Muslim Gold Standard

http://www.worldfutures.info/Analysis/Islamic-World/Islamic-World-Wither-a-Muslim-Gold-Standard.html
Islamic World: Wither a Muslim Gold Standard?
Written by Kazi Mahmood
Saturday, 25 October 2008


The last few times we heard of the Muslim world using Gold to replace currency was during the time of Prime Minister Tun Mahathir's reign. He was sure and certain that Gold cold bring the downfall of the paper money era.
Since then, the idea fizzled amid a few attempts at promoting Gold itself as a currency and as a means to make payments internationally. The business of gold minting in Malaysia, which started with a few companies minting gold for sale locally, went bust.



A type of Gold Dinar from UK

One wonders how doing business with gold can go bust but it is a reality in Malaysia since the people involved in the business were after the quick profit, not after the long haul of becoming rich and solid after years of patience and perseverance.

Though it is relevant to sell gold coins, it must be done with much publicity and the right approach. Trying to impose gold as the currency to be carried around does not work in the modern age. People need cards, gold cards that can help carry thousands of dollars around like in credit cards. We are in the age of the digital money too, and the gold coins providers could shift their businesses more into the cyberspace.

Now what about the gold as Islamic currency?

During that period, writing for Islamonline.net, I suggested that we use gold as the standard, not as the currency necessarily and that this will mean backing the currency we use with pure, existing gold stocks. This idea did not take up since it does not bring ready, quick bucks to any of the would be investors in this business.

Now let me tell you about the US. The much hated and much criticized US governments over the years did one right thing. They used gold as the standard and created a unique type of gold currency investment.

This gold currency investment sores in price after gold prices rise. The profit can be huge and dramatically turn the investments into windfall gains, unexpected and much wanted.

How do they do it?

Everybody knows that gold is a safe investment in times of economic chaos--that's why the U.S. mint recently ran out of gold bullion coins to sell to investors (source: The Los Angeles Times).

The US print money, paper money, to pay for its follies and yet the more it prints, the better it is for Gold prices. In that case, you do not need to own gold itself to earn the benefits of the current US policies. What you need is follow the price of gold on the market and invest in gold currencies that exists for decades in the US.


What about the Islamic world?

What the Mahathir followers in the gold coins business failed to understand is how to use a gold standard system to back the Muslim world's currencies. What the US did was to back their currency with gold standards = the US remains one of the major gold hoarding nations on earth.

Simply follow the US principle and integrate gold in the modern currency system by backing one's entire currencies on gold would have created support for gold currency standards but no one will do that since there is no 'profit' to be made by 'brokers'. That is the real problem faced in the Muslim world and it has escaped the promoters of gold currencies in countries like Malaysia.

The question is will there be a gold standard for the Muslim world? There can be such a standard only if the Arab world with the Asians and Africans in the Organization of Islamic Conference (OIC) pushes for gold to become the standard currency to be used to back the existing paper money.

Its a long shot and it may not see the light not with this generation of Muslims anyway.

BBA Financing

Wednesday, September 10, 2008
BBA: Banking sector braces for impact from ruling

By HABHAJAN SINGH

The Islamic banking fraternity is bracing to face a fallout from the recent High Court rulling that the application of the Al-Bai' Bithaman Ajil (BBA), a widely used Islamic home financing contract, is contrary to the Islamic Banking Act 1983.

At the heart of the written judgement by Datuk Justice Abdul Wahab Patail is that since some BBA contracts were structurally faulty, defaulters need not pay more than the original financing amount that they received, depriving banks of the profit that they would have otherwise booked from the transaction.

Bankers also fear the judgement could mean that current BBA financing clients would only need to pay the facility amount and would escape from paying the profit portion.

The home financing facilty extended under the BBA concept runs into billions of ringgit. "It will impact (the industry) in a big way. Bankers and financiers are used to the idea that when a default takes place, they are entitled to recover the full balance of the sales price. This and the previous judgement by Justice Wahab has altered that," said a local lawyer who ranks among the pioneers in the field of Islamic finance.

Wahab's latest judgement, dated July 18, encompassed 11 separate cases involving Bank Islam Malaysia Bhd and Arab-Malaysian Finance Bhd as the plantiffs.

It is understood that the banks are appealing to the Court of Appeal to overturn the judgement which was received by lawyers involved in the case only last month.

Industry experts estimate that close to 70% of Islamic financing has been granted under the BBA concept which essentially is a deferred payment sale (the sale of goods on a deferred payment basis) at an agreed selling price, which includes a profit margin agreed on by the customer and the bank.

The BBA concept is widely used in various Islamic financing instruments, including for bridging finance, cash line facilities, contract financing, project financing and letters of credit.

Among the big local players on this front are CIMB Bank Bhd, Malayan Banking Bhd, Bank Islam Malaysia Bhd and Public Bank Bhd, all of whom have home financing facilities based on the BBA concept. Local banks like CIMB and Maybank now have full-fledged Islamic subsidiaries that handle such financing.

"Banks are worried this judgement will set off alarm bells with regard to confidence with BBA locally. As for foreign investors, they fear its potential ramification on Malaysia's efforts in becoming a global hub for Islamic finance.

"Our whole industry has been BBA-driven. Banks are fervently trying to find a solution," said an industry executive.

It is understood that the legal departments of some these banks are now trying to get their hands on Abdul Wahab's latest judgement which has yet to be published by any of the local regular sources for the legal fraternity.

On Monday, The Malaysian Reserve ran a report on Abdul Wahab's ruling followed by excerpts from the 54-page judgement the next day.

The judgement on the appplication of BBA, popular at home but much criticised abroad, is set to be another widely discussed judgement after Abdul Wahab's earlier ruling in the case of Affin Bank Bhd vs Zulkifli Abdullah, in which he passed a ruling on the calculation of the amount to be paid in the event of a foreclosure.

The 2006 case attracted much attention, and is still the subject of seminars today, as it turned on its head the way bank practitioners calculated the outstanding amount to be repaid by borrowers who had defaulted on their BBA contracts.

Some banks had calculated the amount up to the full period of the facility, even though the borrowers may have defaulted only a few years into the financing. to be fair, though, banks usually have a defaulter rebate, which is at their sole discretion.

"The effect of this judgement is that customers are obliged to pay only the principle that had been extended to them.

"Since the court holds this contract null and void, Section 66 of the Contract Act will apply," said a lawyer. Section 66 of the act states that "when an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under the agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it."

(The Malaysian Reserve, Sept 11, 2008)
Posted by HABHAJAN SINGH at Wednesday, September 10, 2008
Labels: Bank Islam, BBA, Islamic finance, judiciary