543Money Dinar

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ISB543

The concept of money


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Medium of payment for goods/services Assets as a money?specific assets?

Conventional

Has a `right to earn more money Can be sell and rent.

As Commodity

A measurement to determine a just price Dirhams & Dinars as a judge and mediators Because its not an objective in themselves. They may circulated and act as a fair judge.

Islam

Nature of Money


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Conventional

Medium of Exchange

Unit of Account

Store of Value

Standard of DeferredPayment

Islam

Medium of Exchange

Measure of Value

Not for trading toexchange must be

EQUAL

Functions of Money


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Money Creation in Banking System

Most important activities of CB - the process bywhich the money supply of a country is expanded.

Create money in the form of checkable deposits,credit card lines, debit cards, etc.

Effect: Cause a gradual shift of power which can lead a gradual

loss of sovereignty.

Controlling power gains over assets in the economy.


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Money Creation

CB introduce or issuenew money into the

economy

Quantitativeeasing

Physicalcurrency

The new money introduced by theCB is multiplied by commercial banks

through fractional reserve banking

Currency originallyissued by the CB

Bank deposits atcommercial bank


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Fractional Reserve Banking

Medieval goldsmiths started the fractional reservebanking

Mean banks keep only a percentage of theirdeposits on reserve as vault cash and deposits at theCentral Bank.

The steps:1.Accepting new deposit

2.Making a loan

3.Clearing the loan cheque


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When a commercial bank loan is extended, newcommercial bank money is created.

Because of this money creation process by thecommercial banks, the money supply of a country isusually a multiple larger than the money issued bythe central bank;

that multiple is primarily determined by the reserve ratioset by the relevant banking regulators in the jurisdiction.


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(i) Accepting New Deposit

Assets Liabilities

Required Reserve +10,000

Excess Reserve +90,000

Mr Tan a/c +100,000

Total 100,000 Total 100,000

10% x 100,000

No effect on money supply

BANK A


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(ii) Making a Loan

Assets Liabilities

Required Reserve 19,000

Excess Reserve 81,000

Loans +90,000

Mr Tan a/c +100,000

Aminah a/c +90,000

Total 190,000 Total 190,000

+9,000 = 10% x 90,000Create money by making a

loan to Aminah

BANK A


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(iii) Clearing the Loan Cheque

Assets Liabilities

Required Reserve 10,000Excess Reserve 0Loans +90,000

Mr Tan a/c +100,000Aminah a/c 0

Total 100,000 Total 100,000

Assets Liabilities

Required Reserve +9,000Excess Reserve +81,000

Sendayu a/c +90,000

Total 90,000 Total 90,000

BANK A

BANK B


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ROUND BANK DEPOSIT RR ER

1 A 100,000 10,000 90,000

2 B 90,000 9,000 81,000

3 C 81,000 8,100 72,900

4 D 72,900 7,290 65,610

5 E 65,610 6,561 59,049

6 F 59,049 5,905 53,144

- -TOTAL INCREASE 100,000 900,000

MONEY MULTIPLIER = 1/RR

M1 = ER X MM


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Law of One Price

In a dual system the Islamic banks would also creatingmoney also caused a problem

The link made the bank cannot operate independently Arbitrage would set- in in any price differentials Profiteering would move the pricing to Law of One Price

Islamic bank need to redefine money and eliminate interestrates to truly operate on Islamic principles.


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General Inflation

Increase in aggregate pricelevel due to money creation

Not everyones income wouldhave risen

Disparity in income

distribution Concentration & circulation of

wealth among the rich

Disparity in Income Distribution& Creation of Poverty

Income grows slower thaninflation

Pushing to absolute povertylevel that continuously created

Small group enjoys a growth in

income > growth in price level Inequality in income

distribution become widenand widen

Socio-Economic Effects ofMoney Creation


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Effects on Housing

Property sector beexpected to grow higher

Burdensome on thelower income group

Shrink the size of hometo make it affordable

Longer durations tosettle housing loans

Effects of Price Control onAgriculture

Agriculture become lessattractive

Self-sufficiency in foodmay not become apriority



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Effects on Society

Poverty warrant the

women to work in orderto sustain her family More problems in work

place Implications for family

solidarity & child rearing Smaller home make the

children spend most of their time outside

Effects on Environment

Physical & social

environment The struggle to survive

may cause them to resortto crime

May also cause theenvironment to beblundered and destroyed

Such as making myopicbusiness decisions



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Any practice allowed by the Prophet (s.a.w.) is considered as atradition and is thus necessarily just and in accordance withIslam.

With the spread of Islam, the dinar was minted in largequantities and gradually displaced the bezant gold coin.

Prophet Muhammad (s.a.w.) said: A time is certainly coming overmankind in which there will be nothing (left) which will be of use save a

dinar and a dirham.

It stresses the intrinsic value that is in gold.


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The Islamic Dinar is a specific weight of 22k gold (917.)equivalent to 4.25 grams.

The Islamic Dirham is a specific weight of pure silver equivalentto 3.0 grams.

Since the exchange between the dirham and dinar were fixed,the Islamic economies of those days basically operated on thegold standard.

Umar al-Khattab established the known standard relationshipbetween them based on their weight:

7 dinars = 10 dirhams .


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Modern History While in Islamic history, the dinar and dirhams were metal coins,

the Islamic Dinar system being proposed in this modern era isbasically an electronic payment system that is gold backed.

Transactions can be carried out through the internet by meansof electronic transfers but however all transactions are backedby gold for convenience and safety reasons.

The card system can be incorporated into this gold paymentsystem as well.


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As a result of currency crisis in Asia, in first of 1997, then PM of Msia, Dr. Mahathir Mohamad proposed introduction of Islamicgold dinar as currency for international trade in the Muslimworld.

It was supposed to suppress the too overly traded Americandolar and ensure that dollars instability does not affectinternational trade.

The using of Gold Dinar that supposedly was to start in mid-2003.


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Gold Dinar in Malaysia

Kijang Emas Kelantan This coin have originated from India. It was first issued inKelantan and Patani when the religion in these states wasHinduism. This motif is the basis of Bank Negara emblem.

Dinar Emas Matahari Kelantan The Dinar Matahari or Sun Coin of Kelantan had either a 6 or 8pointed star, or a 4 petalled flower on obverse side.


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Implications of Gold Dinar System

Stable Money Dinar is gold itself Fiat money (money not backed by gold) be the cause.

Eliminate money creation & destruction, counterfeiting-

inflationary Money supply can be not overshoot growth in the real sector.

Excellent Medium of Exchange

Accepted globally. Its inherent price & easy divisibility

USD100 or gold worth USD100 Not a legal tender forced to accept by law


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Minimizes Speculation, Manipulation & Arbitrage

A single currency No different rates or fluctuation

No speculation & arbitrage

Minimizes Business Cycle Effects MS CPI - debt

MS growth leveled reduce business cycle effects

Stable labour-capital; no unemployment Dinar exchange within real sector instantaneous & actual

funds Harmonious relationship


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Diversifies Risk & Promotes Trade Unify currencies diversify currency risk Intrinsic value & treasured by all nations

Reduced transaction costs

Promote international trade

Promotes a Just Monetary System

Harmonious growth between real sector & monetary sector Price control not necessary anymore

Dissatisfaction among producers of agriculture wouldminimized.


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Reduced Social Problems

Ex: Poverty, Unequal distribution, Women labor,Child neglect

Zakat system

Smaller fraction of time used to earn a living balanced society

Sovereignty Protected

Protect the sovereignty of nations from economic Cultural dominance by foreign forces


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Prospects


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Challenges

Institutionalsetback

Attempts tofail

Increase inUse

Dual system

Confidence


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