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Demonetisation of Indian Currency and the Islamic view point

towards it



On 8th November 2016, the Indian Government announced its

decision to demonetize 500 & 1000 rupees notes in the country
overnight. It was conveyed that people could exchange the old
currency notes at various institutions such as public & private
sector banks and post offices. And, individuals could deposit up
to 2,50,000 INR into their bank accounts with a promised
indemnity from tax on that sum. This hasty announcement has
led to a visible unrest and a palpable confusion amidst a whole
lot of unanswered questions.

To understand the issue better, some aspects of the Indian

economy need to be studied.

Firstly, in the past few years, Indian public sector banks have
accrued a total loss of 2.5 lakh crore INR ($ 37 Billion). This was
reportedly lost in loans given out to borrowers who eventually
defaulted. In the past 2 years alone, SBI (State bank of India)
has incurred a loss of up to 75,000 crore INR ($ 11 Billion) due to
these bad loans (which the bank has no hope of recovering). The
penurious state of the public sector banks in India has forced
them to stop lending money to businesses in the country. Many
businesses now have to resort to approaching foreign investors
and banks for loans.

Early in June this year, Moodys Investor Services had said
that the Indian government will have to infuse Rs 1.2 lakh crore
into PSU (Public Sector Unit) banks by 2020 to bolster their
balance sheets and make good the losses suffered by them.

This was echoed by the Indian finance minister in his budget

speech this year. He declared that the government
had announced a revamp plan - 'Indradhanush', to infuse Rs
70,000 crore into state-owned banks over four years, while the
banks will have to raise a further Rs 1.1 lakh crore from markets
to meet their capital requirements in line with global risk norms

Secondly, a large section of Indian economy is cash driven.

According to a 2015 report from consulting firm PwC
(PriceWaterHouseCoopers), 68 of the total value of (small &
large) consumer transactions is conducted in cash & 98% of all
large transactions happen in cash. Compared to this cash
formed 55% & 48% of the consumer payments in US and UK. As
a result, a large shadow economy exists (one that is neither
taxed nor monitored, nor included in the GDP). According to
conservative estimates by McKinsey & Company this stands at
26% of Indias GDP and 1/4th of the Indian economy. And,
according to a report tabled in May 2016 by the National
Institute of Public Finance and Policy (NIPFP), a public economics
and policies institute under the Indian Finance ministry, the cash

driven black economy is about 75% of the reported GDP of the

Thirdly, since the transactions of this shadow economy happen

outside the purview of the banking system, the government is
unable to monitor them and thereby receives no taxes on the
sum involved or the profits made. Capitalist governments and
authorities contend that this unwatched circulation of cash often
allows an informal or shadow economy to grow or dominate.

Fourthly, India being one of the most corrupt countries globally

is a huge deterrent for international businesses and investors.
Although high-profile corruption and scandals have been absent
from the Modi administration in the past 2 years, low-level,
everyday corruption has flourished unabated, harming the
countrys more vulnerable citizens. Corruption Perceptions Index
(CPI), a prominent watchdog which scores and ranks nations
based upon expert perceptions of public sector corruption,
ranked India 38, making it the 76th most corrupt country in the
world out of the 168 nations surveyed. This has minified the
current governments prospects of inviting foreign businesses to
invest in India.


1. The Modi government found that quantitative easing

(printing more money) for infusing into the banks would lead to
hyper-inflation in an already inflated economy. Instead, the
government chose to find a mechanism that would infuse the
much-needed liquidity into the banks. And the recent decision
has had its desired effect. So much so that on the 12th of
November, 2 days after the announcement, the Indian finance
minister proudly revealed, About two lakh crore rupees
deposited in banks till Saturday afternoon in public and private
banks. News reports state that SBI alone received 39,677 crore
INR in deposits in just 1 day after the announcement, what it
normally receives in 1 month.

2. The Modi Government in its attempt to open up the country's

Agricultural & Commodity market to foreign MultiNationals like
the US based WalMart has faced large opposition from Trade
Unions at mandis and other wholesale hubs who deal mostly in
cash in making purchases from the farmers and selling to the
retailers and by demonetizing the currency the government has
ensured that cash strapped Trade Unions now exert lesser

influence and control on the agricultural & commodity market
can be opened to the big Multinationals.

3. The Indian government, speciously, calls this a drive against

black money. Nothing can be farther from the truth than this.
The expectation that the government has is that roughly 3 lakh
crore INR ($ 45 Billion USD) are not likely to be exchanged for
new notes out of the 17.11 lakh crore INR in
circulation (according to RBI records as on October 28, 2016).
The government intends to portray that people holding black
money will not come to the banks to deposit this
amount, fearing high taxes and penalties announced by the
government. However, the World Banks data of Indias GDP in
2016 was $2073.54 billion which means that the share of
shadow economy would come out to be $523 billion USD as the
shadow economy in India stands at 26% of the GDP.

Now if we compare the amount of black money in cash , 3 lakh

Crore INR ($45 billion USD) with the actual black money that
exists in the economy ($523 billion USD) then the black money
that will be retrieved through this exercise is just 8% of the total
amount. This is because over the years, it has been converted
into legal bank deposits, real estate investments, jewelry and
a major portion sent to safe havens abroad.

So, in reality, the demonetization will barely have an impact on
the income made through the shadow economy or the black
economy in the past few years.

4. Its an open secret that all political parties maintain large

troves of cash, running into hundreds of crores. Most of
the campaign finances of Indian political parties are, typically
driven by unofficial funds. Data over the last decade shows
that about 75% of the money going to political parties in India is
from undocumented sources. During the 2016 Bihar elections
alone, over 80 crore INR were seized by the election officials.

Demonetization of the currency means that

all unaccounted cash that political parties use to buy and cajole
votes will simply become paper.

In this way Modi has strangled all major opposition parties in the
states having assembly elections in the next few months. Parties
and candidates who accumulated unaccounted wealth to cover
their election campaigns will now have to find new ways to first
dispose off the existing cash and then generate fresh funds.


1. The Capitalist economies and their banks are driven by giving

and taking interest which is the root cause behind the failure of
the banks in India and has been the reason for the financial
crisis that has plagued the worlds economies since 2007. Allah
(swt) says:

Allah has permitted trade and forbidden (all) interest. [TMQ Al-
Baqarah: 275]

Islam abolishes all interest based contracts only to be replaced

by contracts which share returns and risks. The absence
of Riba (usury/interest) encourages people not to detain their
money in a bank. People would be inclined to circulate it into the
market and earn profits than to just regularly incur a
2.5% Zakah on unused wealth. The spending and investments
will thus generate economic activity in the society and boost any
economy bringing greater employment and better standards of

2. Todays currency is fiat (paper) currency which has no
inherent value nor is backed by real assets, yet it rides on a
(false) confidence instilled by the capitalists. This is the primary
reason for the ever-increasing inflation the world over. Islam
resolves this by making Gold and Silver the basis of the currency
in Islam. The Islamic rules have been set in the Quran and
Sunnah in terms of Gold and Silver such as the Nisab of Zakah.

The Prophet (saw) established the tangible things as basis for

the Islamic currency - the Dirham and the Dinar thereby,
defining a currency that has real, inherent value and also retains
its value. A currency that is not only backed by its basis but also
interchangeable with it. So, in the Khilafah one can go to
the Bayt al-Mal and exchange the paper notes for gold or silver.
Therefore, inflation is eliminated as the value of gold and silver
are stable.

3. Islam discourages hoarding of wealth and emphasizes that

the wealth should not circulate among a few, He (swt) says
referring to wealth:

That it does not become a commodity between the rich among

you. [TMQ Al-Hashr: 7]

Islam has made the circulation of wealth among all citizens an

obligation, and it has forbidden the restriction of such circulation
to a certain group of people to the exclusion of others.

Hoarding/monopolizing goods is forbidden. Islam treats market
hegemony as oppressive and iniquitous. Hoarders arent allowed
a free run nor monopoly permitted lest the price be dictated by
a select few. This is based on the hadith:

Whoever monopolized is a wrongdoer. [Muslim]

4. Despite the false assurances by the government that the

demonetization is going to help the common man by creating a
transparent economy, the only beneficiaries of this economic
adventure are the ailing banks of the country and the
Governments reputation and its future political success.

The nature of the Capitalist Economic system is that it works only

for the benefit of the capitalists and those who are close to the
ruling class and this has led to fasaad all over the world. The crisis
in India is not the first. In fact, there have
been hundreds of crises that have taken place in India and
elsewhere before this. The reality of the Western Secular Capitalist
system is like that of the house of the spider which even though
complex is so weak, Allah (swt) says:

The parable of those who take protectors other than Allah is
that of the Spider who builds (to itself) a house; but truly the
flimsiest of houses is the Spider's house if they but knew.
[TMQ 29. Ankaboot: 41]

The only solution to this demonetization crisis and all other

crises that are created by the Capitalist Economic system in
India and globally is through the implementation of Islam which
has a detailed and comprehensive Economic system that will
solve the problems that have been created by the Western
Capitalist system and will establish a just, stable and a
prosperous economy.