Interest Free Banking

Idea of Islamic dinar gaining momentum

ArabNews.com

LONDON – Next month Malaysian Prime Minister Dr. Mahathir Muhammad will address an international seminar on the adoption of the Islamic dinar as the unit of currency for international trade, especially between the Muslim countries.

The two-day seminar, scheduled to be held on June 25-26 in Kuala Lumpur under the patronage of the Institute of Islamic Thought, a Malaysian think tank, hopes to bring together a cornucopia of central bank officials, economists, bankers, businessmen, academics and other interested parties.

Dr. Mahathir, who is also the country’s finance minister, first mooted the idea of an Islamic gold dinar as a standard unit of currency for trade and financial transactions between the 54 member countries of the Jeddah-based trans-national Islamic Development Bank (IDB), last year. This in the aftermath of the currency crisis that hit the Asian countries, including Malaysia, so badly in 1999 and in 2000.

The Malaysian premier, whose government is the most proactive supporter of Islamic finance in the world and which has instituted a dual banking policy, a conventional system operating side-by-side with an Islamic one, cooperating but not interacting, has already hosted a domestic convention on the subject.

The volatility in the currency markets still persist today, and the Muslim countries, many of whom are primary commodities producers, are perhaps amongst those that are most affected. World commodity prices including crude oil, natural gas, palm oil, natural rubber, rice, tea and so on, are quoted on the commodity and futures exchanges in the US dollar.

Not surprisingly, many of the Muslim currencies including the Malaysian ringgit, the Saudi riyal, the Kuwaiti dinar, the UAE dirham, have traditionally been pegged to the US greenback. Malaysia was forced to go down this route in 1999, following the Asian crisis which saw the US dollar and other international currencies such as the Japanese yen and sterling sharply appreciate against the ringgit. However, pegging your currency to a strong international currency such as the US dollar has its upside and downside. When the dollar is strong, then those currencies tracking the dollar, similarly remain strong relative to the other international currencies.

But the greenback itself can be susceptible and has crashed against a clutch of currencies three times in the last two decades in 1985, 1988, and according to some analysts, is currently in the process of decline. So much so that some bankers in London confirm that already US investors are moving into non-dollar assets. Falling US share prices and the steady rise in the price of gold, are two other signs that the once-mighty dollar is on the decline and confidence in US-backed assets is on the decrease. Even the once-troubled euro last week closed at a healthy 92 US cents, almost 10 percent up on its all-time low in October 2000.

Some European central banks are already having to cut interest rates to stem a rush of abandoning the US dollar into their currencies. Part of the problem is that the US economic recovery post 9/11 is an artificially engineered one, and one fueled largely by a flood of foreign funds — currently about $400 billion a year, and projected to rise to a staggering $800 billion a year within four years, if the dollar does not fall. America in a nutshell is living beyond its means. It is spending more than it is saving, and borrowing the balance from abroad.

Various economists over the last few decades, following the Bretton Woods agreement after the World War II and the abandonment of the gold standard, have hankered romantically for a return to a new gold standard or its 21st century equivalent. Is Dr. Mahathir’s call for an Islamic gold dinar unit of currency a mere coincidence, in this respect?

It certainly is not a new idea. Several Muslim economists and prominent Shariah compliance experts have called for such a unit of currency in the past or some sort of return to a gold standard.

In fact, the Islamic dinar does already exist as the unit of currency of the Islamic Development Bank (IDB). But the IDB’s dinar is also indirectly pegged to the US dollar, because one Islamic dinar is equivalent to one special drawing rights (SDR) of the International Monetary Fund (IMF), which needless to say, is quoted in the US dollar. As such the US dollar remains the de facto unit of currency of the IDB even if its accounts and internal accounting is presented in Islamic dinars.

How pragmatic or efficacious is Dr. Mahathir’s suggestion for the establishment of the Islamic dinar?

Malaysia in terms of innovating payments arrangements between developing countries, has set some notable precedents. It was Dr. Mahathir’s current economic adviser, Tan Sri Nor Mohammed Yakcop, also the architect of Malaysia’s Islamic banking system, who pioneered the bilateral payments arrangement (BPA), whereby Malaysia could settle its trading accounts with individual emerging countries such as Chile, Algeria, and Iran, through the two respective central banks, without the involvement of costly correspondent banks in London, New York or Frankfurt. The two countries would allocate a small group of banks in their respective countries to handle the trade transactions which would then be settled between the two central banks on an annual basis.

When Yakcop suggested to expand the BPA into a multilateral payments arrangement (MPA), which was due to be discussed at the Group of 77 developing countries summit in New Delhi in the mid-1990s, it was the mighty IMF that intervened and warned Malaysia that any adoption of the MPA would constitute a contravention of IMF membership rules. The Fund swiftly dispatched a delegation to Kuala Lumpur to press home the implicit threat, and the suggestion never made it on to the G-77 agenda.

Tan Sri Nor never could hide his disappointment over the sidelining of the MPA. Today, he is spearheading an urgent review of Malaysia’s serious corporate debt restructuring situation.

As to the pragmatism or efficacy of the Mahathir suggestion, it is highly unlikely that an Islamic dinar unit of exchange between Muslim countries would take off, at least under present circumstances. Economic disparities; lack of capital markets formation; weak currencies; lack of economic liberalization and reforms; lack of political consensus and unity amongst the Muslim countries; dependence on primary commodities such as oil, gas, palm oil, rice, tea, etc. – these are all factors that would seriously delay any successful implementation of an Islamic dinar unit of exchange.

Re: #62 by dullabhatti
...home prices (and/or rents) have gone up for most (say 80 to 90%) of them in any given 15 yr period in the last 100 years. 2 or 3 yrs in real property is like 1 week in Stock market.

An insect living on the bark of a tree with a life span of five days, is quite oblivious to the reality of the four seasons. To him the tree bark is an immutable reality.

On the economic and historical landscape we live and percieve reality as does the tree moth. And rightly so!! Why should I care if trends were entirely different a hundred years ago? But the trouble is many things happen in cycles and very similar themes. Economic history can sometimes give us perspective. Most of us have only seen the inflationary age of the post 1971 ``free floating`` paper money era in which the population mushroomed and became extremely mobile and housing prices mostly increased, at least to keep pace with inflation.

But these are just common trends we have become used to and accept as immutable. They are not. What happens in 20 years, few can predict. What happens in hundred years, few can even imagine. But one can imagine all sorts of changes in the landscape, any of which could play a role in the evolution of factors that shape future reality.

(i) The world could experience a massive wave of depopulation in this century due to diseases, hunger and war. (ii) The entire monetary system may change to something quite unlike what we have today. (iii) Nuclear fusion could become a reality and energy problems could vanish, taking with them any notion of world-wide fresh-water shortage. (iv) Women could become even more interested in sex than are men (that could be particularly nice!!).

The whole trouble with making forward projections by extrapolating from the past is that we can only do so by linear forcasting, but the future hardly ever follows a linear course. Its like driving forward in the dark by looking into the well light rear-view mirror.

Two or three years, at a critical juncture of history, can make all the difference in the world when it comes to most things (including property values). A week, if its a critical week, can have a profound impact on the stock market. As for the long run? Well, we are all going to be dead --and that is the one absolute.

...whether Islamic banking is good or not ... people seem to believe as if non-muslim world is trying to make it fail (like many other Islamic things)... God did not tell us any of that..what he told us was to go and sit under a tree ...

That tree was in the Garden of Eden and when he evicted us from that prime property and landed us on this rough and inhospitable spot he promised to send a detailed ``instruction manuel`` soon.

Then he kept sending dibs and drabs of the manuel that kept being mis-read and misunderstood. Somehow he never sent a xerox copy of the haquiki, i.e. the original but instead had it read to somebody, usually a middle aged guy somewhere alone in a desert or on a mountain, who in turn came and reported to his friends and family, who told it to others, who later decided to write some of it down, some of which got changed and some got lost.

I have total faith in the absolute, complete and final truth of the Word of God, but only in that original copy which is preserved in Paradise (presumably on solid-state media, or at least, on microfische). What survives and has been passed down to us is, if not a fake, at best incomplete and contaminated.


Re: #61 by tahmed32

[``...it is appropriate to question ... unsound practices simply because someone attached the ``islamic`` prefix ... proponents of ``islamic`` everything have extended this prefix ... to economics ... politics ... science ... keeps you ignorant... ruins nations and people. ...``]

We couldn`t agree more. However, you forgot to mention the ``jinn power research project`` which could have solved the energy crisis :-)

What does any of this have to do with Islamic Banking? Islamic what? Ah, and I thought all along we were talking about ``Baking``. Now that is a subject we could really have a discussion about, beginning by comparing the differences between a halal oven design and a makru oven design.

Re: PM Thank you for asking. I didn`t go anywhere. As a matter of fact I was here all the time. But then, my `here` is out there for you and vice versa.

...SR

afsand #63 I think we just had an ijma on this board :-).
More seriously, as far as the religious aspect goes, it isnt rocket science - it is for each individual to decide for himself what the concept of riba means in light of the overall message that comes across in reading the Quran. I have already decided: it means dont take advantage of someone`s cash flow problems by charging him an outrageous amount. Since I dont lend people money on interest, and since I put my cash funds in regular bank accounts whose on-lending charges kept within reason by the marketplace, the entire issue is irrelevant as far as I am concerned.
The RELEVANT ECONOMIC ISSUES that are also to be found in the Quran are never mentioned by the proponents of islamic banking - the Quran also says to be honest in your business dealings; it also says to be true to your word; it also says to put your business deals in writing where possible. Such guidelines dont need scholars or rocket scientists to discuss in an ijma till the cows come home. They simply need individuals willing to ACT on them. My family has had some experience in dealings with the Saudis when they rented a house from us in Islamabad - I recall my late father getting totally frustrated trying to get them to pay rent, and myself heard him inform the Saudi official over the phone once that while they may call themselves an islamic kingdom their actions were anything but. I know what he meant, but i doubt if the saudi really knew (since honesty in business dealings is not an issue that concerns these proponents of islam).

Reply to Tahmad and the folks in this discussion group

In my opinion there is a great need for Ijma on this issue. Currently there is not even a clear definition of Riba. Riba is generally translated as interest but the real definition will only be defined by a through and exhaustive discussion between religious scholars and economic experts.

Most of the financial instruments we see today are generally looked upon as “haram-e-mutlaq” by most of the Islamic Scholars. But in the absence of a clear definition of Riba, how can someone pass a judgment on various financial instruments.


As far as Islamic home loans go, we have yet to see if it can create a market of its own. Currently in USA it is a niche market with lot of die-hard fans just like Macintosh computers. Paying more for a loan does not count as long as you are following Allah. So in a nutshell it is the peace of mind that counts.

Just to add to price variations in USA home market. I live is Sacramento CA where prices have fluctuated 30 percent +/- in last 15 years. Prices went down 30 percent in 1994 compared to 1991 prices. Lately they have gone back to pre 1991 levels.


Asfand Siddiqui
Sacramento CA

SR: You are correct about Japan and I am sure there are some other examples too although my challenge was more rhetorical. You will agree that 5 billion people living in houses today, out of 7 billion on earth,(crude guesstimates) home prices(and/or rents) have gone up for most(say 80 to 90%) of them in any given 15 yr period in the last 100 years. 2 or 3 yrs in real property is like 1 week in Stock market. Anyone who buys real property, particularly residential housing, to make quick money in 2 or 3 years deserves his home price cut in half.

Having said that, I have no interest in whether Islamic banking is good or not or whether it will succeed or not. Some people seem to believe as if non-muslim world is trying to make it fail(like many other Islamic things)...fact is there are many Islamic type banks in the West who are allowed to do business like other banks do. The ultimate test will be whether they succeed in attracting enough customers to be a viable alternative. As a customer I don`t see any benefit right now...if they can prove that I can save more money with them than the traditional banks, hey I will be first to dump Bank of America...but don`t expect people to invest in them because God told us to do so. God did not tell us any of that..what he told us was to go and sit under a tree and remember him and thank him for the falling jamuns....ok that was our God who told that...but you get my point anyway.:-)

sr #60 I believe the real estate market in Houston collapsed in the mid-1980`s due to the downfall of oil companies brought about by the breakup of the OPEC cartel. And no doubt billions were lost by small investors in the S&L scandal in the US some years ago, as well as in Pakistan where the savings cooperative caused small investors to lose crores. The 1997 financial collapse of the Far East miracle (brought about by poor lending practices of local banks as well as the euphoria of global investors) is another major example. Japanese banks, which at one time dominated the top ten list of the world`s largest banks are still sitting on oodles of non-performing assets a decade after the Japanese economy went South. The list goes on, and far be it for me to claim that modern financial systems are exactly where we want them to be.
HOWEVER, having said all that, many important lessons have been learnt as well along the way and gradually the wild horse of modern finance is being brought to heel (to mix metaphors with what one teaches domesticated dogs, but what the heck this is chowk and anything for a laugh). And one important lesson is: financial systems are enormous and complex, and one needs to be practical and down to earth in terms of how one deals with them. And being practical means not confusing things with dogmatic notions of how God wants the system to work. God is not a micromanager, and all He cares about is whether you use your God given mind to think logically and your God given heart to be concerned about the well being of your community. Neither the requirements of God nor the requirements of well managed financial systems is apparent in listening to the proponents of Islamic banking. That is why I do think it is appropriate to question the unquestioning acceptance of accepting unsound practices simply because someone attached the ``islamic`` prefix to them. Some extreme proponents of ``islamic`` everything have extended this prefix not just to economics or politics but to science as well (with one person having computed the speed of heaven). Bad science simply keeps you ignorant. Bad finance ruins nations and people, as has already happened in Pakistan where investment is at a standstill in large part due to uncertainties created by talk of islamic this and islamic that.

Tahmed #various (up to #27),
Cool down, bhai sahib. Not everything prefixed by `Islamic` is doomed to ruin, though I can sympathize with your concern, based on various Islamic experimentation in the IRP.
Now, is just me the novice or are the mark-up and Morabaha schemes just that-- clever SCHEMES that try to technically stick to the letter while offending the spirit? It would seem that something along the lines of Mushraika is the only (mentioned) device that is in keeping with the spirit of Islamic banking, viz, the sharing of risk and the elimination of the `` moral travesty`` of interest. (Though, personally, I find nothing morally offensive in expecting a fixed payoff for taking the risk of lending what might be my hard-earned fortune to. IMHO, it becomes an issue only when (a) the lent monies are not hard-earned, and/or (b) the fixed payoff, i.e, interest rate is exploitaively high-- an issue on its own!)
Further, Mr. Ahmed, you may be right that the Shariat Courts in Paksitan are a travesty and indeed a blot on the good name of Islam, but it can compellingly be argued that bad neeyat is more to blame (Yes, there is a case to be made for any project beginning with `Islamic` to be deferred until the neeyat issue is (re)solved! :) )
My aunt and uncle in the US lost almost all their savings and have had to defer retirement plans due to the fudging of profit figures in some corporate quarters. Should we declare Western investment models a travesty? Or should regulation be tightened. Is it even possible? Who watches the watchers? And who watches them? In the end, isn`t it mostly a matter of neeyat?
Banker, #various, and FJ #27, Thanks for the informative links. Looks like I`ve got my weekend reading cut out. :)

Have just read up to #45 in the replies. This issue was brought up, if memory serves, about a year and a half ago, but ran amuck with the interjections of some bad spirits-- myself included. Speaking of which, :) where have all the Indian interactors gone?? This time `round there actually seem credible voices on the side of Islamic finance, and, quite incredibly, many an open ear on the other side. Perhaps the recent corporate scandals in the US have hit some interactors too close to home for comfort?
For what it`s worth, allow me to produce what I`ve learnt from the discussion thus far, as well as some thoughts of my own:
There is consensus that a more equitable alternative to the greed-driven runaway-interest based financing modes as presumably originated in the West. (There is no reason to equate this capitalism, per se).
Islamic financing is seen as an a viable alternative. But Islamic banking may not be a totally revolutionary concept. It is, in fact, no more intrinsically Islamic than Christian love is the exclusive domain of Christians. (So relax, Mr. TAhmed! :) )
The two broadly differing motivations to introduce Islamic banking are:
(a) it is ``Islamic`` and so must be better, in which case Islamising banking is so much a matter of fudging with the language and mode of operation, while the essense of the whole idea is neglected. Rafay sahib points out that Islamic banking, like Soical is a great idea but needs widespread usage for its success. I have no pretence to either islamic or financing scholarship, but it should be clear enough that Islamic banking is but a part, that needs implementation in spirit more than letter, of the whole concept of the just and equitable Islamic society. And it may not be a substantial enough part to determine the direction the whole takes.
(b) the present system is perceived as inequitable (having nothing to do with its ostensible `Western` origins). In this sense, many Westerners, including atheists such as Bertrand Russell have advocated what amounts to Islamic financing.
-----------------------
It is interesting that the highest Sunni authority has recently declared fixed interest to be kosher. I think it fair to say that most of us perceive the very lending of monies represents a risk, for which some reward may be justifiably accrued. In considering the traditional legalistic Islamic opposition to such interest-taking, it would be invaluable to look at how cash was viewed in the seventh-ninth centuries AD and see if there was a difference from how it is nowadays. Someone said something about it not having intrinsic value back then. Surely, such a fundamental change necissitates some fundamental reframing of the law, staying withing the spirit in which it was originally formulated.
This need not be just a matter of calling a whorehouse a house Mut`aa.
PM.

Good to see ya back here Sohail! Here`s some thought-food for the `deep-down` idealist in you: Believing is Seeing. (I think it`s Gandhi, though I may be wrong).
Have just read your reply on ‘fiat money’— cursorily. Looks like we might be on to something here...

Hey Sohail! Good to see ya back here-- and with a vengeance too! Just read - cursorily - your post on fiat money. hmmm.. might be on to something critical there.
Stay safe and happy, bud!

Re: #53 by dullabhatti on November 21, 2002 3:28pm PT

Please list 3 liveable places in the world(except Afghanistan) where home/real property prices(total market value) has gone down over a continuous 15 yr period.

First, Japan. From what I have read, since I don`t live there myself, many places in Japan have seen an erosion of real estate prices. If you bought at the peak in Tokyo, and paid $100, today your property could sell for anywhere between $40 to $60.

As for two more examples, we could probably find them somewhere but I`ve not done the research. Fifteen ``continuous`` years is going to be a problem. If you only look for shorter periods, say two to five year stretches, we see many examples.

Argentina is presently a huge bargain. In the past, likewise, if you were to see it from an international buyer`s perspective, as a result of exchange rate fluctuations, over the last two decades, Brazil, Mexico, Nicragua, Bolevia, Indonesia, Thailand, Turkey, Poland and Russia, just to name a few, have seen similar erosion of real estate values for various lengths of time.

...SR

re asfand #52:

Its sad to see so many bright and young Muslim men and women waste their intellectual energies going after the quackery of the bygone ages in the name of Islamic finance.

Your example rests on the assumption that the seller or lender in the first half has a riskless transaction. That is plain wrong. The expected life of the loan is 15 years but the buyer has the option to pay it off in full at any time(that is how most mortgages work these days). In industry parlance this is called `prepayment risk`. Without going into too much details, I`ll simplify. Suppose a widow has put all her life savings of a million rupees in Defence savings bonds which promise her a `profit` of 10% annually for 15 years. After only one year the bank(the buyer) decides to return the widow the entire million rupees. The widow protests that she is not interested in a million, she wants 100000 for the next 15 years and then the principal. The bank tells her that they can take the money back but they`ll only pay her 9%(which is the prevailing profit/loss sharing rate). What can the widow do? Not much.

Now granted I`ve oversimplified the example but you get the picture. The lender expects payments for 15 years, when it gets its money back earlier(or later) than he expects he takes a hit. What direction the hit goes is too complex to explain here.

later
-sac

asfand #52 and dulla bhatti #53 I think afsand sahib that you provide numbers but the substance of your argument lies in the ``consolation`` a buyer can get by watching renters suffer from the same misery as he is from his installment increases. (I thought good muslims did not get consolation from watching other people suffer too, incidentally). dulla bhatti, on the other hand, demonstrates how a borrower on fixed interest mortgage avoids the need for such consolation in the first place.
The unavoidable fact is: if islamic banking is so good, why are hindus and jews (who are supposedly well-versed in financial matters) not coming into islamic banks (with tasbih in hand and pretending to be muslims), in order to enjoy the benefits being offered by the good islamic bankers? I am saying this jokingly, not being cynical, but I think you will agree that this is something worth thinking about. I am not questioning that for some people under some circumstances, mortgage tied to prevailing rents may be beneficial, but in general that is not true as is easy to see. Financial markets are very creative, and there is a lending instrument tailored to every need. Islamic banking has definitely not passed the market test (and no wonder the religious parties are trying to get it imposed on the ``hostage nation`` of Pakistan).