This article first appeared in Forum, The Edge Malaysia Weekly on October 27, 2025 - November 2, 2025

At the Global Islamic Finance Forum 2025 in Kuala Lumpur last week, the discussion was all about how Islamic finance can drive business progression while empowering societies. The goal? “By blending ethical foundations with cutting-edge advancements, the Forum illuminates pathways to sustainable growth, fostering inclusivity, innovation and resilience.”

The keynote addresses and panel discussions, one of which I participated in, set the tone for the geo-economic context of Islamic finance, accounting for 24% of mankind, roughly 9% of world GDP, but only 1% of global financial assets. Taking into consideration that Islamic-majority countries probably have roughly half of the declared global reserves in oil and gas, it does seem curious why such wealth in natural resources could not be translated into higher levels of global economic output and share in global trade. There was broad consensus that solutions could be found in technology, investments in human talent and seeking new models of economic development. These await pilot experimentations to see which model, product or service could reach a global scale.

Last week also saw US and Japan stock markets hitting record highs, and the gold price exceeded US$4,300 per ounce despite big swings in sentiment as to whether the US-China trade negotiations were on track or had gone off the rails. Last weekend, the World Bank/IMF Annual Meetings saw central bankers and financial ministers meeting in Washington, DC, relieved that, so far, the global economy and financial system were more resilient to global shocks than expected. Overall, the mood was grim awareness that the global economy was on the verge of slowing as the tariff shocks began to taper into minor shocks, even though inflation has not yet surfaced as much as initially feared.

I have always believed that Islamic finance should never feel disadvantaged relative to mainstream, interest-based finance. Conventional finance has grown far faster than GDP, reaching US$486.4 trillion at end-2023, or 4.2 times world GDP, mainly because fiat-money systems (driven largely by advanced reserve currency countries) are debt-based and driven.

In a foundational and groundbreaking working paper on “Fundamentals of Modern Money and its Application to Central Bank Digital Currency (CBDC): An Exploratory Shariah Analysis” by researchers of the Islamic Finance Department of Bank Negara Malaysia dated July 2025, the authors concluded that “the essence of modern money is a credit relation and promise to pay abstract value, constituted by social (economic and political) relations between individuals, banks, the central bank and the state”. The paper’s real contribution is to go back to the fundamentals of syariah or Islamic interpretation of money, which is essentially commodity-based.

Historically, it says, “during the period of prophet Muhammad (PBUH), his companions and the classical shariah scholars, goods and labour were usually priced in, and paid with, gold and silver coins (dinar and dirham). Both dinar and dirham are the ‘measurer of value’, while goods and labour are the ‘measured’ thing (muthman). Thus, according to the majority of classical shariah scholars, thaman is the dinar and dirham”.

“Thaman is a term combining two meanings: (1) price, in which goods and labour are denominated; and (2) the countervalue, which the buyer is offering in exchange of the seller’s goods.”

Historically, the gold dinar was an Islamic gold coin minted during the Umayyad Caliphate (661 to 750 CE) to replace the Byzantine gold coins and Persian silver coins (dirhams) that circulated widely in the Middle East region. The first purely Islamic coin was standardised at 4.25g of gold under Umayyad Caliph Abdul al-Malik ibn Marwan in 696 CE. The gold dinar remained the official currency and was widely used until the collapse of the Ottoman Empire in 1924. The move to fiat currencies, backed by sterling, francs or dollars, came with the colonisation of the region, even as banking and credit systems were transformed into conventional interest-bearing credit institutions down to the present day.

The Bank Negara paper opened up the debate on whether Islamic finance should go back to its roots as a commodity-based money system. Note that I am not advocating the return to a pure gold standard, since hybrid systems have always coexisted in history, from gold and silver (bimetallism) to more and more credit-based fiat currency systems based on government credit that pushed gold or commodity currencies to the periphery since the abandonment of the gold standard.

Two events have changed the global game. The first is the return of gold as a store of value as investors became aware that with the weaponisation of the US dollar and the confiscation of Afghanistan and Russian assets, any holdings in the US dollar, euro, yen and even Swiss franc may be subject to freezing, sanctions or confiscation. As the US got increasingly into deficit and debt, with the current government lockdown, there is less and less faith in fiat currencies. The sharp rise in gold price is more a loss of trust in fiat currencies than a pure de-dollarisation move. As long as the value of dollar assets is vulnerable to bubbles, some hedging into other assets is fully rational and understandable.

The second event is the rise of cyber-currencies, or digital money, through tokenisation, using blockchain and stablecoins, or Central Bank Digital Currencies (CBDCs).

As 99% of stablecoins are linked to the US dollar, and there is no guarantee that such stablecoins are free from official (or non-official) monitoring or hacking, one possibility is the usage of e-dinars or stablecoins linked to gold. As the Financial Times reported recently, central bank gold holdings in value now exceed their holdings in US Treasuries.

What this means is that the central banks may want to increase their holdings of gold, currently reported by the World Gold Council at 36,359 tonnes, of which 12,365 tonnes (34%) are owned by Europeans (including the UK, Switzerland and Scandinavian countries); 8,133 tonnes (22.4%) by the US; and 3,425 tonnes (9.4%) by Islamic-majority countries. Central banks, mostly outside Europe, have been buying gold at the rate of 1,000 tonnes per year for the last three years. If, for geopolitically strategic reasons, the non-Western central banks begin to buy gold to back their own currencies up to, say, 20% of their reserves, there will be a major game change from a US dollar-dominated international payment and monetary system to one shared with different types of money, including gold and stablecoins backed by either fiat currencies or gold, precious or rare metals, energy or real commodities.

The real interesting innovation in Islamic finance would occur if an e-dinar (stablecoin or CBDC backed by gold) were to be issued. Such an e-dinar can easily be used by central banks to settle cross-border payments, using local-to-local foreign-exchange clearing and settlement on a net basis. That moves gold from a store of value to a means of digital payment.

Since the gold price has risen by roughly the same proportion as the rise in US government debt of between 8% and 9% annually since the 2008 global financial crisis, and gold is the only non-interest-bearing asset not issued by any government (the non-fiat currency), the usage by Islamic majority countries to return to an e-dinar may be adopted for cross-border payments beyond the Islamic countries.

Which Islamic country could take the lead in such innovation? That is the real challenge of truly foundational transformation.

Tan Sri Andrew Sheng writes on global issues from an Asian perspective

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