Islamic Finance 7e

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Islamic Finance 7e

  1. 1. - Business From Islamic Perspective-
  2. 2. introduction <ul><li>Claimed by a Muslim scholar, Ibn Khaldun that God created the two precious metals, silver and gold to serve as a measure of all commodities </li></ul><ul><li>Gold had played an important role for many centuries in a way or another until the end of Bretton Wood’s system </li></ul><ul><li>After the collapse of Bretton Wood’s system, fiat money and a floating rate exchange system have taken place in the monetary system </li></ul><ul><li>Fiat money is created out of nothing by the power of an issuing authority </li></ul><ul><li>With the spread of Islam, the dinar was minted in large quantities and gradually displaced the bezant gold coin as the major international currency, circulating throughout the Muslim world and the Christian Europe as well </li></ul>
  3. 3. Gold Money Background <ul><li>A) History of Gold </li></ul><ul><li>Previous Islamic leadership (632-661 M) till 1880; metal money (silver & gold) </li></ul><ul><li>Innovation - mixing too much currencies, but still backed to gold. </li></ul><ul><li>B) Gold Standardization (1880-1914) </li></ul><ul><li>1880-World War I- known Gold Standard-constant valued </li></ul><ul><li>C) 1918-1939 (War Period) </li></ul><ul><li>-Critical in stocks money- most countries fully independent to gold standardized except 5 th countries :France, Belgium,Holland,Italy & Switzerland </li></ul>
  4. 4. Cont: <ul><li>D) Bretton Wood System </li></ul><ul><li>E) 1971 till today </li></ul><ul><li>-1960s , critical deficits in United States economics </li></ul><ul><li>-August 15, 1971, US$ independently from gold base </li></ul><ul><li>-February 13,1973: Bretton Woods system broken. The Floating regime </li></ul><ul><li>Example; </li></ul><ul><li>-Malaysia (1998), pegging Malaysia Ringgit to US$ </li></ul><ul><li>Q: consequence to Malaysia (+/-) when US$ go down?? </li></ul>
  5. 5. Malaysia Promoting Dinar <ul><li>Have been used before in Malacca Empire since 16’s. </li></ul><ul><li>Unity of the Islamic Countries (OIC) strengthens </li></ul><ul><li>Negative effect from west region (industrial countries); economic dependent too much </li></ul><ul><li>prohibition of Usury in Islamic teaching. </li></ul>
  6. 6. Constraints <ul><li>Gold holding among Islamic’s countries smaller </li></ul><ul><li>(Malaysia; 1.20 % from reserves) </li></ul><ul><li>Knowledge about Dinar among society is low </li></ul><ul><li>Rejection from super power country </li></ul><ul><li>(especially from United States) </li></ul>
  7. 7. Money <ul><li>Three Basic Roles of Money </li></ul><ul><ul><li>Medium of exchange </li></ul></ul><ul><ul><li>As a store of value </li></ul></ul><ul><ul><li>As a unit of account </li></ul></ul><ul><li>Problems created by fiat money </li></ul><ul><ul><li>As a store of value </li></ul></ul><ul><ul><li>As a unit of account </li></ul></ul>
  8. 8. Case for Floating <ul><li>Automatic adjustment </li></ul><ul><li>National economic sovereignty </li></ul><ul><li>Greater fiscal autonomy </li></ul><ul><li>Less likely to be interventionist </li></ul>
  9. 9. Fixed Exchange Rate <ul><li>No monetary independence </li></ul><ul><li>Interest rate taker </li></ul><ul><li>Lower transaction costs for importer and exporter </li></ul><ul><ul><li>Transaction exposure </li></ul></ul><ul><li>Certainty for investor </li></ul><ul><ul><li>Economics and translation exposure </li></ul></ul><ul><li>More responsible govt finance </li></ul><ul><li>Fiscal and monetary constraints </li></ul><ul><li>Excessive volatility under floating </li></ul>
  10. 10. Other Alternative to Gold Dinar <ul><li>Gulf Dinar 2010 </li></ul><ul><li>Applicable to GCC 8 countries </li></ul><ul><li>Could be linked to major OIC economies </li></ul><ul><li>Then can be converted to Islamic Gold Dinar (Rodney 2004) </li></ul>
  11. 11. Umar Vadillo Against the Fiat Money <ul><li>The creation and utilization of paper money whose use is a confined monopoly </li></ul><ul><li>The usurping of part ownership </li></ul><ul><li>The payment of usurious interest </li></ul>
  12. 12. <ul><li>The uses of the Gold Dinar </li></ul><ul><li>For bilateral and multilateral payment settlement </li></ul><ul><li>For savings because they are wealth in themselves. </li></ul><ul><li>For paying Zakat and dowry as established within the Islamic law (Nuradli R.S. at el, 2004) </li></ul>
  13. 13. Problem As a Storage of Value Title: Annual Average RM/USD from 1990 to 2003
  14. 14. Problems from Money creation <ul><li>D=1/r X R </li></ul><ul><li>D= change in total checkable deposits </li></ul><ul><li>R = required reserve ratio </li></ul><ul><li>Changes in reserves </li></ul>
  15. 15. The Equation of Exchange <ul><li>MV = PY </li></ul><ul><li>M = M1 </li></ul><ul><li>V = velocity is the number of time the avrg $ spend on goods and services </li></ul><ul><li>P= Agg Price Level </li></ul><ul><li>Y = Real output </li></ul>
  16. 16. Problem As a Unit of Account <ul><li>Issue: Money Supply (M) can be increased without limit </li></ul><ul><li>Problem: Increase in M beyond the increase in economy’s output leads to corresponding reduction in the quantity of wealth. </li></ul><ul><li>Changes in the quantity of goods represented by currency corrupts accounting process and all economic transactions that are spread over time </li></ul><ul><li>It is therefore a clear case of fraud exactly similar to the fraud that results due to manipulation of weights and measures. </li></ul>
  17. 17. Gold Dinar as a solution? <ul><li>Central Banks </li></ul>
  18. 18. BPALC PROCESS Exporter Importer Importer’s Designated Bank IDB Exporter’s Designated Bank EDB Importer’s Central Bank ICB Exporter’s Central Bank ECB 1. Sales Contract 2. BPA L/C Application 3a. Advice Of LC Issued 3b. Send BPA L/C 4a. Advise Of L/C Received 4b. Inform BPA L/C 5a. Ship Goods 5b. Documents 6a. Payment 6b. Documents 6ci. Reimbursement Request 6cii. Payment 7. Letter of Advice 8. Payment RM15 mil 9. Documents 9b. Debit Authorization 86,641.09 GD A. Advice of Payment B. Payment
  19. 19. Why International Trade Only? <ul><li>Might affect one economy if it is not done correctly. </li></ul><ul><li>Could promote trade among OIC countries. </li></ul><ul><li>The platform for the unity of the OIC countries </li></ul><ul><li>To avoid a massive disrupts to the overall economy because as the demand of Gold increases the prices of other currencies will decrease (Nuradli RS at el, 2003). </li></ul>
  20. 20. differences between current monetary system & dinar system <ul><li>CURRENT MONETARY SYSTEM </li></ul><ul><ul><li>“ Money creation would cause a gradual shift of power into the hands of those who control the financial system. With foreign financial institutions like banks operating, gradual loss of sovereignty is likely to be seen in the land.” (Ahmad Kameel Mydin Meera, The Islamic Gold Dinar, 2002) </li></ul></ul><ul><ul><li>Paper money quantity can be increased at will any time since there will always be demands from the public to increase the quantity of money which would cause inflation = manipulation of paper money </li></ul></ul><ul><ul><li>Floating rate exchange is the currency rate that is unstable which can be easily fluctuating </li></ul></ul>
  21. 21. Differences between current monetary system & dinar system <ul><li>DINAR SYSTEM </li></ul><ul><ul><li>fixed exchange rates resulted the absence of exchange rate instability and thus exchange rate risk where this may encouraged world trade by eliminating the uncertainty when exchange rate fluctuate </li></ul></ul><ul><ul><li>Islamic countries will not need reserve of foreign currencies to finish commercial trading </li></ul></ul><ul><ul><li>The principle of the Islamic economy in the light of the Qur’an and the sayings of the Prophet Muhammad S.A.W. is to improve the quality of the economy by encouraging good and forbidding the harmful </li></ul></ul>
  22. 22. How dinar can help in economic crisis? <ul><li>The gold prices are indeed relatively stable compared to other commodity prices, exchange rate movement and the stock market index </li></ul><ul><li>Manipulation of currencies and the impact toward one economy could be reduced because of the fact that gold does not inflate in value as it is a commodity and, thus, has an intrinsic value </li></ul><ul><li>If gold coin were used, then counterfeiting would also be checked </li></ul><ul><li>With dinar and elimination of interest, we would have a stable currency and monetary system, money supply growth (from new discoveries of gold) can be expected not to overshoot growth in the real sector, thus eliminating the inflationary pressure in the economy </li></ul><ul><li>If all these exchange rates are eliminated by means of a single currency like the dinar, then speculation, arbitrage and manipulation will be very much removed if not eliminated </li></ul>
  23. 23. can dinar solve the trade problem among the Islamic countries? <ul><li>Organization of Islamic Conference (OIC) </li></ul><ul><ul><li>international organization grouping to pool their resource together, combine their effort and speak with one voice to safeguards progress and well being of their people and all Muslims in the world </li></ul></ul><ul><li>implementing part-by-part of the Gold Dinar reflects on how our Prophet Muhammad S.A.W. started to introduce Islam </li></ul><ul><li>the successful implementation of the Islamic Gold Dinar is the level of acceptance among OIC members </li></ul><ul><li>“ The Gold Dinar could be an important facilitating mechanism to help the smaller countries of the world move away from an inherently unstable and ultimately unjust global monetary system,” (Minews, 2002). </li></ul>
  24. 24. can dinar solve the trade problem among the Islamic countries? <ul><li>Though there is yet empirical evidence to conclude on the overall acceptance by the OIC members, several salient factors might need to be considered </li></ul><ul><li>The factors can be further segregated into economic, political as well as infrastructure facilities development </li></ul>
  25. 25. gold standard <ul><li>a monetary system in which the standard economic unit of account is a fixed weight of gold </li></ul><ul><li>gold standard may also be viewed as a monetary system in which changes in the supply and demand of gold determine the value of goods and services in relation to their supply and demand </li></ul><ul><li>often been viewed as ensuring long run, though not necessarily short-run, price stability via the operation of the classical commodity theory of money </li></ul><ul><li>its rarity and durability, gold has long been used as a means of payment </li></ul>
  26. 26. implementing the gold dinar <ul><li>Implementing the Gold Dinar in Domestic Transactions </li></ul><ul><li>The other way of implementing gold dinar </li></ul><ul><ul><li>Collection and Distribution of Zakat </li></ul></ul><ul><ul><li>Minting, Buying and Selling Coins/Kiosks </li></ul></ul><ul><ul><li>Trading with Dinars and Dirhams </li></ul></ul><ul><ul><li>Establishing an Open Market </li></ul></ul><ul><ul><li>Donating in Dinars </li></ul></ul><ul><ul><li>Supporting Da’wa </li></ul></ul>
  27. 27. the dinar future <ul><li>The future of Gold is a very young gold market with a long way to go (Sinclair, 2002) </li></ul><ul><li>promotion of direct trade between Islamic countries, preferably through the mechanism of the gold dinar, could be the initial first step in the proverbial journey of a thousand miles </li></ul>
  28. 28. the dinar future <ul><li>5 reasons that dinar will be excellent in the future: </li></ul><ul><ul><li>Many people are aware of the shortcomings of the present system and advancements in IT technology that providing a way out for these people. The emergence of e-dinar, e-gold, and GoldMoney. From the IT, political is not necessary and a gradual introduction of the dinar is possible without adversely affecting the current system. </li></ul></ul><ul><ul><li>Does not require substantial new regulations. The system is easy as where people invest in gold. </li></ul></ul><ul><ul><li>With the advent and staggering growth in e-commerce, e-money is unavoidable. </li></ul></ul><ul><ul><li>Gold has high prospect as a single global currency. Just consider the obsession humanity has for this metal since historical times. </li></ul></ul><ul><ul><li>The simultaneous economic distress in the US, Europe and Japan are warranting to ponder over the underling causes. </li></ul></ul>
  29. 29. conclusion <ul><li>We have spent a good part of the last two decades in establishing Islamic financial systems in our respective countries </li></ul><ul><li>The time is now right to complete or complement the domestic systems with an international system - a system that will allow each Muslim country to reach out to one another and strengthen the level of trade - a system that will also allow the ummah to use its collective surpluses to fund each other, and help each other grow </li></ul>

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