How Does Islam Solve the Problem of Inflation?

21 October, 2016
Q Dear scholars, As-Salamu `alaykum. How does Islam deal with the issue of inflation, i.e. currency losing its value with the passage of time? Jazakum Allah khayran.

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.

Dear questioner, we would like to thank you for showing keenness on knowing the teachings of Islam, and we appreciate the great confidence you have in us. We hope our efforts meet your expectations.

As regards your question, Prof. Dr. Monzer Kahf, a prominent economist and counselor states:

In answering your question, let’s consider the following precepts:

1- Interest is not a compensation for inflation; it is not its cause nor its effect, though there are at times when one notices correlation between them in the sense that any increase in one of them may have the same effect on the other, but there is no known causality between them.

2- Interest is a price on time in loans, pure and clear.

3- Inflation is caused either by having surplus means of payments (including mainly quantity of money in a society) or shortage of general supply. In other words, it deals with supply and demand but in a general matter that touches all goods and services in economy. It may occur in a society that deals with usurious transactions, at the same time it may happen in an interest-free society.

Shari`ah does not approve any action on the part of people (rarely, such as withdrawal of metal currency for other industrial uses) or government (very often, printing more money to finance its expenses or internal debt payment) even if such action is deemed a solution to a problem; for any solution, in Islamic economy, must not involve interest. Indexation is suggested but the International Fiqh Academy refused it because it may be taken as a justification for interest. In fact, it’s very often intermingled with interest. Arbitration is suggested by some `Ulama, especially in the end of 12th century of Hijrah. Arbitration can be imposed by courts and certain rules can be set for it. In my opinion, this is the best solution because the effect of inflation on people varies; as some become richer, well-off, and get higher income, others become poorer and get lower income. In loans, and bank deposits, indexation is completely unacceptable, since any indexation in loans is interest.

Allah Almighty knows best.