Gold Financing in Islam

Gold has been an integral part of Islamic finance for centuries, with its use being guided by Shariah principles. The notion of gold as a currency in Islam is rooted in historical precedent, where it was considered a store of value and a medium of exchange. In recent times, gold and silver have continued to play a significant role in Islamic finance, with their use being governed by Shariah standards. In this comprehensive guide, we will explore the relationship between gold and Islamic finance and shed light on the Shariah standards that govern its usage.

shariah standards on gold

The Significance of Gold in Islam:

Gold holds great significance in Islam, both religiously and culturally. Its use as a currency dates back to the time of Prophet Muhammad (PBUH), who himself used gold as a medium of exchange. The Quran also mentions gold as a form of currency in various verses, further solidifying its importance in Islamic finance. In Islamic tradition, gold is considered a symbol of wealth and prosperity, and its acquisition is encouraged for both practical and spiritual reasons. It is seen as a tangible asset that can protect against inflation and market volatility, making it an attractive investment option for followers of Islam.

1. Gold Standard and Money in the Early Islamic Period:

During the past Islamic period, there were neither banks nor any part of enthusiasm for financial movement. The allotment of funds/venture and transformation of speculation into creation and conveyance occurred without the organization of interest. The business sector used to consolidate a wide range of services, including the sale and purchase of goods and services, as well as the provision of funds for initiating economic activity. It may help understand what the is gold standard in Islam, as it is said to be derived from that period.

A. PEER TO PEER FINANCING:

Without financial intermediaries like banks, savers, also known as surplus units, and investors, termed deficit units, interacted directly. This scenario is predominantly recognized as Peer-to-Peer (P2P) finance in contemporary terminology.

B. COMMERCIAL TRANSACTIONS:

The gold standard in Islamic banking may be considered for the deal/buying of various products in the business sector, two Islamic modes were utilized: Murabha (by telling the cost of merchandise), and Musawamah (without demonstrating the cost).

2. Shariah Standards on Gold in Islamic Finance

  1. Islamic finance practitioners follow Shariah standards to ensure financial transactions align with Shariah law principles. These extend to the use of gold in Islamic finance.
  2. As per the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), gold is viewed as a “currency with intrinsic value” and can be a transaction medium.
  3. For the use of gold to be permissible by Shariah, certain conditions must be met:
  4. Gold could drive the development of gold standards in Islamic finance, with new controls enabling Islamic investors to access gold-based products.
  5. The London-based market development body and the AAOIFI are creating a draft standard that could stimulate the $2bn Islamic finance industry.
  6. Previously, customers were mostly limited to investing in bars and coins as the standards in this area were clear.
  7. New standards could change how Islamic countries access gold. A final draft is expected to be published in the coming months, followed by a public consultation period.
  8. It is predicted that the gold standards in Islamic banking and finance could be issued in the final quarter, encouraging adoption and potentially unlocking massive additional demand for gold.

Gold a Viable Means of Providing Financial Support

1. The Ascendancy of Gold Financing in Islamic Finance

The concept of gold financing in Islamic finance has been gaining traction as a viable means of providing financial support to individuals and businesses. As an asset with intrinsic value, gold can be used as collateral for loans, or it can be leased out to generate income. The prohibition of interest is a fundamental tenet in Islamic finance, and this principle is particularly critical when examining the role of gold financing. The operations of Islamic finance revolve around the Profit and Loss Sharing (PLS) system. As per this system, profits earned from gold financing are apportioned between the lender and the borrower according to a previously agreed-upon proportion. Conversely, in the event of a loss, it is the lender who shoulders the burden.

2. Monetary Organization: A Cross-Cultural Comparison

Historically, gold and silver have served as cash across civilizations. Every society needed to establish its financial system, including the foundation of a gold standard, its internal and external trade, and its wealth protection. The monetary organization was similar across nations. It involved:

  • Adopting a financial law defining the unit of account
  • The standard of value.
  • The types of coins in terms of weight and shapes permitted in circulation.

It also entailed organizing mints — their functions, offices, and equipment — to issue the coins.

3. Implementing a Gold Standard in Islamic Banking: A Complex Challenge

While it is challenging to implement a gold standard in Islamic banking, the advantages of Islamic banking and finance suggest that such a move could be beneficial. However, establishing a historical precedent for a gold standard is difficult as no such standard was documented in the past. Mints issued coins for bullion brought to them without any limitation. Their role was purely a conversion of metal into coins, with no influence on the quantity of money in circulation. The quantity of metal to be coined was solely determined by those who owned bullion and wished to convert it into coins. Coins were standardized and minted to be easily identifiable, circulating with perfect confidence in commerce.

gold and Islamic finance

Gold in Islamic Finance: An Asset, Not a Currency

The role of gold in Islamic finance is complex and multifaceted, reflecting numerous Shariah standards and principles. Paramount to approach gold in Islamic finance not as a currency, but as an asset and a basis for mutually beneficial financial transactions. As the landscape of Islamic finance continues to evolve, it will be intriguing to see how the role of gold adapts and potentially transforms. The nuances of gold in Islamic finance are often best understood through advanced educational pursuits specifically designed around Islamic economics and finance. For instance, an Islamic Banking and Finance MBA Master’s degree provides a comprehensive understanding of the complexities of gold financing within the Shariah context. Alternatively, a research-based PhD in Islamic Economics and Finance offers a deep dive into the role that gold historically plays and its potential future in the evolving landscape of Islamic finance.

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