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The writer is an Islamic finance researcher who completed his MBA
(Investment Management) from Concordia University and is a CFA Level 3
candidate. He was recently awarded the Islamic Finance Qualification (IFQ)
designation.
A Super Sovereign
Calls for reforming the international monetary system have picked up pace with
Zhou Xiaochuan, Governor of the People's Bank of China opining that the IMF's
SDR should be widened in scope and allocation and presents the best possible
solution in securing global stability and facilitating world economic growth.[i]
The criteria he presents in selecting an international reserve currency are:
i. Stable value
ii. Rule-based issuance
iii. Manageable supply[ii]
Clearly, a new Islamic Dinar weighted to equal 4.3 grams of gold and an Islamic
Dirham weighted at 3 grams of silver will exceed the established criteria
prescribed by the governor in terms of its intrinsic value, convertibility and
flexibility. It is entirely independent from the economic conditions and
geo-economic interests of any single country and directly addresses the Triffin
dilemma by providing liquidity while maintaining value. Similarly, it is a far
superior alternative to the Bancor currency proposal of John Maynard Keynes
whose world currency unit fixed in terms of 30 commodities seems impractical and
unstable.
Intriguingly, the UNCTAD's Trade and Development Report of 2010 also highlight
the challenges being faced by the international monetary system and the use of
US Federal Reserve notes as the world's reserve currency.[iii] Unfortunately,
the solutions presented by the authors fall woefully short of meaningful
financial reform where replacing the US dollar with an artificial SDR currency
is seen as a remedy to budget deficits and instability. It would be difficult to
expect the thoroughly discredited International Monetary Fund, with its standard
prescription of shock therapy austerity measures for developing economies, to
act as a neutral arbiter in supervising its implementation and working.
Proposals
A drastic restructuring of the existing financial disorder will require the
Islamic Development Bank to play a leading role in transforming the current
central banking warfare investment model[iv] that governs the planet with the
establishment of a new monetary regime that actually enhances economic welfare,
help formulate monetary policy of all Organization of the Islamic Conference (OIC)
member states and provide a platform and basis for greater economic integration
of Muslim countries. Specifically, the Islamic Development Bank would be tasked
to:
1) A new Islamic Central Bank (Baat ul Maal) -a bank of last resort for
all OIC member central banks with powers and functions similar to the Bank of
International Settlements tasked with engendering greater stability through
guidelines and regulations across the entire spectrum of the Islamic financial
system. Its principal task will be to coordinate and manage monetary policy of
the new Islamic Dinar providing liquidity and limiting supply as international
market conditions dictate. It will also be mandated to ensure that member
central banks actively replace conventional banking practices with Sharia
compliant operations in their respective jurisdictions. The new central bank
will need to settle the debate on an Islamic interest rate and provide a
principal benchmark rate that will be used to price all future Islamic financial
contracts. The underlying drivers of the new Islamic interest rate will need to
be carefully selected and endorsed by consensus with fatwa across all five
schools of Islamic thought. Certainly, the IDB would need to mobilize member
states particularly Saudi Arabia, Malaysia and Turkey to provide impetus and
focus for an independent and empowered central bank that will lie of the heart
of new Islamic financial system.
2) Regional commodity exchanges -across the Arab/Islamic world regional
commodity exchanges will set commodity prices and settle trades in Islamic
Dinars. Maintaining constant demand for the new Islamic Dinar will be necessary
to gain traction and credence in the forex market. Possible options can include
but are not limited to:
Commodity |
Location |
Oil |
Dammam, Saudi Arabia |
Gas |
Doha, Qatar |
Precious Metals |
Dubai, UAE |
Cotton |
Istanbul, Turkey |
Cocoa |
Kuala Lumpur, Malaysia |
Rice |
Karachi, Pakistan |
Jute |
Dhaka, Bangladesh |
3) Restrict derivative use -ban any form of 'naked' short-selling of the
new Islamic Dinar across all international currency markets. The OIC should seek
a treaty at the multilateral level if need be to protect the currency from
harmful speculative attacks orchestrated by the economic hit-men of Wall Street
and the City of London. The new Islamic Central Bank could consider charging a
special tax on hot money flows that are outside the purview of normal monetary
exchanges to desist speculators.
4) Islamic Monetary Union (IMU) - Develop a phased program for the
adoption of the Islamic Dinar by OIC member countries provided certain
macro-economic benchmarks are met. An Islamic version of the Maastricht treaty
(as described by my colleague Bernardo Vizcaino), is initiated where the
formulation of monetary policy at the state level is subordinated to a
supranational body that will be responsible for coordinating and integrating
Muslim countries under a single economic platform. The roll-out should be
gradual and incremental on a country by country basis where admission to the
program is contingent on matching specific economic criteria and membership is
guaranteed through continued adherence with fiscal and monetary benchmarks of
the program. Drawing upon the experiences of the Gulf Cooperation Council the
new Islamic Monetary Union should seek to avoid the petty squabbling that marred
the GCC monetary union debate through transparency and accountability of its
proposed operations. An important outcome of the new monetary regime will be 'dinarization'
that should occur as OIC member states seek to conform to the new IMU. The
decline of the US dollar will make it necessary for countries to seek
alternative means to ensure fiscal and monetary discipline of individual member
states. With dinarization central banks of member states will be in no position
to print money ad infinitum thereby constraining local money supply, preserving
the value of local currencies while resulting in an acceptable loss of
seigniorage.
5) An exclusive Free Trading Zone - The formation of an expanded free
trade area within the Arab/Islamic world is sorely needed. A free trading zone
that harmonizes tariffs and trade with non-Muslim world while removing
intra-trade barriers should provide the right ingredients for specialization and
sectoral growth in the OIC. The new IMU using the Islamic Dinar as the principal
currency of exchange while enabling the free mobility of capital and labor will
unleash untapped economic synergies benefiting millions across the Islamic
world. This should also provide the Islamic Dinar with the real chance of
becoming an alternate reserve currency of the world as countries build up their
Dinar holdings.
Conclusion
A strategic reform of the international monetary system has become a moral
imperative for the world's economic managers. The question is one of willingness
and capacity to replace the existing the disorder in the international financial
system with one that is ordered, robust and stable. It is my firm belief that a
new Islamic currency will play a critical role in the evolution of such a system
although whether this call is heeded remains to be seen. Consensus-building will
take time but the forces of globalization have provided an excellent opportunity
for Muslim countries to develop their own economic bloc in this rapacious new
world order. The urgent need to strategically reorder the Islamic financial
landscape in to a system that underscores its moral and ethical value system is
long over-due. The Islamic world needs a renaissance and no single dynamic will
give it as much momentum as a new Islamic currency that binds the old with the
new.
References
[i] The People's Bank of China,
online article, September 9, 2010
[ii] Ibid
[iii] The Telegraph, "UN
wants new global currency to replace dollar", September 9, 2010
[iv] Catherine Austin Fitts,
online article, September 9, 2010
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