In the Name of Allah, Most Gracious, Most Merciful.

All praise and thanks are due to Allah, and peace and blessings be upon His Messenger.

Dear brother in Islam, thank you for your question and may Allah increase your earnest to learn the teachings of your religion.

The Islamic Shari`ah does not impose restrictions on the forms of money. Islam only organizes the human conduct and people's attitude toward money and wealth. As long as the Islamic regulations are observed, modern forms of money should not be objectionable.

Answering your question, Dr. Monzer Kahf, expert in Islamic economics and finance, said,

Money can be in any form: paper, electronic accounts, pieces of hide, or metals. There is nothing in our Shari`ah that requires money to be in a specific form. It is the society's decision.

Besides, money does not determine the economic activity in a country; it affects it, but the main determinant is whether humans use the resources around them wisely or not.

A central bank is needed for many reasons: mainly supervising banks and being a bank of the government. The fact that our money is paper and can easily be printed is not the cause of inflation. One of the most common causes of inflation is governments' or central banks' behavior of printing money unwisely. However, there are many countries in the world that contain the printing machines in a very wise way.

Having central banks and commercial banks does not mean they have to be interest-based. Just as there are Islamic commercial banks, central banks can also be Islamic.

I suggest that you read a few academic books on banking and finance and Islamic banking to acquaint yourself with this area.