Ilma Khan

Jamia Millia Islamia, India

This article explores how a Central Bank Digital Currency (CBDC) might be structured to align with Islamic legal and ethical principles, steering clear of riba (interest), gharar (excessive uncertainty), and maysir (gambling). After reviewing classical Shariah foundations for money, it outlines a hybrid retail–wholesale architecture featuring profit-and-loss sharing reward structures, transparent issuance, Shariah-governance oracles, and ongoing oversight by a dedicated Shariah Board. It further examines the implications for Islamic monetary policy—such as tokenized sukuk-style liquidity facilities and instant Shariah-compliant repos—and concludes with regulatory, technological, and capacity-building recommendations to realize a fully Shariah-compliant CBDC.

Introduction

In Islamic jurisprudence, money (mal) serves primarily as a medium of exchange, a store of value, and a unit of account. Classical jurists such as al-Ghazālī and Ibn Taymīyah stressed that money must not be used for speculative ends or to generate guaranteed returns (riba), nor should it expose transacting parties to undue uncertainty (gharar) or resemble gambling (maysir). Extending these timeless principles into the digital age, a Shariah-compliant CBDC must preserve the objectives of Islamic law (Maqāṣid al-Sharīʿah) by fostering economic justice, preventing harm, and promoting communal welfare.

Shariah Foundations for CBDC Design

Islamic legal and ethical mandates place clear constraints on a digital currency’s structure. First, any incentive mechanism linked to CBDC holdings must avoid predetermined interest; instead, reward structures should mirror genuine profit-and-loss sharing through arrangements such as digital muḍārabah pools, ensuring that risks and returns align with real economic activity.

Second, the design must eliminate excessive uncertainty and chance-based outcomes by providing complete transparency in issuance schedules and supply-monitoring via a public ledger, and by forbidding arbitrary fees or lottery-style rewards.

Third, embedding the Maqāṣid al-Sharīʿah requires integrating digital identity solutions to broaden financial inclusion, safeguarding against fraud and money-laundering to uphold social order, and preserving individuals’ wealth through robust security protocols.

Hybrid Retail–Wholesale Architecture

To balance broad access with systemic stability, the proposed CBDC adopts a hybrid architecture. On the retail side, an account-based ledger—integrated with comprehensive KYC/AML checks—ensures that all users, including the unbanked, can participate safely and transparently.

For offline scenarios, token-based mechanisms (e.g., NFC or Bluetooth-enabled wallets) replicate the anonymity and convenience of cash while maintaining an immutable digital audit trail.

At the wholesale level, a distributed ledger among central bank nodes facilitates large-value settlements, reducing counterparty risk and enhancing operational resilience. This dual-track approach preserves cash-like utility for everyday users and delivers efficient, low-risk clearing among financial institutions.

Shariah Governance and Oracle System

A robust governance framework is essential to uphold Shariah compliance. Each CBDC transaction is first checked against a whitelist of smart contracts pre-certified by qualified scholars to ensure no element of riba, gharar, or maysir. Shariah oracles—off-chain services governed by a permanent Shariah Board—provide dynamic certification, vetting new smart contract proposals and preventing the deployment of unethical code.

This layered oversight guarantees that innovation proceeds under continuous scholarly supervision, preserving both compliance and consumer confidence.

Islamic Banks’ Liquidity Management

Conventional central bank facilities such as discount windows are prohibited for Islamic banks due to their reliance on interest. A Shariah-compliant CBDC framework introduces alternative liquidity tools: the central bank could issue tokenized sukuk-style instruments denominated in CBDC, offering genuine profit-sharing returns instead of fixed interest. Instant repo markets, executed through smart contracts and collateralized with permissible assets, would provide swift, interest-free funding to alleviate short-term needs. Additionally, digital muḍārabah pools—where surplus CBDC liquidity is invested in vetted Shariah-approved ventures—would distribute real economic returns to participating institutions, aligning liquidity management with core Islamic principles.

Implications and Recommendations

To bring this vision to fruition, several steps are essential. First, national Sharia councils must codify clear fatwās defining permissible CBDC features and governance standards, ensuring consistency across jurisdictions. Second, investment in resilient distributed-ledger technology—capable of secure offline operation and seamless digital identity integration—is critical to support both retail and wholesale functions.

Finally, capacity-building initiatives should equip Sharia scholars and financial practitioners with the technical expertise to oversee ongoing innovations, bridging the gap between classical jurisprudence and modern fintech.

Indonesia’s “Rupiah Digital” (Project Garuda)

Bank Indonesia’s Project Garuda (Digital Rupiah) aims to issue a wholesale and, eventually, a retail CBDC by 2025. In its White Paper and subsequent Consultative Paper, Bank Indonesia emphasizes full fiat parity, interoperability with existing payment rails, and integration into the 2030 Payments Blueprint (BSPI 2030) and FX Market Blueprint (BPPU 2030).

Scholars note that, in principle, a retail CBDC that is non-remunerated and stable in value functions similarly to physical fiat and therefore meets the baseline requirements of a Sharia medium of exchange (mal). The Digital Rupiah’s transparent issuance mechanism and central-bank backing address concerns of gharar (excessive uncertainty) and maysir (gambling).

Despite conceptual alignment, significant gaps remain:

• Store-of-Value Function: Digital Rupiah still lacks explicit safeguards against hoarding and artificial scarcity. Islamic jurisprudence requires money not be used as a speculative asset—yet the current design does not limit accumulation or enforce real-economy backing of each token.

• Regulatory and Legal Framework: There is no comprehensive Sharia-specific regulation covering CBDC distribution rights, ownership transfer mechanisms, or conversion safeguards. This regulatory vacuum risks gharar in contract terms and unsettled ownership disputes.

• Digital Security and Fraud Protection: While Bank Indonesia outlines cybersecurity standards, these focus on conventional threats. Islamic financial ethics demand robust protection against fraud and money-laundering to uphold hifz al-māl (preservation of wealth), yet the proposed framework has not integrated dedicated Sharia governance controls or oracles.

• Public Awareness and Education: Lessons from Islamic fintech show that low Islamic financial literacy can lead to misuse of Sharia-branded products. For Digital Rupiah to avoid dharar (harm), large-scale consumer education on CBDC features, rights, and risks remains outstanding.

These challenges indicate that, while Indonesia’s Digital Rupiah conceptually aligns with Sharia objectives, its execution must incorporate binding Shariah governance, usage constraints, and consumer protection measures before being deemed fully compliant.

Addressing these challenges requires close collaboration among central banks, national Sharia councils, fintech developers, and Islamic scholars. Only by integrating rigorous Sharia governance into both wholesale and retail CBDC designs—and by codifying clear legal and technical standards—can Muslim-majority countries realize fully Sharia-compliant digital currencies that honor both classical jurisprudence and modern economic objectives.