Trust is the name of the game, mistrust is the code followed. Today digital currency is the fuel of financial system, and it extracts value from the paper currency (backed by
nothing) in circulation. But on the contrary it deems to have the power to
purchase anything based on its value derived from the trust in the economy of
the nation it belongs to (demand of currency in international market: more
economic strength, more demand, and more value).
The Economic Strength of the nation? Is only a matter of perception, as proved many time in the history. In present times the economic strength stands over a bubble of debt in the
economy. The bubble expands with the ever growing debt, with a fraction of real
wealth to back. The ultimate result.... the Bubbles are there to burst, leading
to benefit of the few, and disaster for millions. Case in point: sub-prime
mortgage crises in America.
Since the time Lehman brothers declared bankruptcy, a plethora of articles with analysis of the entire fiasco, its causes and impacts has been published but probably none (at
least I cannot find one) has really disclosed or talked about the real root
cause of the entire disaster. When I look at the entire scene, the question
that pops in my mind is how a debt of $11 trillion in 'mortgages', alone, is
loaned out when there is only $1.3 Trillion of printed notes available? In
addition to this Credit card debts, other types of public and private loans
mounting to a total of around $50 Trillion, only in American economy? (Total
U.S. mortgage debt outstanding was $10.7 trillion at the end of the third
quarter 2006. Source: http://www.freeratesearch.com/en/newsroom/mortgage_statistics/)
Out of Thin Air
A common man, uninformed
of this jugglery, would eventually ask that how on earth can this ever be
possible. The answer is simple but seems like a joke, a nasty one indeed. The
Banks creates money out of thin air when they have to loan out to someone? Magic?
No! The process they use is called fractional reserve banking and the effect is
called Money Multiplier in economics.
"The study of money, above all other fields in
economics, is one in which complexity is used to disguise truth or to evade
truth, not to reveal it (p15). The process by which banks create money is so
simple that the mind is repelled."
John Kenneth
Galbraith, Money: Whence it came, where it went - 1975, p29.
This is the most core of the banking business and all the
central bank policies are directly or indirectly related with it. Paper
Currency is printed in the quantity, desired by Central Bank, is multiplied as
it passes through Fractional Reserve Systems of Conventional banks. The CB
imposes a Cash Reserve Requirement i.e. CRR is 7 ~ 10% on commercial banks
(even Islamic banks) which determines the amount to be loaned out. A CRR of 20%
means that a bank can lend 80 rupees if it has a deposit of Rs. 100. The bank
in fact transfer this amount to the borrowers bank account, i.e. the same bank
(or any other bank) receives it, again make it a part of the deposits (of the
banking system) ready to be loaned again. The cycle continues and the money printed
or minted by central bank is multiplied many times in the form of loans and the
commercial bank expects it back with interest. Check the chart above or for more
details please visit: www.en.wikipedia.org,
www.lewrockwell.com)
No surprise the amount
of debt (increasing every year) is more or less the same as the amount of time
and demand deposit (demand deposits are saving and current accounts, and time
deposits are long term deposits which are not withdrawn at least for one year) during
the same period. Thus money is created continuously as debt in the economy.
Today in US economy, only 3% is real money and the remaining is just ...
Numbers!!! Same is the case with UK. In Pakistan the cash in circulation is Rs.
982 Billion, which is around 21% of the total Money supply (Rs. 4,672 Billion) and
21.6% of total domestic credit (Rs. 4,531 Billion). These statistics has been taken from www.sbp.org.pk.
Murray N. Rothbard states in his article “The
Case for a 100 Percent Gold Dollar” (http://mises.org/story/1829#_ftn19)
In my view, issuing promises to pay on demand in
excess of the amount of goods on hand is simply fraud, and should be so
considered by the legal system. For this means that a bank issues “fake”
warehouse receipts—warehouse receipts, for example, for ounces of gold that do
not actually exist in the vaults. This is legalized counterfeiting; this is the
creation of money without the necessity for production, to compete for
resources against those who have produced. In short, I believe that
fractional-reserve banking is disastrous both for the morality and for the
fundamental bases and institutions of the market economy.
Inflation or Devaluation
The rate of increase
of these numbers is in fact real inflation, or more appropriately devaluation
as the increase reduces its value. Let’s say if these numbers multiply by an
amount of 10% in one year, then the inflation would be around 10%. In other
words there is 10% more money in the economy to buy the same amount of goods. This
will eventually increase the prices in case the production has decreased? Yes
of course if the production in the economy has also grown by an amount of 10%
then supply (production) and demand (purchasing capacity) will be synchronized
and there won’t be any inflation. However this seldom happens, the rate of
increase of money supply (of course numbers) is always faster in the
conventional economic system and thus supersedes the rate of increase in
production hence inflation (devaluation) is mostly observed.
Conventional economic
theories suggest that some inflation (say around 4 ~ 5% is desirable), as it
encourages people to purchase more in fear of increase of prices in near future,
thus increasing demand which further encourages the production. However when
the interest rates (of course absolutely illegitimate in Islam) are low, the
banks go crazy and starts to lend to almost every one. A common man perceives
that its profit that’s driving them crazy, but there is more to it, the entire
banking machinery allows each other to generate numbers (having purchasing power)
with an exponential rate. The loan of one bank is the deposit of another, but
please, the deposit in the banks are considered as liabilities, in order to
convert them to assets the deposits must be loaned out again, and when they are
loaned they again become deposits of some third bank. The cycle continues; and we
see a continuous increase in the money supply and of course an equal increase
in the prices of the commodities we purchase. More money for the same amount of
products! In other words devaluation of monetary unit.
Bankrupt: A Loser like in the
Musical chair game
When this mindless (or
mind full) multiplication of money supply is increased, please note that the
debt with in the society also increases with the same pace. Increase in debt
increases the money supply in form of numbers (97% of America’s Money supply).
Now as all the debt has to be paid back with interest (of course) then how on
earth every one can pay back their debt ‘with
interest’ as the total money supply in the economy is (more or less) equal
to the amount of debt produced? ... Mathematically it’s impossible. The only
way is to look back at the system for more debt to cover this gap! (And thats
also needed to be paid back with interest). The result is constant inflation as
money supply in always created as debt to fill the gap. … A never ending ‘vicious’
spiral!
Bankruptcy is inherent
feature of the system. Somebody at some point in time will get bankrupt,
despite any unforeseen circumstances, as there isn't enough money ever to pay
back the interest with the principle amount.
Credit cards,
mortgages, car loans, personal loans, etc, when advertised in TV or print
media, claim to bring the ultimate prosperity and happiness to its users. If
you are a user of these services then ask yourself, do you ever become 'happy
ever after' or satisfied to the extent shown in TV commercials? I am sure
majority will say no. The fear is there, as the threat of bankruptcy is real.
Check out the charts showing the bankruptcy trends in America.
The Central Bank comes to the
Rescue
When the threat
becomes substantial, the central bank wakes up due to the havoc caused by the
merciless, uncontrolled expansion of the money supply, raising the prices out
of the reach of the ordinary man. Now the state bank drops another bombshell on
already aggravated and indebted citizens, by increasing the interest rates. This
discourages people to restrain them self from the banks as cost of purchasing
debt (I repeat, illegitimate in Islam) has gone up. Now lesser money is
generated and as lesser debt is generated, the inflation is reduced; the central
bank celebrates.
"I believe that banking
institutions are more dangerous to our liberties than standing armies. Already
they have raised up a money aristocracy that has set the government at
defiance. The issuing power should be taken from the banks, and restored to the
people to whom it properly belongs."
Thomas Jefferson, 3rd US President.
But as we have already
discussed that debt is actually the money supply and the bank payments against
debt (principle + interest), are greater than the amount available in the
economy and requires more debt to generate to pay back the interest on
principle amount. Now due to tighter monetary policy (high interest rates)
lesser new money or debt is created, thus the gap between what is required (principle
+ interest) and what is available, widens! Now somebody has to loose, like in
the musical chair game, and he is no other then ordinary citizen. And as the vacuum
or gap widens, the number of bankruptcy goes skywards. In Urdu we call it "Asman
se Gere, Khajoor main atke" (society escaping from one problem by getting
stuck into another).
Such a period is
called recession and when this period starts creating havoc as unemployment
rates soars, prices declines due to reducing purchasing power etc, the central
banks comes again to rescue and do its best by reducing the interest rates.
This again makes the banks go crazy, again, to add more to the money supply and
of course to their Profit. And guess what, the poverty is never reduced in fact
increases in real terms (reduces in nominal terms though!), either due to high
inflation or lack of employment in either forms of monetary policies. Michael
Rowbotham observes:
"This
(monetary management) a government does by lowering or raising interest rates.
This alternately encourages or discourages borrowing, thereby speeding up or
slowing down the creation of money and the growth of the economy.... The fact
that, by this method, people and businesses with outstanding debts can be
suddenly hit with huge extra charges on their debts, simply as a management
device to deter other borrowers, is an injustice quite lost in the almost
religious conviction surrounding this ideology…
…This
method of controlling banks, inflation and money supply certainly works; it
works in the way that a sledge-hammer works at carving up a roast chicken. An
economy dependent upon borrowing to supply money, strapped to a financial
system in which both debt and the money supply are logically bound to escalate,
is punished for the borrowing it has been forced to undertake. Many past
borrowers are rendered bankrupt; homes are repossessed, businesses are ruined
and millions are thrown out of work as the economy sinks into recession. Until
inflation and overheating are no longer deemed to be a danger, borrowing is
discouraged and the economy becomes a stagnating sea of human misery. Of
course, no sooner has this been done, than the problem is lack of demand, so we
must reduce interest rates and wait for the consumer confidence and the
positive investment climate to return. The business cycle begins all over again
- There could be no greater admission of the utter and total inadequacy of
modern economics to understand and regulate the financial system than through
this wholesale entrapment and subsequent bludgeoning of the entire economy. It
is a policy which courts illegality, as well as breaching morality, in the
cavalier way in which the financial contract of debt is effectively rewritten
at will, via the power of levying infinitely variable interest charges."
Like bankruptcy,
poverty is another inherent feature of the conventional debt, interest and FRB
based economic system. Considering an economy such as of UK where 97% of
all the money supply is in the form of debt created as numbers or book entries
by fractional reserve banking system. Disposable income of individuals in such
economies is draining out in payments of credit card bills, car loans,
mortgages etc. There monetary savings are being gradually reduced and threat of
bankruptcy has rendered these disintegrating savings increasingly sacred
(http://www.creditaction.org.uk/assets/PDF/stats/2008/october.pdf). Similar the
case in United States or other developed countries with similar economic
scenario.
It’s a common banking practice nowadays that whenever a
person asks for some debt, the bank in return asks him to pledge his real
wealth / savings so that bank investment can be secured in case the creditor
gets bankrupt. Thus pledging further disables the creditor to extract a portion
of his savings to help the poor of the society. So if the citizens of such
economies would have been Muslims it would increasingly become psychologically
and financially difficult to pay Zakat or any other form of charity to the
poor.
In an interest / debt driving economies, the lending
institutions ask for more (principle plus interest) then they actually give.
Financial vulnerability of an individual or any business gives them an excuse
to charge more markup. Thus, the banks gradually suck up the money supply and
ultimately increase the amount of economic disparity. Little surprise when we
say “Richs are getting richer and poor
are getting poorer” in today’s debt reddened so called developed countries
…
Root Cause of All Evil
Looking back at the
subprime mortgage crisis in America, there are a lots of reasons being cited
such ‘as boom and burst in the housing market’, speculations, High-risk
mortgage loans and lending practices, Securitization practices, Inaccurate
credit ratings, Government and central bank policies, Financial institution
debt levels or leverage etc … but I think they are only the symptoms of the
underline causes which are as follows:
Fear and Lust: Fear of bankruptcy and consumption beyond the
means, are the two motivating factors that derived the behavior of the
borrowers. But looking closely we realize that this has also been a byproduct
of the system which first created the debt and then through media, “psychologically
conditions” its user to become indebted, for the sake of their own
profitability. (Watch the movie: Zeitgeist-Addendum) This led us to the
ultimate reason which is:
The bank’s ability to control the money supply: For the sake of
their own benefit, they create money supply out of thin air, this leads to exploitation
and mass bankruptcy (some of their own gets sacked as well), and implementation
of solutions which creates more problems than are solved, like monetary
policies of central banks. All of this brings them unprecedented power to control,
manipulate or enslave nearly everything, including governments, central banks,
corporations, or even entire nations.
"Allow me to issue and
control the money of the nation, I care not who writes the law"
Mayer Amschel Rothschild, in
1828
"Banking was conceived
in iniquity and was born in sin. The Bankers own the Earth. Take it away from
them, but leave them the power to create deposits, and with the flick of the
pen they will create enough deposits to buy it back again. However, take it
away from them, and all the great fortunes like mine will disappear, and they
ought to disappear, for this would be a happier and better world to live in.
But if you wish to remain the slaves of Bankers and pay the cost of your own
slavery, let them continue to create deposits."
Sir Josiah Stamp, President
of the Bank of England in the 1920's,
The second richest man in
Britain
The Question of Islamic Banking
IB cannot
be called totally legitimate, but it can be said that the evil effects of the
banking system have been significantly curtailed though not eliminated. The
number (money supply) generation in IB is supposedly balanced with the real
asset creation, speculation or gambling is totally prohibited and of course
business which are illegitimate like vulgar TV channel, wine or cigarette
factory, casinos etc are also not financed by Islamic Banks (ideally speaking).
Furthermore, Islamic banking is completely asset backed and talks about profit
and loss sharing.
However certain
modes of Islamic finance are criticized and there is difference of opinion among
scholar. Like the markup charged is benchmarked to KIBOR and Islamic banks are
bound to follow the policies of the state bank etc.
However the
biggest challenge for Islamic Banking would be to free itself from the
fractional reserve system of conventional banking. Since state bank of Pakistan
has clearly defined cash reserve requirement (CRR = 11%, source: www.sbp.org.pk/bsrvd/2008/c8.htm) for Islamic banks, thus has
forced Islamic banks to follow the foot print conventional banks. Many Scholars
Including Omar Chapra, has tried to develop a frame work however these
frameworks remains theoretical till date. Even Mr. Taqi Usmani, has criticized
FRB to full lengths in his book “Historical Judgment on Riba” however a very
clear framework is not presented there as well. Professor Dr. Muhammad Anwar department
of Economics of International Islamic University Malaysia states his verdict on
Fractional reserve model as follows.
Supporters
of Islamic banking in the ranks of fuqaha, economists, bankers, and others
mainly focused on the interest-based transactions as deals between banks and
their clients. This outlook, perhaps inadvertently, led to the negligence
of the larger issue of the legitimacy of the banking system itself. The banking
system representing the institutional arrangements for collecting deposits and
making advances in a fractional reserve system is in violation of the explicit
Qur'anic verdict that forbids devouring of peoples' money in the following
words "O' believers, do not eat your properties among yourselves through
false means" (Nisaa, 4: 29) ….
Suppose all the money
created by the banks is translated into real growth so that there is no
inflation and no reduction in the real value of deposits. Then do the
commercial banks have any advantage? Yes, because they being the creditors
still become owners of the deposits created through this process.
Therefore, inflation or no inflation the commercial banks would enjoy
undue advantage thanks to the money expansion multiplier process. The
government enjoys similar advantage when money supply is increased by the
central banks as it acquires ownership of the peoples' property in exchange to
the tune of the money so created. The difference being the central banks
directly create money while the commercial banks create money indirectly
through the deposits.
If all the depositors turn
to banks to withdraw their deposits then would they be able to receive back
their deposits? Surely not because of the fractional reserve system that grew
out of the dishonest practices of the early goldsmiths with whom people used to
keep their trusts. Therefore the Allah's orders like "Allah commands you
to render back your trusts to those to whom thy are due" (Nisaa, 4: 58)
and "do not misappropriate knowingly things entrusted to you"
(Anfaal, 8: 27) can never be complied in the presence of the fractional reserve
system. Moreover, due to expansion of money supply by the banks, the
resulting inflation means that real value of the deposits falls. This
means that the deposits withdrawn from the banks have diminished value.
This amounts to a clear violation of not only the above commands but also
of those commands that require to "give not short measure or weight"
(Hud, 11: 84) and "give full measure and full weight" (Hud, 11: 85).
Accrual of the seignorage to the commercial banks by
devaluing the money holdings of people through inflation necessarily favors
concentration of real wealth into few hands, an outcome contrary to the
Qur'anic command that wealth "does not make a circuit among the
wealthy among you" (al-Hashar, 59: 7). The tendency of concentration
of wealth into few hands is due to the seignorage that would happen even if the
loans were issued at a zero rate of interest. Therefore, credit system imposes
a larger problem compared to the practice of interest.
(http://www.globalwebpost.com/farooqm/study_res/i_econ_fin/anwar_islamicity.doc)
Financings constituted 49.7% of the total assets and stood
at Rs. 88.3 billion in September 2007 as compared to Rs.78.8 billion at the end
of June 2007, showing an increase of 12%. However total cash in hand with
Islamic banks was 16.3 Billion in Sep 07 which is 9% of the total assets.
Whereas the total deposits were 124.4 Billion in Sep 07 (http://www.sbp.org.pk/ibd/Bulletin/2007/Jul-Sep-Bulletin.pdf ).The most interesting part is that the 70% of the business of Islamic banks is
through Murabaha (working capital finance) and Ijarah (Rental Lease), while 26%
is via Diminishing Musharaka (Alternate to Mortgages). The interesting thing is
that there isn’t much profit and loss sharing in these modes. And since from customer’s
point of view all these modes are liabilities and there is a possibility of customer
getting bankrupt due to any unforeseen circumstances.
Furthermore when these financings operate under fractional
reserve framework they contribute to further creation of money supply in the
economy, out of thin air. As all Islamic banks are privately operated, there
ability of creating money out of thin air, reminds me of Thomas Jefferson’s
statement "I believe that banking
institutions are more dangerous to our liberties than standing armies. Already
they have raised up a money aristocracy that has set the government at
defiance. The issuing power should be taken from the banks, and restored to the
people to whom it properly belongs."
This
will only happen, if Islamic banks get profit to top their priority list and
get blind folded from the potential havoc they would bring to the society, if
they keep stick to the same model of fractional reserve nature for the sake of
monetary returns, if they don't take the pain to improve on all the inherent
discrepancies, then my views will coincide with that of Thomas Jefferson in
context of ground realities of Islamic Banking (although in theory the major emphasis
is on Musharakah and Mudarabah). The current trends if extrapolated to paint
the future status of Islamic banking industry, what we see is a subsidiary of
conventional banks curtailing some of the conventional banking problems, not
all.
Despite
all this I personally believe that there are a few people in the industry who
are genuinely interested in taken the economy toward the Islamic essentials.
For example the team headed by Mufti Taqi Usmani are no doubt applause-able and
deserves due support. There supervision to certain banks makes them in any case
a better alternate incase of dire need of any financial services. However I
would still emphasize that by remaining under the framework fractional reserve
banking the path ultimate objectives remains blur. My opinion and proposed
alternative would be to design and develop a system completely free present
framework, which I shall Inshallah try to demonstrate in my limited capacity.
Floating on ‘Thin Air’
Another important dimension which must also be taken into
account while extending the Islamic banking framework to international levels, is
the floating exchange system. Through this system the value of a currency is
considered flexible and weighted against other currencies such as dollar.
Floating
Exchange Rates: Currency exchange rate which is
determined by free
market forces, rather than
being fixed by a government. (http://www.investorwords.com/2016/floating_exchange_rate.html) Take a look at this simplified model: if demand for a currency is low,
its value will decrease, thus making imported goods more expensive and thus
stimulating demand for local goods and services. This in turn will generate
more jobs, and hence an auto-correction would occur in the market. A floating
exchange rate is constantly changing. (http://www.investopedia.com/articles/03/020603.asp)
Before this, let’s talk on Paper currency first. Paper
currency is a hoax (pay orders, bonds, cheques and other receipts included) and
digital currency (debt / credit cards) are even bigger hoax, as it was supposed
to be hedged to gold (or any other real asset) but it’s not. The reason paper
currency superseded gold and silver was that it could be produced effortlessly
and multiplied many times over in form of debt by passing it through the FRB
system. The digital currency in form of credit and debit cards has even
eliminated minor repercussions which paper currency had, like printing and
distribution, as now it’s even easier to generate and multiply it in digital
form, thanks to the latest information technology.
Paper currency is a pivotal element of Debt / Interest based
economic environment which enables world powers to accomplish their agenda of
Economic domination and slavery (for details of this agenda read the book by
Confession of an Economic Hitman by John Perkins who worked at organizations
supporting IMF and World bank), as it allows the banks to control, issue and
devalue the money supply.
Devaluation of currency is practiced to keep countries under
the economic slavery of international agencies like World Bank and IMF. You
must have noticed the devaluation of Rupee in the past and more significantly
in recent times. The World Bank occasionally pushes Pakistani government to
devalue the currency or through design political turmoil (see video zeitgeist
addendum, part 2 for interview of John Perkins) accomplish this, simply because
it increases the amount of debt in dollars and the interest on that debt
(previously to pay back 1 dollar, we had to earn Rs. 60, now we have to earn
Rs. 80) as a result Pakistan has to pay more out of its savings for an even
longer period of time to pay back the debt and accumulated interest rate, and
if things are more precisely executed by the agents of the agencies then the
country go to the verge of bankruptcy. Now in return of the debt, the country
is asked to hand over its natural resources at a fraction of a cost in the name
of privatization.
The ultimate delima with the paper currency (and floating
exchange rate) is that the real goods produced in a country are valued as per
the exchange rate of the country in international market. Now if the value of
Pak rupee is decreased then the value of the real good such cotton or wheat is
also reduced in the international market. With a 50% decrease in value of Rupee
as compare to euro (for example), twice the amount of cotton will be sold to
anyone having the same of euro in his pocket. How on earth, the intrinsic value
of real good is reduced with the reduction is fictitious value of worthless
pieces of papers? To justify this injustice, citizens are told that this will
enhance the trade of the country as the price of our products are reduced in
the international market as Rupee is now 26% weaker then dollar. Now if that’s
the case then, if the currency loses say 99% of its value against dollar, then
the real goods will be sold in the international market for almost free! Now
please thinks from the buyers point of view, wouldn’t they always want the
currency of a country, rich with natural resources, to lose its value to the
extent possible? Why wouldn’t they and it is already happening with all the
country in debt, thanks the world-bank and IMF.
“THE GREAT ESCAPE”, THE DESIGN
Following are the factors which must be perused in the
following sequence after studying the prevailing challenges in the conventional
economic models and threats from its stakeholders.
- Mode of Interest Free transactions, of
course
- Unit of Exchange Based on real wealth, totally
asset based. Deterrent to devaluation via floating exchange rate. For details
please read “The Case for a 100 Percent Gold Dollar” by Murray
N. Rothbard (http://mises.org/story/1829)
- A monetary unit
- Effective mechanisms for uplifting the poor via
education and financial support, Reduction and elimination of economic
disparity
- Mode of financing for contingencies
(Takaful)
- Need driven, rather than want driven
- Continuous circulation of wealth, in every nook
and corner of the society
Of course the entire society cannot be converted on to the system
probably in one go. The change will take many years, probably decades. In order
to make it an inherent part of the society, the change must also be brought on social,
political ground and most importantly at spiritual levels (social and
individual). Every facet of his change will have a different sub-strategy and
also grand one including all smaller ones, which can be designed by the respective
experts of every field. However everyone has a right to contribute and so do I.
Thus in context of this article, I present here an idea which may lead us into
the direction of cumulative well being of the society. The idea is to start the
model, as a business, just like the Gold Smiths started all the scam, but we
will do it for the welfare with utmost honesty. Now think about reversing the
process the Gold Smiths started. Following are some of the starting steps which
will at least establish the model.
The Game Plane, Brief
Think about a commodity trade model like NCEL in Pakistan,
DMCC in Dubai or E-Dinar in Malaysia (check out http://www.dmcc.ae/,
http://www.ncel.com.pk/ and http://www.e-dinar.com),
with some modification. Think about a commodity exchange company which allows
investors to open an account with an amount as low as Rs. 10,000/- (and no
upper limits) however this amount will be stored in the forms of commodities,
such as gold, silver, diamonds, or a variety of things. This will eventually
free investment from the waste caused by devaluation or inflation. Future
buying will be restricted and depositors will be allowed to take physical
possession when they require.
There will also be a salary account in which depositors can
put their monthly salary, in form of Gold (or other commodities), and use it to
shop for grocery and other stuff, "via debt card
system" and keep their savings or disposable income in commodities
such as gold. For that, Super stores like Naheed Superstore, Aga's super market
(to start with) for example will have their commodity accounts as well, so that
electronic trading among them is seamlessly possible. These accounts will be
like foreign currency accounts, as the prices of commodities fluctuate (but
increase substantially in long run due to monetary inflation). By keeping their
savings or disposable income in gold/silver or a mix of different commodities, will
save the customers from loses caused by devaluation or inflation of the
monetary unit.
The profit to the company will come from service charges and
long term investments and trading in commodities such as gold whose annual
price increase is averaging around 70% during last 5 years at least.
Short term Qurd-e-Hasana (interest free loan) in the form of
commodities will be given to the ultra poor (after proper screening). For
example 10 gm of gold or monetary equivalent (monetary unit will be naturally preferred
due to general acceptance) will be credited to them to finance specially the
working capital and the time of maturity will be short i.e. 1 week or 1 month.
After maturity the borrower will have to return the commodity credited to him
in the same amount (10 gm of gold in this case) or its monetary equivalent. Due
to short term nature of the loan, the increase in price of commodity in monetary
terms will be nominal (some time lesser as price decrease some time as well)
thus its return won’t be a burden or probably a blessing in case of decrease. These
customers will be invited to open up a commodity account (like current accounts)
with whatever amount they can save. They will be told and they will eventually
experience (Inshallah) that through saving in form of commodities such as gold,
inflation will become an alien concept. These savings will be investments in
the company and can be used in trading real assets. However they will be
allowed to withdraw their savings whenever when in need.
Rationale of 3D Commodity Exchange
This proposed model is only an extension of the commodity
exchange model, in fact micro finance, and electronic commerce (Debit Card) has
been merged in to the commodity model. If all three of these have done wonders
in their respective areas, then there isn't slightest of doubt in my mind that
there combination model won’t do miracles specially when executed in the light
of principles of Islamic Shariah.
The company also profits (though in monetary terms) from its
investment in gold as in monetary terms it increases about 70% annually. There
is always an impact of demand and supply on the gold and silver prices, however
this fluctuation is always moving around the theoretical price (see chart). The
formula to calculate the theoretical prices of gold or any other commodity is
simple. By tracking the inflation of monetary unit (particularly dollar) and
inflation in gold (annual production) predicts the theoretical price of gold.
And guess what, the real price of gold always keeps on coming back to theoretically
predicted value. The shift from theoretical can also be predicted by keeping an
eye on the global economic and political events. Generally gold price increases
when dollar devalues, if global events tend to devalue the dollar, investors
prefer shifting to gold and other commodities like oil, increasing the demand thus
raising the prices.
As we have already defined that Islamic economic system must
contain interest free modes of financing, prohibited from creating money out of
thin air (FRB), must be free from the impacts of inflation (through electronic
barter), etc
These features are embedded into the proposed system. Through
Combining the Commodity Model, with electronic trade at consumer level (debit
cards), further extending it to working capital financing to ordinary
businesses and business giants expanding and taking it to the poorest of poor
through micro finance all under the guidance of Islamic Shariah of course,.
This can start the process of bringing the public to real Islamic model, free
people from debt, free them from inflation, however though this is just a
start. The benefits will only be reaped by those who get them self associated
with the system, however the entire society will benefit only if the entire
financial sector adopts this model.
This system will promote welfare in the society directly and
indirectly. Short term loans with Qard-e-Hasana will directly uplift the poor
and help them to stand on their feet. in the long run the poverty reduction
will increase the purchasing power of the masses thus demand for essentials
will increase, this demand might increase the prices of commodities in monetary
terms but the customers dependent on this system will remain protected as their
savings are kept in the form of commodities them self! Furthermore this
increased demand will encourage the producers to produce more of the essentials
then luxuries.
Educational programs for the customers (of micro finance) in
the form of seminars, etc will be designed to educate them spend their incomes
in the most efficient ways, they will be educated to focus on essential items
and restrain them self from going after luxuries. This education will
eventually increase the demand of essentials, affecting its monetary price. Furthermore,
the company will have to keep its borrowers under proper monitoring so that
their borrowings remains constructively utilized there benefits and they remain
in a credit worthy state. Grameen Bank ways of operational management of micro
finance can be used to improve the efficiency of the system (check out
www.grameen-info.org)
This model will remain profitable for the business in ‘Real Terms’
(real growth = nominal growth - monetary inflation). As already explained, the
profit will come from long term investment and trading in commodities, which
will be sold as soon as a deal with reasonable profit is established the market
(buy in bulk, sell in chunks). Furthermore this system has inherent feature of
raising demand of commodities which eventually increase the prices in monetary
terms. But the effected are those who didn't invest their savings in this system
but for those who have! So through word of mouth a massive demand of this
system will be created as no one wants to get hurt by inflation, this will also
reduce the marketing cost.
All the investors will be encouraged to contribute to the
charity fund, they will be educated through newsletters, seminars etc that
doing so it their religious responsibility, Quran and Ahadith has put ample
emphasis on it, they will be told that real benefit to the poor can only be
delivered when they will be pulled out of the grip of monetary inflation, education
and employment generation. Now since this 3D commodity exchange model is
indulged in doing so, thus this will be the best way to help poor i.e. to help
this model grow. This charity fund will be effectively utilized to help
customers of micro and regular finance in case of any unforeseen emergency. Furthermore
the model of Takaful can also be integrated into the system to profitably help
the customers in case of emergencies.
Some Final Thoughts
You might have already noticed that this system is also dependent
on the paper currency for external transactions. However endogenous exchanges
will be made without the need of any paper at all. I cannot claim that it’s the
ultimate way out, nobody can, and however I hope that this model will allow
people to think about new possibilities and new ways which may ultimately free humanity
from the destructions of current usurious, monstrous, cancerous, economic
model.
The proposed model isn’t a nonprofit NGO. It’s a profitable
business at the same time, as profit is a necessary requirement for any systems
survival and growth; however that should not be the real purpose, if it is, then
from Jim Collins point of view such a business is short lived i.e. dies with in
a generation. However if it’s developed around certain core purpose and vision
based on timeless principles and universal values, it is destined to last till
the time its foundations remain intact and it continues to practically achieve
the vision. Like in our case, it is “The establishment of Islamic economic and
social system, first within its boundaries then extending it gradually to every
nooks and corner of the society”, if this vision remains intact and if every
stakeholder remains adhered to it with utmost conviction, honesty and
determination, then it won’t be surprising to see such an organization (or
something similar) might bring about the noble changes in the society it
intends to achieve.
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