passes over them, then five dirhams are due on them. You do not owe anything—meaning in gold—until you have twenty dinars. If you have twenty dinars and a year passes over them, then half a dinar is due on them." (Narrated by Abu Dawood). It was also narrated from Ali that he said: "In every twenty dinars, half a dinar is due, and in every forty dinars, one dinar is due." And from Ali (ra) who said: The Messenger of Allah ﷺ said:
فَهَاتُوا صَدَقَةَ الرِّقَةِ مِنْ كُلِّ أَرْبَعِينَ دِرْهَماً دِرْهَماً، وَلَيْسَ فِي تِسْعِينَ وَمِائَةٍ شَيْءٌ، فَإِذَا بَلَغَتْ مِائَتَيْنِ فَفِيهَا خَمْسَةُ دَرَاهِمَ
"...So give the sadaqah of silver (al-riqqah): one dirham for every forty dirhams. There is nothing due on one hundred and ninety, but if it reaches two hundred, then five dirhams are due." (Narrated by al-Bukhari and Ahmad). Also, Abdur Rahman al-Ansari narrated in the book of the Messenger of Allah ﷺ and the book of Umar regarding Sadaqah:
والورِق لا يؤخذ منه شيء حتى يبلغ مئتي درهم
"...And nothing is taken from silver (al-wariq) until it reaches two hundred dirhams." (Narrated by Abu Ubaid).
All these Hadiths indicated "monetariness" and "valuableness"; because the words al-riqqah (silver currency)—with the context of "in every forty dirhams"—al-wariq (silver currency), the Dinar, and the Dirham, are terms applied to minted and coined gold and silver, i.e., those that are money and prices. Expressing with these terms indicates that monetariness and valuableness are intended in these Hadiths, and to them many Sharia rulings are attached, such as Zakat, blood money (diyat), expiations (kaffarat), the cutting of the hand for theft, and other rulings.
Since fiat paper money has realized this monetariness and valuableness, it is included in the Hadiths regarding the obligation of Zakat on the two currencies, gold and silver. Thus, Zakat is obligatory on it, just as it is obligatory on gold and silver, and it is valued by gold and silver. Whoever possesses an amount of this fiat money that equals the value of twenty gold dinars—i.e., 85 grams of gold—which is the nisab of gold, or possesses an amount equal to the value of 200 silver dirhams—i.e., 595 grams of silver—and a lunar year passes over it, Zakat is obligatory upon him, and he must pay 2.5% of it.
Zakat for gold is paid in gold, representative paper, and trusted paper. Zakat for silver is paid in silver, representative paper, and trusted paper. It is also sufficient to pay Zakat for gold in silver or fiat paper, and for silver in gold or fiat paper; because they are all money and prices, so one suffices for the other, and it is permissible to pay one for the other as the purpose is achieved. The evidences for taking the value instead of the essence of the property upon which Zakat is due have already been mentioned in the chapter on Zakat of crops and fruits.]
As you can see, fiat paper money fulfills the legal reason ('illah) of monetariness and valuableness, and therefore Zakat is obligatory on it if its value reaches the nisab and a lunar year passes over it. This means that a Muslim living in a state that does not adopt gold and silver as its currency as required by Sharia, but instead adopts inconvertible fiat paper money as its currency, must pay Zakat on his paper money if its value reaches the nisab and a lunar year passes, at the same rate that Zakat is paid for gold and silver as currency.
I hope this answer is sufficient. Allah is Most Knowing and Most Wise.
Your brother, Ata bin Khalil Abu al-Rashta
27 Ramadan 1443 AH 28/04/2022 CE
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