Compensating for the Depreciation of Fiat Money in Islamic Shariah, and the Paradox of its Fungibility

Inflation and its distributive effects have consistently been one of the most important economic and social issues in countries without stable economic policies. Periods of chronic and high inflation have given rise to legal and Shari'ah-related questions, one of which is whether or not it is necessary to compensate the depreciation of fiat money in long term debts, bank deposits, and the like. As the compensation creates an illusion of paying Riba, the jurisprudential judgments in the issue has gone into three categories: non-necessity (fungibility theory of fiat money), necessity (purchasing power theory of fiat money) and the middle solution (compensation for major losses). Criticizing all three points of view, this article presents a new explanation of the problem and a normative account of fungibility, contrary to the previous descriptive accounts which generally take fiat money system with depreciating money value for granted. Hence, the monetary system unable to meet the fungibility requirement set forth cannot be approved by Islamic jurisprudence. In the case of an antecedent inflation, compensation for major losses can only be prescribed as a "secondary law" (Aḥkām Al-Thānaviah) which is of a limited and temporary nature.