Petro-Dollars and Sound Money
In 1963 a savings bank based on profit-sharing was established in the a small Egyptian town. For fear of being seen as a manifestation of Islamic fundamentalism, this 1st modern experiment with Islamic banking was undertaken under cover, without projecting an Islamic image.
In this report we take a brief look at the growing world of Islamic Financing and Banking, it’s history, and strict governing laws. We will observe it’s unique features, implementation strategy and give some background to the ideology that exists behind the system.
As a result of the un-sustainability, and the debt associated with this present fiat $US backed global financial system; and in effort to avoid the booms and busts, evils and injustices created by it, worldwide today there are many groups, organizations and peoples pushing for a reestablishment of a sound and stable monetary system. Surprisingly it is not the west that is leading this move, but rather a global trading network that has fast become an vast, strategically placed and connected, sophisticated trading block that decisively controls a strategic commodity.
In May of this year (1998), officials in Singapore announced they would host the Inaugural “Asian Islamic Banking and Finance Conference” in August. Singapore, keen to host the conference, believe they are well placed to tap into the fast growing pool of funds from what potentially may become the largest trading bloc in all history.
OIL FUELED GROWTH
From the end of World War 2, through the baby-boomer years and onwards, global annual use of crude oil skyrocketed. This brought with it a steady shift of wealth from the high oil consuming nations of the West into the high oil producing nations of the Middle East. Annually, vast amounts of US “Petro-Dollars” to pour into Islamic/Arab nations.
By l967 there were nine such banks within Egypt. These banks neither charged nor paid interest, and invested mostly by engaging in trade and industry, directly or in partnership with others, and shared the profits with their depositors. Thus, they functioned essentially as saving investment institutions rather than as commercial banks.
During the oil embargo days of the 1970’s “The Islamic House of Funds” was registered. Controlled from Geneva, it started to accumulate a large portion of this new petro-dollar Islamic wealth, becoming a vast monetary pool. The aim of the House of Funds was to build a strong capitol base and to establish a worldwide network of interest free business and banking services.
The Islamic Development Bank was established in 1974 by the Organization of Islamic Countries (OIC) primarily as an intergovernmental bank aimed at providing funds for development projects in member countries.
In the seventies, changes took place in the political climate of many Muslim countries so that there was no longer any strong need to establish Islamic financial institutions under cover. A number of Islamic banks sprang into existence in the Middle East for instance; the Dubai Islamic Bank (1975), the Islamic Bank of Sudan (1977), the Islamic Bank of Egypt (1977), and the Bahrain Islamic Bank (1979), to mention a few.
In the Asia-Pacific region the Philippine Amanah Bank (PAB) was established in l973 by Presidential Decree and was designed to serve the special banking needs of the fast growing Muslim community. Today it has eight branches including one in Metro Manila.
Bank Islam Malaysia Berhad made its debut in Malaysia in l983. One 1988 report stated there were plans to open six new branches a year in that nation.
The Islamic Finance House, was established in Luxembourg in 1978, representing the first attempt at Islamic banking in the Western world.
Iran completely switched to Islamic banking in August 1983 with a three-year transition period.
Today world-wide there are over 130 banks and countless more “non-bank” financial institutions.
Most observers of this “Islamic Banking Phenomena” have been staggered at the speed with which Islamic banks have sprung up and the rate at which they have progressed.
Islamic banks and financial institutions have been successfully established in countries where Muslims are a minority including India, Switzerland, Denmark, Copenhagen, the UK and the Islamic Investment Company in our own Melbourne, Australia
STRICT LAWS AND PRINCIPLES
Islamic banking and finance is governed by the strict “code of conduct.”
The essential feature is that it is interest-free. Islam prohibits Muslims from taking or giving interest (riba) regardless of the purpose for which such loans are made and regardless of the rates at which interest is charged.
The prohibition of “riba” is mentioned in four different sections in the Qur’an. The first emphasizes that interest deprives wealth from God’s blessings. The second condemns it, placing interest with wrongful appropriation of property belonging to others. In the third reference it instructs the Muslims to stay clear of interest for the sake of their own welfare and the fourth establishes a clear distinction between interest and trade, urging Muslims to take only the principal sum and to forgo even this sum if the borrower is unable to repay.
It is further declared in the Qur’an that those who disregard the prohibition of interest are “at war with God and His Prophet.” The prohibition of interest is also referred to in no uncertain terms in the Hadith or the “sayings of the Prophet”. The Prophet Mohammed condemned not only those who take interest but also those who give interest and those who record or witness the transaction, saying that “they are all alike in guilt.”
Many writings by scholars of Islam discuss the issue. Some distinguish between profit and profiteering, arguing that Islam has prohibited the latter. Some writings have alluded to the ‘unearned income’ aspect of interest payments.
The ban on interest does not mean that capital is without cost in the Islamic system. The system allows for the provider of capital, through a system of “profit sharing.” This is an important distinction as the lender of capitol also shares in the risk, unlike the western system today where the bank providing the capitol shares no part of the risk. If the venture goes bad the bank seizes the assets.
Islamic banks are inclined to be more concerned about the viability of the project and the profitability of the operation rather than the size of the collateral. Good projects which might be turned down by conventional banks for lack of collateral would be financed by Islamic banks on a profit-sharing basis. As a result Islamic banks can play an important role in stimulating economic development.
This system of “equity participation” is where the Islamic bank or financial institution comes in. The bank essentially manages the funds of the depositors to generate profits under very strict laws and guide lines.
Unlike our present system of banking in the west, these guidelines prevent these institutions from employing a “fractional reserve system”. By comparison, official Federal Reserve figures show us that less than $2 exists within our banks, for every $100 dollars we have on deposit. The potential for a bank run that exists in the west, just could not happen within the Islamic Banking system.
These banks, just like conventional banks operate current, savings, and investment accounts. They provide the broad range of payment facilities, clearing mechanisms, bank drafts, bills of exchange and travelers checks etc.
A 1987 International Monetary Fund study by found Islamic banking to be a viable proposition that can result in efficient resource allocation. The study suggests that banks in an Islamic system face fewer solvency and liquidity risks than their conventional counterparts.
Islamic banking has three distinguishing features: (a) it is interest-free, (b) it is multi-purpose and not purely commercial, and (c) it is strongly equity-oriented.
THE RE-EMERGENCE OF SOUND MONEY
From within this emerging financial network, are now coming the inevitable calls for the establishment of a central controlling body or an “Islamic Central Bank” and a return to a sound gold and silver backed currency.
In 1998 the US$ dollar is the reserve currency of the world. Oil can only be bought and paid for in US$. As the US$ fluctuates and inflates it effects Muslim economies. Many within the Muslim nations of Indonesia and Malaysia blame the US$ and policies for the 1997/98 Asian crisis that devastated their currencies.
Illustrating the Islamic push for a gold monetary system is a publication called “The New Coins of the World Islamic Trading Organization.”
It outlines the history of the Dinar and Dirham coins in early Islam History. Sounding more like Free Market Journal on sound money or the gold standard, it goes on to point out the frailties and unjustness of our present global monetary system.
The publication points out that, according to the Qur’an and the Sunnah, the only “lawful money” is non-usurious gold and silver. In the chapter entitled “Using Dinars and Dirhams” it demonstrates the stability of gold and silver over time. An interesting observation is that at the time of the Prophet, around 600 AD, a silver Dirham would buy a chicken. Today the same 3 grams of silver in England will still buy a chicken
“The New Coins of the World Islamic Trading Organization” calls for the Islamic World to unite behind the newly rebirthed Dinar; “When the millions of Muslims start to pay their Zakat (or tax) in newly minted Dinars and Dirhams, they will put millions of gold and silver coins into the mainstream of the daily commercial activities of our communities. That single act will become the most important act this century, opening the path toward the establishment of our own free currency, breaking away from the usurious financial system.
“The new standards of the World Islamic Trading Organization are based on the traditional average weight and measure of the Dinar and Dirham during Muslim rule”
Historically very strict laws surround the minting of the Dinar. Since 1992 silver Dirhams and gold Dinars have been minted and are now in commercial circulation in the UK, Spain, Scotland, Germany and South Africa.
The World Islamic Trading Organization appears to have a clear and orderly establishment program for the new currency;
1st The issuing and minting of Dinars and Dirhams according to the traditional weights and measures under the standards of the World Islamic Trade Organization.
2nd A call to establish again this gold and silver coinage as a medium exchange in day-to-day business within Muslim communities. In Islamic law there is total freedom to buy, sell and possess any quantity of Dinars and Dirhams.
3rd Facilitating the transport and transference of gold for international trade by a network of agencies throughout the world. This infrastructure already exists with the 130 or more financial institutions and banks globally. This network will be expanded to facilitate international payments and bank clearing.
4th Changing all paper currencies to Dinars and Dirhams. This stage is the final transition to Bimetallic Currency.
LEADING THE WORLD
Today Islam boasts a low-cost large productive labor force of over 1 billion people. It commands the lion share of the guaranteed global oil market is the fastest growing trade and finance block in the world. Islam transcends political and geographical boundaries, maintains strategic alliances, religious fervor and military might.
It has been the west that has led the entire world into an era of corrupt, debased and debt backed money along with all it’s crippling and impoverishing effects. It is Islam that is now leading the world in a resurgence of sound money. Should this not be a call to the west to rise up and lead the world in a return to just weights and measures; a fair, wealth based monetary system. Such a system, coupled with all the practical benefits of our modern technical age and high division of labor, would surely usher in a new era of freedom, wealth and prosperity not yet seen.
by Philip Judge