A Note on Money and Islam - a Medium of Exchange and a Unit of Account Versus Money as a Commodity. a Short Essay by Mustafa Aydemir

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These Short Essays are partial fulfillment of Paper IE1001 of Part 1 of Certified Islamic Finance Professional (CIFP) [DRAFT V0.5]

INCEIF
Student Name: Mustafa Aydemir Student ID: 1200279

IE1001 Assignment in Islamic Economics - Short Essay No 3 by Mustafa Aydemir - DRAFT Version 0.5.doc

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Bismillahirrahmanirrahim Essay No. (3) Money and Islam - A Medium of Exchange and a Unit of Account versus Money as a Commodity Everybody is using money. Most of us want it; we work for it and think how to get more of it. Therefore, it is vital to ask what money is, where it comes from, and what money is worth. Economics is an academic discipline that tries to answer those questions. It would be to long and lengthy to discuss about money creation and growth from A-Z but in the following paragraphs the subject matter is elaborated from the conventional as well as the Islamic worldviews. Money in the conventional sense is a commodity people use in exchange for goods and services. Before money was used as a medium of exchange, barter trade was practiced whereby people trade goods and services in exchange for other goods and services. However, barter trade was considered not so practical as weighing, transporting and dividing goods was difficult. It was the lack of transferability and inefficiencies that created the need for better ways of exchange. The concept of money was born. There are different types of money that developed over time, which should be presented briefly.

Commodity money is defined as valuable goods, which were used as an underlying for a currency, such as gold, silver, coffee or even tobacco. The biggest advantage of this kind of currency was its portability and easy storage. Another example of commodity money is the U.S. currency before 1971, which was backed by gold (Investopia). Fiat money is the paper money currently circulating in our world that is not convertible in any other type of money. It is used in our daily life where we buy and sell goods and services. Fiat money is basically not backed by any commodity but by a government that guarantees its value and creates a perception and faith in people that it is worth it. It is simply needed because gold is

IE1001 Assignment in Islamic Economics - Short Essay No 3 by Mustafa Aydemir - DRAFT Version 0.5.doc

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rare on this planet. The perception created is, that the stronger the economy, the stronger is the value of its money. It is important to understand, that money is valuable because we want it, but we want it only because it can get us a desired product or service. Money is generated by a kind of an uninterrupted collaboration between physical things, our elusive desire for them, and our theoretical trust in what has value. That is why printing fresh money will not enrich a nation.

Another type of money is named credit money. Investopia defines credit money as “Any future monetary claim against an individual that can be used to buy goods and services”. There are many forms of credit money, such as IOUs, bonds and money market accounts. Virtually any form of financial instrument that cannot be repaid immediately is considered credit money. Economists measure money in M1, M2 and M3 defined as follows. M1 money includes all coins and currency that is physically available, travellers checks, demand deposits, checking accounts that is used to make payments. M2 money is all the money in M1 plus saving accounts, timelinked deposits and non-institutional money-market funds. M3 money is all the money in M2 plus all large time-deposits, liquid assets, institutional money-market funds, and short-term repurchase agreements. M1+M2+M3 together is the total supply of money in an economy, the “broad money”

Money fulfills the three main functions. It is used as a medium of exchange. Furthermore, money is a unit of account that is a numerical unit of measurement for transactions, goods and services.

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