On Tuesday, 8th Safar 1438, November 8th, 2016, the Government of India announced the withdrawal of 500 and 1000 rupee notes as legal tender and that these notes have no monetary value.
Those individuals that pay taxes will be allowed to exchange these old demonetized notes for new notes (by depositing their old notes in the bank) up to an allowable limit. If the amount deposited is more than the allowable limit, the Government of India will consider it to be money acquired corruptly or withheld from tax authorities and will exercise the right to confiscate it.
The Government has given around 50 days for the exchange to take place. The exchange of old notes for new has already begun. Some people are selling these old notes for a lesser amount because they fear the Government of India will confiscate their money and impose other penalties. In addition, the fear of damage to a person's reputation is also great. On the other side, those individuals who have given large amounts in tax to the Government of India have much more flexibility in terms of the allowable limit of cash they can have. These individuals are purchasing these notes.
The question is: Is it permissible to exchange the old notes for new notes when there is disparity in the value [one amount is greater than the other]? Regarding this, the Ulama here (in India) are of two opinions:
One opinion is that it is impermissible due to the following reasons:
1. The Government of India has promised to exchange the notes over the next 50 days. As a result these notes still retail their value. In addition, people still want to obtain these notes.
2. A similar situation took place in Burma and the fatwa [Fatawa Uthmaniya, 3:145-6] said it was impermissible.
The other opinion is that it is permissible due to the following reasons:
1 .The announcement of the Government of India is clear and leaves not ambiguity that these old notes are now demonetized and have ceased to be legal tender. This is further verified by the fact that in the shops and stores these notes are no longer accepted and can no longer be used for purchasing goods.
2. The promise of the Government of India to exchange the old notes (which gives rise to the doubt that these notes still have some value) is not unrestricted. Rather, this promise is subject to the limits of cash set by the Government and only those monies which it considers to be legal and not corrupt or as a result of tax evasion.
3. There are many Muslims (who being in the working or middle-class do not have access to the banking system or need to have enough liquidity to run their micro-businesses) and as a result it is feared their entire savings will be lost due to this recent measure. As a result, by allowing the exchange of old for new, they will at least be able to preserve some of their savings.
4. The issue of riba is dependent on the monetary value of these notes, otherwise these notes do not hold any intrinsic value and neither is value [qadr], the cause ['illa] of riba found in these notes. Mufti Nizam al-Din in Nizam al-Fatawa has written: “These notes are of the same category [jins] because paper is all of the same category, but not the same quantity [qadr] because quantity has to do it with measurement and weight and currency is neither weighed nor measured. Instead, they are counted so it is permissible to exchange these notes with excess on one side, although not on a deferred basis as that will constitute delayed interest [riba al-nasi'ah].”
5. Another point to keep in mind is that the exchange of these notes carries the possibility of having to expend a lot of effort and expenditure during which a lot of paperwork is undertaken and large amounts of tax are given after which the new notes are obtained. One can consider the excess amount on one side in the exchange of old for new as a substitute for these efforts.
In the Name of Allah, the Most Gracious, the Most Merciful.
As-salāmu ‘alaykum wa-rahmatullāhi wa-barakātuh.
Interest [riba al-fadl] is realized in an exchange of commodities (with excess on one side) when both of the following conditions are found in the exchange:
1.) Both commodities are from the same category [jins].
2.) The value [qadr] of the commodities is defined by their weight or measure.
Based on the above, an exchange of the same local currency (i.e. Indian Rupees for Indian Rupees), with excess on one side, in principle does not result in interest.
This is because only the 1st condition of riba is found in this exchange: the category [jins] is the same (i.e Indian Rupees exchanged for Indian Rupees, since each local currency is considered as one category).
The 2nd condition is not found in this exchange since “value” is defined by weight or measure and paper currency is counted, not weighed or measured.
According to this principle, an excess amount on one side would technically be permissible with the condition that it is a spot exchange and not delayed, otherwise this will constitute delayed interest [riba al-nasi'ah]. However, under normal circumstances even this spot exchange (of the same local currency with excess on one side) is not permissible to close the door to riba.
In addition, paper currency takes the ruling of token currency [fulus]. According to the Shaykhayn - Imam Abu Hanifah and Imam Abu Yusuf (May Allah have mercy on them both) - excess is permissible in fulus, whereas Imam Muhammad (May Allah have mercy on him) deems such an exchange impermissible. The fatwa is upon the opinion of Imam Muhammad (May Allah have mercy on him).
The real issue of the 500 and 1000 rupees is not related to whether these notes retain their value or not. Rather, the issue is related to the acceptance and usage of these notes among the people. The value of the paper money is based on customary usage ['urf]. When the usage and acceptance of these 500 and 1000 rupees is no longer found in the general public, its value as money also does not remain.
The acceptance of paper currency as legal tender is an agreement by the Government of India with its citizens. To withdraw these notes and demonetize them is to break that agreement. As a result, the public in an effort to save their money, can sell their old notes for a lesser value acting upon the ruling of the Shaykhayn in this temporary situation which would make excess on one side permissible.
There is no stratagem [heelah] required here. The general public should not be told to include some other items (for example pen etc.) with their money when exchanging local currency with excess on one side as there is the possibility that this practice would be used under normal circumstances as well.
As stated earlier, the cause ['illa] for not permitting the exchange of local currencies with excess on one side is to close the door to riba. In the current situation (the withdrawal of 500 and 1000 rupees as legal tender by the Government of India), this cause is not found. Rather, the withdrawal of legal tender is a form of oppression on those who stand to lose their hard-earned savings (especially the working and middle-class who do not have access to banking facilities or are in need of liquidity to run their businesses or conduct daily transactions). The owners of these demonetized notes should be allowed to use appropriate measures to save whatever portion of their money they can.
The general public should be informed that this is a temporary ruling based on the current situation and does not apply under normal circumstances. It should also be noted that this ruling is only limited to 500 and 1000 rupee notes. It is not permissible to trade notes of other values with excess on one side.
In conclusion, the reader is advised that this answer is providing a solution derived from the principles of jurisprudence [fiqh]. However, our advice is that one should not degrade himself by taking actions which are not deemed lawful in the country where one resides. As mentioned in the Hadith:
لا ينبغي لمسلم أن يذل نفسه
It is not befitting for a Muslim to degrade himself. [Musnad Ahmad, 38:435]
And Allah Ta’āla Knows Best
MUFTI EBRAHIM DESAI
Darul Iftaa Mahmudiyyah