Is Interest Permissible If It Is Regulated by Governments for Fiat Money?

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This blog is adapted from an article by Muhammad Rizwan-ul Haque, Founding Chairman of Dawood Family Takaful, CEO of an Investment Bank, and Director of a Trust. The original article was published on August 3, 2015.

Introduction

Money plays a central role in every modern economy. It facilitates trade, allows businesses to operate efficiently, and enables people to exchange goods and services without relying on barter.

But as the nature of money has changed—from gold and silver coins to paper currency and, eventually, fiat money—an important question has emerged in Islamic finance:

Does the prohibition of Riba apply equally to fiat money, even when interest rates are regulated by governments?

According to the perspective presented by Muhammad Rizwan-ul Haque, changes in the form of money do not change the underlying principles governing it in Islam.

From Barter to Money

Before the widespread use of money, people relied on barter to exchange goods and services. The introduction of gold and silver coins made trade much easier because money provided a common medium of exchange.

Over time, precious metals were deposited with goldsmiths, who issued receipts or IOUs representing the deposited assets. These notes could then be used in transactions.

As financial practices developed, goldsmiths and money lenders began extending credit against assets. Eventually, paper-based monetary systems emerged, initially supported by gold, silver, or other valuable assets.

The Evolution of Paper Money

The monetary system gradually moved away from direct backing by precious metals. Governments eventually gained the authority to issue currency according to economic and fiscal requirements.

This led to the development of modern fiat currency—money whose value is not directly tied to a fixed quantity of gold or silver.

Today, virtually all major currencies operate as fiat money. Governments and central banks manage their monetary systems through various policies, including interest rates and money supply.

This evolution raises a fundamental Islamic finance question: does the change from commodity-backed money to fiat currency change the ruling on Riba?

Does the Type of Money Change the Ruling?

The argument presented in the article is that money remains money regardless of whether it is backed by gold, silver, or issued as fiat currency.

Its fundamental economic characteristics remain similar. Money is used as a medium of exchange, can be stored, does not perish like an ordinary commodity, and can accumulate when placed in an interest-bearing arrangement.

Therefore, the distinction between gold-backed money and fiat money should not, according to this perspective, create two separate categories under the Islamic prohibition of Riba.

Is Government-Regulated Interest Different From Riba?

One argument sometimes made is that government-regulated interest rates are different from Riba because they may be intended to protect the purchasing power of money.

As prices rise over time, the argument goes, money loses purchasing power. A regulated interest rate may therefore be viewed as compensation for this decline.

However, Muhammad Rizwan-ul Haque argues that regulation by a government does not fundamentally change the nature of interest.

If a return is being generated simply because money has been lent for a period of time, government approval does not automatically transform it into a permissible transaction.

Is There a Difference Between Riba and “Interest”?

Another frequently raised argument is that Riba refers only to excessive interest or usury, while ordinary or moderate interest may be permissible.

The article challenges this distinction.

The Qur'anic references to the “doubling and redoubling” of debt are understood in the context of the historical accumulation of interest and debt. They should not, according to this view, be interpreted as establishing a permissible lower interest rate.

If Islam intended to permit a certain level of interest, an obvious question would arise: what would the acceptable rate be?

Would it be 2%, 5%, 10%, or another percentage? Such a standard could vary between countries, periods, and economic circumstances.

The argument therefore maintains that the prohibition of Riba cannot simply be reduced to a question of whether an interest rate is high or low.

Money as a Medium of Exchange, Not a Commodity

A central principle highlighted in the article is the distinction between money and productive assets.

Money facilitates trade and economic activity. It allows people to buy, sell, invest, and conduct business.

When money itself becomes a commodity that produces a predetermined return simply through lending, the relationship changes.

From the Islamic finance perspective presented here, wealth should instead be connected with legitimate trade, investment, entrepreneurship, asset ownership, and productive economic activity.

Riba and Socioeconomic Justice

The prohibition of Riba is closely connected in the article with the broader Islamic objective of socioeconomic justice.

When capital can generate guaranteed returns without participating in productive activity, wealth can become increasingly concentrated among those who already possess financial resources.

By contrast, investment in businesses and productive activities creates opportunities for workers, entrepreneurs, suppliers, and communities.

Agriculture, manufacturing, construction, services, and other productive sectors require people to work and create value. A financial system that encourages genuine economic activity can therefore contribute to wider employment and wealth circulation.

The Role of Entrepreneurs

If interest-bearing investments offer a relatively predictable return, an investor may be less willing to take the risks associated with entrepreneurship.

A business investment involves uncertainty. It can generate profit, but it can also produce losses.

According to the argument presented by Muhammad Rizwan-ul Haque, removing interest-based alternatives encourages capital owners to participate more actively in productive economic activity.

In this model, capital is directed toward businesses that create goods, services, employment, and economic value rather than simply generating returns through financial transactions.

The Broader Social Consequences

The article connects excessive reliance on debt and interest-based finance with growing economic inequality.

When economic opportunities become concentrated among a small group while lower-income segments have fewer employment opportunities, social divisions can deepen.

Islamic finance therefore cannot be viewed only as a technical system of contracts. It is also connected to broader questions of fairness, wealth distribution, economic participation, and social responsibility.

Can Governments Make Riba Permissible?

A particularly important question is whether government regulation can change the Islamic ruling on interest.

The position presented in the article is that regulation does not change the underlying nature of the transaction.

If something has been prohibited by the Qur'an and Sunnah, government policy cannot independently transform it into something permissible.

For Islamic finance, the starting point must therefore remain the principles established by Shariah rather than the practices adopted by modern financial systems.

Conclusion

The transition from gold and silver to paper currency and modern fiat money has transformed the monetary system, but according to the perspective presented by Muhammad Rizwan-ul Haque, it does not change the fundamental Islamic principles concerning Riba.

Whether money is backed by precious metals or issued as fiat currency, money continues to serve as a medium of exchange and a means of facilitating economic activity.

The central question is therefore not whether an interest rate is government-regulated, high, or low. The deeper question is whether money itself is being used to generate a predetermined return through lending.

Islamic finance seeks to direct capital toward genuine trade, investment, entrepreneurship, and productive economic activity while maintaining principles of justice and socioeconomic balance.

The discussion ultimately invites us to revisit the Qur'anic message on Riba and consider its implications not only from a religious perspective, but also through the lens of economics, business, and social justice.