From the Decisions of the Figh Academy regarding Paper Currency

All praise is due to Allâh alone, and may blessings and peace be upon him whom there will be no Prophet after him - our leader, Muhammad and his family and his Companions, with an abundance of peace. To proceed:

Indeed the meeting of the Council of the Islamic Fiqh Academy reviewed the research that was sent to it concerning the matter of paper currency and its laws in reference to the Islamic law. After debate and discussion among its members, the assembly decided the following:

First: Indeed it (paper currency) is established upon the fact that the basis in cash is gold and silver, and that the reason for Riba applying to these two currencies is absolutely value-related according to the most correct of the opinions among the Figh scholars of the Islamic law.

Also, it is a given that value is not limited to gold and silver only, according to the Fiqh scholars, even though their source is the basis.

It is also a given that paper currency has become valuable and it takes the place of gold and silver in dealings with it. Things are carried out with it in these times due to the lack of dealings in gold and silver. The souls are satisfied in receiving it as wealth and saving it, and payment and general compensation is carried out with it, even though its value is not in it itself (i.e., the paper). Its value is only in something other than it. Trust is also achieved with it, like a mediator in the circulation of money and exchange. That is the secret of its connection with value.

Since the reality regarding that which causes Riba to apply to gold and silver is absolutely value, and it is also manifest in paper money, and so is in all the cases, the meeting of the Council of the Islamic Fiqh Academy has decided that paper money is currency that is independent. It has the same ruling as the two currencies, gold and silver. Thus, it is obligatory to pay Az-Zakah on it, and Riba applies to it in both of its types - Fadhl and Nasi'ah - just as it applies to gold and silver, exactly. This is due to the consideration of value in paper money based upon an analogous comparison between it and gold and silver. Therefore, paper money takes the laws of cash in all of the requirements that the Islamic law has obligated concerning it.

Second: Paper money is considered independent cash just as the established cash value in gold, silver and other valuable items. Likewise, paper money is considered to be of different types that are as numerous as the amount of sources of its production in the various lands. This means that the paper money of Saudi Arabia is a type, and the paper money of America is a type, and so forth. Every paper currency is considered an independent type of currency. Based on this, Riba applies to it in both of its forms - Fadhl and Nasi'ah - just as it applies in both of its forms to the two currencies of gold and silver and other valuable items. All of this necessitates the following

1. It is absolutely not permissible to sell paper money for paper money or for other than it from the other types of cash, such as gold and silver or other than them, for delayed payment (Nasi'ah). Thus, it is not permissible, for example, to sell a Saudi riyal for another currency of different value, to be paid later without exchange taking place on the spot.

2. It is not permissible to sell one type of paper money for more of the same type of different value (amount), regardless of whether it is for delayed payment or payment made up front.

For example, it is not permissible to sell 10 Saudi riyals in paper money for 11 Saudi riyals in paper money, whether it (the II riyals) is to be paid later or it is paid up front.

3. It is absolutely permissible to sell some of it (paper money) for some of it of another type, as long as it is paid on the spot. Thus, it is permissible to sell the Syrian or Lebanese lira for the Saudi riyal, whether it (the riyal) is in paper money or silver, and it makes no difference if it is more or less. It is permissible to sell the American dollar for three Saudi riyals, or less than that or more than that, as long as all of this is paid up front. The same permissibility applies to selling the silver Saudi riyal for three Saudi riyals of paper money, or less than that or more than that, as long as it is paid on the spot. This (selling Saudi riyals of silver for paper Saudi riyals) is because it is considered selling one type of currency for another type, and them simply sharing the same name (riyal) has no effect while they are not the same in reality.

Third: It is obligatory to pay Az-Zakah on paper money if its value reaches the least of the either of the two minimum amount (Nisab) for Az-Zakah on gold or silver or if it reaches that amount along with other valuables and items meant kept for sale.

Fourth: It is permissible to make paper money the capital sum of wealth in the sale of As-Salam (payment given in advance for receipt of the merchandise later) and partnerships.

Allah knows best and success is from Allâh. May Allâh send blessings and peace upon our leader, Muhammad, and upon his family and Companions.

Source:
Fatawa Islamiyah, Vol. 3 Pages 346-347-348