Financial Systems

Identifying the Problem

The gold standard, fiat central banking, the global dollar system and Islam: how money moves in each system — who creates it, who lends it and at what price, who carries the debt, and where the interest ends up. The red marks show where the non-Islamic systems pile wealth up through debt. Switch each system’s arrows on and off to compare the flows.

What is a financial system?

The rules and institutions that decide what money is, who may create it, and how it moves from those who have it to those who need it. Every financial system answers the same questions:

  • Money — what counts as money (gold, paper, bank deposits) and who issues it.
  • Credit — how savings are lent or invested, and what the lender may take back.
  • Risk — who carries the loss when a venture fails: the lender or the borrower.
  • Institutions — mints and central banks, banks, markets and treasuries, and the law that binds them.

It sits inside the economic system: the economic system decides who owns and produces; the financial system decides how money and debt flow between them.

Does Islam have one?

Yes — not as one institution, but as binding law on every money question above, set out in the Qur’an and Sunnah and worked out by the jurists as the fiqh of transactions (fiqh al-mu’amalat):

  • Money — real value: the gold dinar and silver dirham, minted by the state (Abd al-Malik’s coinage, 696 CE), exchanged like for like, hand to hand.
  • Credit — riba (interest) forbidden (2:275–279); a loan (qard hasan) returns only what was lent; finance earns through trade and partnership (mudarabah, musharakah, murabahah, ijarah, salam).
  • Risk — shared: the financier who seeks profit carries the loss of capital; gharar (excessive uncertainty) and the sale of debt are forbidden.
  • Institutions — the Bayt al-Mal (public treasury), zakat, waqf (endowments), the hisbah (market inspector), and instruments such as the suftajah (bill of exchange), sakk (cheque) and hawalah (transfer of debt).

What it has no place for is the core of the modern system: money created as interest-bearing debt. Today’s Islamic banks work inside fiat, interest-based systems, which is why many scholars argue that Islamic finance is only complete when the money itself is reformed.

Gold standard

Money is gold, or paper notes the bank promises to swap for gold. The money supply is held down by the gold in the vaults — but banks still lend at interest, issue more notes than they hold, and the state can suspend the promise whenever it needs to spend.

Central bank & vault → Banks: Notes backed by goldNotes backed by goldBanks → Businesses: Loans at interestLoans at interestBusinesses → Banks: Principal + interestPrincipal + interestBanks → Households: More notes than goldMore notes than gold1Households → Banks: Gold & depositsGold & depositsBusinesses → Households: WagesWagesHouseholds → Businesses: SpendingSpendingBanks → Gold holders & lenders: Interest incomeInterest income2Businesses → Gold holders & lenders: Gold drains to creditorsGold drains to creditors3Treasury → Central bank & vault: Can suspendCan suspend4Households → Treasury: TaxesTaxesTreasuryCentral bank & vaultGold holders & lendersBanksHouseholdsBusinesses

Heavy arrows: interest and gold flowing to those who already hold it.

  • Money holds its value while the promise holds: prices were broadly flat for long stretches.
  • Gold cannot be printed, so the state must tax or borrow to spend.
  • Lending is still at interest, and banks still lend out more than they hold.
  • The heavy arrows end with the lenders and those who already hold the gold.

Where debt builds inequality

  1. Banks lend out notes several times the gold in their vaults; when depositors all ask for gold at once the bank fails and savers lose (the panics of 1907 and 1931).
  2. Interest is charged on every loan, so income still flows to those who lend.
  3. Gold drains to creditor nations and to those who already hold it; debtors squeeze wages and spending to pay in gold (the deflations of the 1890s and 1930s).
  4. The state suspends gold whenever it needs to spend: the promise was broken in 1914, 1933 and 1971.

Fiat central banking

Money is backed by nothing but law. The central bank sets the price of money and banks create most of it by lending: in the UK about 97% of money is bank deposits created this way (Bank of England, 2014). Every rand is someone’s debt, with interest owed on it.

Central bank → Commercial banks: Reserves at the policy rateReserves at the policy rateCommercial banks → Businesses: Credit made from nothingCredit made from nothingBusinesses → Commercial banks: Principal + interestPrincipal + interestCommercial banks → Households & savers: Mortgages & credit cardsMortgages & credit cardsHouseholds & savers → Commercial banks: Repayments + interestRepayments + interest2Businesses → Households & savers: Wages, rising lateWages, rising lateHouseholds & savers → Businesses: Prices rising firstPrices rising first1Commercial banks → Bondholders: Cheap credit lifts assetsCheap credit lifts assets3Businesses → Bondholders: Dividends & buybacksDividends & buybacksGovernment → Bondholders: Interest on public debtInterest on public debt4Households & savers → Government: TaxesTaxesGovernmentCentral bankBondholdersCommercial banksHouseholds & saversBusinesses

Heavy arrows: interest and new money flowing to asset owners.

  • Money is created when a bank lends and destroyed when the loan is repaid.
  • More money must be borrowed each year to pay the interest on the old.
  • Inflation is a policy target (often 2–6% a year), so cash loses value by design.
  • The heavy arrows all end at the same place: bondholders and asset owners.

Where debt builds inequality

  1. New money reaches banks and asset owners first; by the time it reaches wages prices have risen (the Cantillon effect), a hidden tax on savers and earners.
  2. Almost all money is someone’s debt with interest on it, so households must borrow ever more just to keep up.
  3. Low rates and bond buying (quantitative easing) push up shares and property, which the rich own: after 2008 the gains went mostly to the top.
  4. Governments borrow instead of taxing, and everyone’s taxes pay interest to bondholders.

The dollar system

Since 1971 the world’s money is the US dollar. Oil is priced in it, central banks hold it, and poor countries borrow in it. The US can print what the world must earn, so its deficits are funded by everyone else’s savings.

Federal Reserve → Global banks & IMF: Dollars at the Fed’s rateDollars at the Fed’s rateUS Treasury → Global banks & IMF: Sanctions & conditionsSanctions & conditionsGlobal banks & IMF → US Treasury: Reserves held in TreasuriesReserves held in Treasuries2Global banks & IMF → Developing countries: Dollar loans, IMF termsDollar loans, IMF terms3Developing countries → Global banks & IMF: Debt service in dollarsDebt service in dollars1Global banks & IMF → Oil exporters: Oil priced in dollarsOil priced in dollarsOil exporters → Developing countries: Oil, paid in dollarsOil, paid in dollarsOil exporters → US markets & bondholders: Petrodollars recycledPetrodollars recycled4Developing countries → US Treasury: ExportsExportsUS TreasuryFederal ReserveUS markets & bondholdersGlobal banks & IMFDeveloping countriesOil exporters

Heavy arrows: the world’s savings flowing to the United States.

  • No other country can print the currency its debts and oil are priced in.
  • When the Fed raises rates, the whole world’s borrowing costs rise with it.
  • Payments run through US banks, so access can be cut off by sanction.
  • The heavy arrows all end in the United States and its markets.

Where debt builds inequality

  1. Poor countries borrow in a currency they cannot print; when US rates or the dollar rise their debts swell (Latin America 1982, East Asia 1997).
  2. Every central bank must hold dollar reserves, lending to the US Treasury cheaply — America borrows from the world at a discount (its “exorbitant privilege”).
  3. IMF rescue loans come with austerity and privatisation: subsidies cut and public assets sold, while foreign creditors are repaid first.
  4. Oil sold for dollars is recycled into US bonds and markets (the 1974 US–Saudi arrangement), so the world’s savings fund American assets.

Islam

Riba (interest) is forbidden (Al-Baqarah 2:275–279), so money cannot be created as interest-bearing debt. Money is real value — the gold dinar and silver dirham — exchanged “like for like, hand to hand” (Muslim); finance earns only by sharing in real trade, and zakat keeps savings moving.

Dinar & dirham → Partnership & trade finance: Full-weight coin, no debt moneyFull-weight coin, no debt moneySavers → Partnership & trade finance: Capital as partners (mudarabah)Capital as partners (mudarabah)Partnership & trade finance → Savers: Profit share, or lossProfit share, or lossPartnership & trade finance → Traders & producers: Murabahah, ijarah, salamMurabahah, ijarah, salamTraders & producers → Partnership & trade finance: Real profit from real tradeReal profit from real tradeTraders & producers → Savers: WagesWagesSavers → Traders & producers: SpendingSpendingSavers → Bayt al-Mal (treasury): Zakat 2.5% on savingsZakat 2.5% on savingsBayt al-Mal (treasury) → The poor & 8 categories: To the 8 categories (9:60)To the 8 categories (9:60)The poor & 8 categories → Traders & producers: Spending returns as demandSpending returns as demandBayt al-Mal (treasury)Dinar & dirhamThe poor & 8 categoriesPartnership & trade financeSaversTraders & producers

Heavy arrows: savings moved to the poor and back into real trade.

  • No riba: a loan (qard) returns only what was lent; profit must come from trade or a shared venture.
  • Money is a measure of value, not a commodity sold for more of itself: gold and silver are exchanged like for like, on the spot.
  • No gharar (excessive uncertainty) and no selling of debt, so there is no market in promises piled on promises.
  • The heavy arrows run from savers to the poor and back into trade as spending.

No red marks: money cannot be created as interest-bearing debt, savers share real profit and loss, and zakat keeps savings moving.

What happens to savings?

R100 000 saved for 20 years. As cash under 6% inflation a year, it buys less every year. Held in gold, assuming gold keeps pace with prices as it broadly has over long periods, it keeps its buying power.

Cash under inflationGold
R0R50kR100kYear 05101520R31 180R100 000
Show as a table
YearCash buysGold buys
0R100 000R100 000
5R74 726R100 000
10R55 839R100 000
15R41 727R100 000
20R31 180R100 000

How does a deposit multiply?

R100 deposited. With a 10% reserve, the banking system as a whole can lend it on again and again until R1 000 of deposits exist — R900 of it new money, lent at interest. Held in trust (amanah), the R100 stays R100.

The depositNew money lent at interest
R0R250R500R750R1000Fractional reserve (10%)R1000Held in trust (Islam)R100
Show as a table
SystemDepositNew money lentTotal
Fractional reserve (10%)R100R900R1000
Held in trust (Islam)R100R0R100

The charts use round, illustrative rates to show the mechanism, not market data.