The Money Question in Islamic Finance

Daromir Rudnyckyj & Rehan Sayeed

The Petronas Towers in Malaysia’s financial district.  Photo Credit: Daromir Rudnyckyj

In response to the global financial crisis, a global network of experts and institutions is working to create an alternative financial system that conforms to Islamic restrictions on the unfettered mobilization of capital. The central tenet of Islamic finance is the prohibition of interest (riba), an injunction that is articulated no fewer than twenty times in the Qur’an (Maurer 2005, 27). Islamic finance experts have engaged in a creative set of experiments to create functional financial instruments that can work on a global scale. Rudnyckyj has been documenting these experiments in the Southeast Asian country of Malaysia where the state, led by the country’s Central Bank, seeks to make the country’s Kuala Lumpur a central node in this system by developing the legal, institutional, and human resources infrastructure to make the country a global hub for Islamic finance (Rudnyckyj 2019). This has entailed developing institutions, such as banks and insurance companies, but also regulatory bodies, exchanges, and research institutes. It has also involved writing new laws and streamlining the legal and judicial infrastructure to enable an Islamic financial system to function. Finally, it has entailed cultivating the human resources necessary to staff Islamic financial institutions, from regulatory bodies to commercial firms by establishing universities and training centres.

In spite of all of this development and enthusiasm, money presents a particularly thorny problem for Islamic finance. This is due to the fact that, as readers familiar with Postive Money’s activities will no doubt know, the vast majority of money in any modern economy is created by commercial banks through interest-bearing debt. Given Islamic injunctions against interest-bearing debt, how might money be created in Islamic finance? And, if an Islamic financial system continues to use the same fiat money issued by the states and used as a unit of account by commercial banks, what kind of alternative does Islamic finance offer in contrast to its conventional counterpart?

Currently, virtually all Islamic financial transactions are denominated in a state-issued currency, the most common are US dollars, British pounds, and Malaysian ringgit. Nonetheless, a range of scholars and practitioners have sought to find creative solutions to facilitate the creation of money without recourse to interest-bearing debt. One solution that has been proposed is Public Capitalization Notes (Sayeed 2019). These are “profit sharing investment instruments issued or guaranteed by the government treasury and purchased with fresh money by the central bank” (Papazian 2011, 2). In an economy reliant on Public Capitalization Notes, the central bank would issue new money to purchase the notes from the state treasury. The money created by the central bank would then finance infrastructure projects and other types of government investments. A government agency responsible for managing money generated by Public Capitalization Notes would subcontract the business to private enterprise to promote employment. The central bank would hold the notes, but the new money created to purchase them would spread through an economy. Contractors would use them to pay their workers, workers would use them to purchase goods from merchants, and merchants would use them to restock their supplies, expand their businesses, and perhaps invest in other profit-making activities. New money created to purchase Public Capitalization Notes and circulating in such fashion would offer multiplier effects that would reverberate through an economy.

Public Capitalization Notes provide an alternative to bonds, the dominant form of public finance used by states today. Government bonds are debt-based, in so far as they are sold by the treasury to commercial banks and other financial institutions. They feature a guaranteed interest payment or coupon for a set period of time. In contrast, Public Capitalization Notes would be issued by the state treasury and then purchased only by the central bank. Papazian writes that Public Capitalization Notes feature “equity-like monetization” (Papazian 2011, 10). They are equity-like because of the “nature of cashflows and commitments exchanged between the government and the central bank” (Papazian 2011, 16). The Central Bank would hold the shares and “earn a return when the underlying project earns a return” (Papazian 2011, 12). Thus, they are not public shares in which citizens hold stocks.

Equity instruments are preferred to debt-based instruments in Islamic finance because they offer profit sharing rather than interest payment. Debates and innovations in contemporary Islamic finance center on how to foster equity-based rather than debt-based instruments (2019: 96-98). Public Capitalization Notes offer a more shariah-compliant form of monetization, in so far as they enable the creation of money, not through interest-bearing debt, but rather through the creation of equity ownership. In such a system, money is not created solely through an entry on a balance sheet, but through producing tangible objects in what Islamic finance experts refer to as the “real economy.” Public Capitalization Notes offer an equity-like means of financing development. The money used is not a mere accounting entry, but is spent into society.

Experimental ideas such as the use of Public Capitalization Notes in Islamic finance illustrate that money is not natural, but is, in fact, a human creation. Liberal economics has, for several centuries, perpetuated the notion that markets are natural facts, and the flows of money and goods within them behave in ways analogous to biological systems. But contrasting our existing monetary system with experiments such as Public Capitalization Notes illustrates that markets are comprised out of the contingent sum of human actions, not natural facts. Earning money through labor, investing it in productive activity, or deploying it to claim a credit on goods or services, illustrates how money is a reflection of human action. As we say all the time, but unfortunately forget the true implications of, money is something we “make.” Indeed, its making is not simply a matter of earning, but of being brought into being through our labour, ideas, and initiative. Such a lesson reminds us that the financial and monetary systems in which we find ourselves embedded could always be remade along other lines and according to other imperatives.


About The Authors

Rehan Sayeed is a graduate student in the Department of Anthropology at Memorial University of Newfoundland. He completed his Honours B.A. in Anthropology at the University of Victoria in 2019. His research interests include the anthropology of religion, Islam, secularism, religious education, money, semiotics, theology, and ethnography.

Daromir Rudnyckyj is an associate professor of anthropology at the University of Victoria.  His research addresses globalization, capitalism, religion, finance, development, Islam, and the socio-technics of money.  He is the author of Beyond Debt: Islamic Experiments in Global Finance (Chicago, 2019) and Spiritual Economies: Islam, Globalization, and the Afterlife of Development (Cornell, 2010), and the co-editor of Religion and the Morality of the Market (Cambridge, 2017).



Maurer, Bill. 2005. Mutual Life, Limited: Islamic Banking, Alternative Currencies, Lateral Reason. Princeton: Princeton University Press.

Papazian, Armen. 2011. “A Product That Can Save a System: Public Capitalization Notes.” Accessed October 18, 2019.

Rudnyckyj, Daromir. 2019. Beyond Debt: Islamic Experiments in Global Finance. Chicago: University of Chicago Press.

Sayeed, Rehan. 2019. Commodity or Token?: A Para-Anthropological Analysis of Money in Islamic Finance. B.A. Honours Thesis, Department of Anthropology, University of Victoria.

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