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The Council of the Islamic Fiqh Academy, held in its twelfth session, in Riyadh (Kingdom of Saudi Arabia), from 25th Jamādi ath-Thāni – 1st Rajab 1421H (28 September 2000);
Having considered the recommendations, suggestions and final declaration of the Fiqhī and Economic Seminar on Issues of Inflation (in its three sessions of Jeddah, Kuala Lumpur and Manama), and after listening to the discussions of its members, experts and some Muslim Fuqahā on the subject,
Decides the following:
Firstly: Reconfirmation of Resolution No. 42 (4/5) of the Council, which states that:
“In principle debts that have already been created in terms of a certain currency should be repaid in terms of that same currency and not in terms of an equivalent value, because a debt has always to be settled with its exact similar. It is therefore impermissible to link the already existing debts, whatever their source might be, to price level.”
Secondly: It is permissible for the two parties, and as a precautionary measure against an expected inflation, to make the debt in terms of a means other than the currency that will encounter a fall in value. Debt in this case can be made in terms of one of the following:
A) Gold or silver
B) A homogeneous commodity
C) A basket of homogeneous commodities
D) Another more stable currency
E) A basket of currencies
The amount repaid in the above forms should be exactly similar to the original debt (with regard to amount and type of currency), as the borrower should be indebted with no more than what he has received actually.
The above stated forms differ totally from the prohibited arrangement in which the two parties first specify the debt amount in terms of a certain currency, and then agree that repayment should be made in terms of another stable currency or basket of currencies (Indexation). This later arrangement has been strictly prohibited by Resolution No. 75 (6/8 — Fourthly) of the Academy.
Thirdly: It is impermissible in Sharī'ah at the time of concluding the debt contract to link the repayable amount to one of the following:
A) An accounting currency
B) Cost of living index or any other index
C) Gold or silver
D) The price of a certain commodity
E) Growth rate of Gross National Product (GNP)
F) Another currency
G) Interest rate
H) Price of a basket of commodities
Indexation in this way is prohibited because it involves a great deal of Gharar and Jahālah (uncertainty and lack of information), since both parties will not be in a position to know what will be the commitment at the end. Such lack of information violates one of the fundamental conditions of the contract validity. If the indicator used for indexation happens to show an increase, this will lead to discrepancy between the original debt amount and the amount to be repaid i.e. to commitment of usury.
Fourthly: Indexation of Salaries and Rents:
A) Reconfirmation of Resolution No. 75 (6/8) Clause: Firstly, which stipulates permissibility of indexation of salaries according to change in the price level.
B) It is permissible for the contract parties, in case of long period leasing of property, to specify the amount of rent of the first period and then agree in the contract on indexation of the rent for the forthcoming periods according to a certain indicator, provided that the rent amount will become known at the beginning of every period.
Recommendations:
The Academy recommends the following:
1. As the major cause of inflation is the increase in the quantity of money issued by concerned authorities due to various well known reasons, the Council calls on such authorities to spare no effort for eliminating this underling factor which leads to a great deal of harm to the society.
Inflationary financing, whether for the sake of curbing down the budget deficit or funding development programs, should be avoided. At the same time the Council urge upon Muslim societies to abide by the Islamic values in consumption and refrain from extravagance, affluence and profligacy which lead to inflation.
2. Increasing economic cooperation among Muslim countries specially in the field of trade and exerting efforts for substituting industrial imports from Western countries by similar products of Islamic countries. Efforts should also be exerted for strengthening the bargaining and competitive position of Islamic countries.
3. Conducting studies at the level of the Islamic banks in order to determine the effect of inflation on its assets, and propose suitable measures of safeguarding depositors and investors against adverse effects of inflation. Also at the level of Islamic financial institutions there is a need for developing accounting standards that could be used under inflation.
4. Conducting a study on the effect of extensive use of the Islamic instruments of financing and investment on inflation and the Sharī'ah issues involved therein.
5. Studying the feasibility of resorting back to some form of the Gold Standard so as to avoid inflation.
6. In view of the fact that increasing production and the actually utilized productive capacity are two of the main weapons of fighting inflation at the short and medium run, efforts should be made for enhancing the volume and quality of production in Islamic countries.
This could be done through designing plans and measures that aim towards boosting the levels of saving and investment and hence facilitating attainment of sustainable development.
7. The Council calls on the governments of the Islamic countries to put more tight controls on their budgets (including current, development and independent budgets) that draw upon sources of public revenues. Such controls include minimization and rationalization of public expenditures in the light of the directives of the Islamic Sharī'ah. When a dire need arises for evolving means for dealing with a budget deficit, governments of the Islamic countries should resort to the prevailing Islamic financial instruments which rest on partnership, sale and leasing. They should refrain from resorting to usurious borrowing whether from banks and financial institutions or through issuing of borrowing bonds.
8. Adherence to Shari 'ah controls at the time of using instruments of fiscal policy, whether for manipulation of public revenues or public expenditures. This could be done by establishing such policies on the principles of justice, public interest, relief of the poor and just distribution of the tax burden among the members of the society so that each of them takes up the share that conform to his financial ability (measured in terms of both income and wealth).
9. There is a need for using all Sharī 'ah-accepted tools of fiscal and monetary policies as well as methods of moral persuasion, and economic and administrative policies, in order to safeguard Muslim societies against the evils of inflation. Such arrangements should aim towards reducing the inflation rate to the minimum.
10. Making necessary arrangements that guarantee an independent decision of the central bank with regard to maters of monetary management and in relation to the bank's endeavor for achieving stability and fighting inflation. Moreover arrangements should be made for facilitating continuous cooperation between the central bank and the economic and financial authorities, so as to achieve the objectives of economic development, economic and monetary stability and elimination of unemployment.
11. Conducting careful studies on government enterprises with the aim of assessing their economic feasibility and considering the possibility of subjecting them to privatization in the light of the teachings of the Islamic Sharī’ah. Such arrangements are supposed to improve productivity of the privatized enterprises, reduce the budget burden and hence mitigate the adverse effects of inflation.
12. The Council urges upon individual Muslims and Muslim governments to adhere to the rules of the Islamic Sharī'ah and abide by its economic, educational, moral and social principles.
And Allāh knows best.
