Banks and Fiat Currencies

By Muhammad Rizwan-ul Haque

Founding Chairman, Dawood Family Takaful, CEO of an Investment Bank and Director of a Trust

December 10, 2015

Introduction

There has been increasing discussion regarding fiat currencies and the role of banking systems in modern economies. This article presents an overview of these concepts from the author’s perspective.

What Is a Bank?

A bank is generally understood as a place where something is stored or accumulated. For example, a place where blood is collected is known as a “blood bank.” In the modern sense, however, a bank is commonly recognized as an institution where money is deposited and managed.

Early Forms of Banking

Primitive banking systems existed throughout ancient civilizations, including Greece, Rome, India, China, and Syria. Wealthy individuals and temple-based lenders commonly:

• Provided loans to farmers and traders,

• Lent money to financially struggling individuals,

• Accepted deposits, and

• Exchanged currencies.

These transactions were typically associated with usury or interest (Riba), which often trapped borrowers in long-term debt.

Riba and Exploitation

According to the article, it was because of exploitation linked to Riba that it was forbidden through divine teachings brought by various Prophets (AS). During those times, gold and silver coins were commonly used as currency.

The Practice Continued

Although financial systems evolved over time, the author argues that the underlying practice of interest-based lending continued, becoming increasingly sophisticated while operating under different names and structures.

Evolution of Modern Banks

The article refers to the historical role of goldsmiths, whose written receipts (IOUs) gradually evolved into instruments accepted as legal tender. Initially, these IOUs were backed by valuables deposited with them.

Over time, however, goldsmiths reportedly observed that many depositors did not reclaim their valuables, encouraging the issuance of additional IOUs beyond actual reserves.

Fiat Currency

Fiat currency refers to money declared legal tender by governments but not backed by a physical commodity such as gold or silver.

The Rise of Banks and Central Banks

The article notes that one of the earliest recognized banks was the Medici Bank in Italy, while the Sveriges Riksbank, established in 1668, is widely considered the world’s first central bank.

The Age of Fiat Money

Under the Bretton Woods Agreement, the U.S. dollar was tied to gold at a fixed rate, while other currencies were linked to the U.S. dollar.

The system eventually ended following economic measures introduced by Richard Nixon in 1971, after which the global economy increasingly shifted toward floating fiat currencies.

Banking and Interest

The article argues that the core activities of modern banking continue to revolve around:

• Collecting deposits,

• Issuing loans, and

• Operating through systems linked to prevailing interest rates.

The author further contends that this applies to both conventional and Islamic banking structures where transactions are benchmarked against interest rates.

Conclusion

According to the article, fiat currency systems allow governments to issue money without direct commodity backing, often through deficit financing and debt expansion. The author argues that this contributes to inflation, economic inequality, and growing financial instability.

The article concludes by asserting that meaningful socioeconomic reform requires confronting these structural issues directly rather than relying solely on modified banking models that continue to reference prevailing interest-rate systems.

Author Credit:

This article is written by Muhammad Rizwan-ul Haque, Founding Chairman of Dawood Family Takaful and a researcher in Islamic economics and finance.