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Thursday, 5 July 2012

Islamic finance can restore confidence during crisis

COMMERCIAL trade exchanges can facilitate both domestic and international trade. A trade exchange stimulates trade by brokering the members' merchandise, keeping account of members' transactions and trade balances and acting as a clearing house.

Similarly, central banks can use multilateral payment arrangements (MPA) to spur trade among member countries while significantly reducing the need for foreign exchange reserves. It would be even better if the MPA is gold-based, since central banks can leverage on their gold reserve holdings.

The need for cash (or gold) for settlement can  be reduced by increasing the membership size and lengthening the settlement period.

Malaysia has bilateral payment arrangements with about 20 countries. Now is an opportune time to implement the gold-based MPA as proposed by former prime minister Tun Dr Mahathir Mohamad as a response to the 1997 East Asian economic crisis.

As for long-term solutions, one important thing that governments need to do is establish a global currency that is anchored to some "money" commodities like gold.

This would effectively be a fixed-exchange-rate regime that would bring about monetary stability and hence encourage international trade.

Such a currency can play the role of international reserve currency that is not under the control of any one nation. Recently, the governor of China's Central Bank, Zhou Xiaochuan, made a proposal for the adoption of such an international reserve currency, that is, global money to be managed by the International Monetary Fund.

The 2009 G-20 Summit agreed to support a Special Drawing Rights (SDR) allocation which will inject some US$250 billion (RM800 billion) into the world economy. It's this SDR, an instrument created by the IMF to replace gold as an international reserve asset, that is the most likely candidate for a global currency.

To make it truly political-free and stable, the SDR has to be made redeemable for some real commodities like gold.

From an Islamic perspective, the gold dinar and silver dirham were the monetary units of the Islamic caliphate from the dawn of Islam until the collapse of the caliphate in 1924.

The world has to be careful not to allow money or SDRs to be created out of thin air and thereafter, lent out on interest.  Money and SDRs should be made redeemable for gold or other commodities, even oil, in order to prevent abuse and the repeat of monetary crises in the proportions of recent times.

In order to stimulate economic activity, particularly in the current recessionary environment, governments should keep taxes as low as possible. Low rates encourage business activities and do not encourage tax evasion whereas high tax rates discourage business activities while increasing the probability of tax evasion.

For sustainable economic development, governments should move towards imposing negative interest rates.  Experts have shown that sustainable economic development requires negative interest rates.

Unlike in the current system, annual savings should be "taxed" rather than rewarded through interest. A negative interest rate is also consistent with the natural order of entropy and is also a characteristic embedded in the Islamic principle of zakat.

And as learned from the current crisis, the banking sector, rating agencies and hedge funds must be monitored carefully with more regulations and transparency.

Speculative gambling in the derivative markets must also be checked. The derivatives market has grown into a huge bubble, estimated to be in the vicinity of US$1 quadrillion (a thousand trillion).

 Derivatives markets are accelerating the current monetary meltdown, particularly the credit default swaps  that failed during the subprime mortgage crisis in 2008.

 There is a likelihood of huge sums of money leaving that market into the commodities markets, thereby sparking the rise of commodity prices to unprecedented levels.

From an Islamic perspective, the measures outlined above contribute to the attainment of the maqasid al-shariah or the objectives of the syariah, by inculcating values like compassion, justice, avoidance of greed and protection of rights back into the socio-economic dimensions.

The 1990s saw the collapse of socialism; now clearly, capitalism is on a downward trend. Perhaps the world could now give Islam a chance to show the good things it has to offer mankind.

The Vatican remarked that banks should look at the rules of Islamic finance to restore confidence among their clients at a time of global economic crisis
(News Straits Times /  14 June 2012)

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