How does Islamic Economics and Finance addresses the depreciation of the FIAT currency?
Bismillahi Ta’ala
Walaikum Assalam Warahmatullah,
Answers to your questions are presented hereunder:
The depreciation of fiat currency poses a major concern in Islamic finance as it silently erodes the wealth of savers and creditors, transferring value unjustly to debtors and issuers of money. A loan of 100,000 rupees today may return the same nominal figure years later, but with much weaker purchasing power. This imbalance undermines ʿadl (justice) in dealings and threatens ḥifẓ al-māl (preservation of wealth), one of the key objectives of Sharīʿah.
From a juristic perspective, classical fiqh treated gold and silver as money, requiring strict unit-for-unit repayment in ribāwī exchanges irrespective of fluctuations in market value. By analogy, fiat currency, though lacking intrinsic worth, is treated the same way in repayment of debts. While a minority of contemporary scholars suggested indexation to inflation or gold, but this has been predominantly rejected by major bodies and senior scholars, as it effectively introduces contractual increments akin to riba. Mufti Faraz Adam has a wonderful detail answer on this which emphasizes, pegging loans to inflation is impermissible.
The practical resolution lies in structuring finance around real assets rather than fiat benchmarks. Modes such as murābaḥah, ijārah, and mushārakah inherently link money to goods, services, or equity, naturally absorbing inflation through market value. For wealth protection, individuals are encouraged to use Sharīʿah-compliant hedges like gold holdings, real estate, and equity investments, which rise with inflation. At a systemic level, Islamic finance pushes towards asset-backed currencies and gold-linked fintech solutions to restore stability. Thus, without compromising the prohibition of riba, Islamic finance addresses fiat depreciation through asset-linkage, risk-sharing, and real economy anchoring.
In the case of personal loans where inflation is a concern, one solution is to structure the loan in gold or silver rather than fiat currency. For example, instead of lending $10,000 in cash, a lender could advance gold worth that amount—say 100 grams. The loan would thus be defined as “100 grams of gold,” not “$10,000.” At repayment, the borrower returns 100 grams of gold, regardless of gold’s market price at the time. In this way, the lender’s wealth is preserved against inflation, and the arrangement remains free from riba, since the contract stipulates repayment in the same unit originally lent.
The only drawback of this method is that actual gold must be lent, which the borrower will then sell in market to acquire his $10,000 cash (or whatever he is able to sell at). This can be daunting, but when the concern of lender to secure himself from inflation over long period of debt is concerned, it may be worth it.
And Allah Ta’āla Knows Best
Mufti Faisal al-Mahmudi