Many advocates of Islamic banking suggest using gold as a replacement for the money created through the interest rate mechanism. This is an interesting proposition, especially in the context of Malaysia where the state of Kelantan has already started using gold and silver coins as a potential replacement for the federally issued legal tender of currency notes and coins.
It is important to assess its economic implications with respect to growth and overall economic activity in the country.
Americans find it difficult, and painful, to revert back to the gold standard for reasons peculiar to the US economy, but these limitations are not relevant to Malaysia.
In Malaysia, the government can experiment with the gold currency by limiting the use of gold and silver coins issued by the state governments for investment purposes only. This will allow people to buy gold and silver coins through paying in ringgit providing an alternative tool for saving on a long-term basis, even if gold and silver coins are not treated as legal tender.
Furthermore, the Malaysian government can use Islamic banking as a tool to introduce gold deposits for customers who would like to save for the long term. In fact, Bank Negara Malaysia (BNM) may continue to issue coins like Kijang Emas bullion coins and distribute them through Islamic banks.
At present, Malayan Banking Bhd (Maybank) designates 32 branches to sell Kijang Emas bullion coins but an extended programme may be rolled out with the help of Islamic banks in the country.
While Islamic banks could be allowed to use gold deposits (by way of selling gold for cash), they must return the depositors’ gold if the latter wish to redeem after a specified time period. Alternatively, the gold deposits must be kept for safe custody, in which case the depositors must be willing to pay a safe custody fee to the banks.
This alternative arrangement will also have a dampening effect on the ability of the Islamic banks to extend credit to their customers as they will not be able to use the depositors’ gold (by selling it for cash) to offer financing to those who may need it. This will, in turn, have implications for economic growth.
If Islamic banks are reluctant to offer gold deposits, the government may use the likes of Lembaga Tabung Haji and similar institutions to allow Muslims to save in gold and silver. It is expected that an overwhelming demand for the proposed gold deposits will compel Islamic banks to start offering such deposits out of market pressure.
If the introduction of gold coins in the states of Kelantan and Perak proves successful (which appears to be the case so far), monetary authorities — ie BNM — may consider using gold coins to bring about monetary reforms in the country. Indeed, advocates of monetary reform have long advocated a return to the gold standard. Some prominent economists, like Nobel laureate sRobert Mundell and James Robertson, have written extensively on the benefits of returning to the gold standard.
In the context of Islamic banking and trade, the likes of the former Prime Minister Malaysia, Tun Dr Mahathir Mohamed and activists like Tarek El Diwani have been influential figures in advocating the introduction of gold dinars and replacing the fractional reserve based banking system.
While it may take some time for BNM to expand its Kijang Emas bullion coins issuance, the increasing demand for Islamic banking in Malaysia (25% of the country’s financial sector’s assets derive from Islamic banking) offers Islamic banks a window of opportunity to exploit the trend by offering bullion-based investments to those who consider gold coins to be more Shariah-compliant than conventional money created through an interest based credit system.
If the gold deposits look like a radical idea, there are some other more acceptable ideas floating around.
James Fierro of Recipco Holdings Ltd has for some time been advocating for an international currency based on the excess capacity the world’s businesses have at any given point in time. This concept has similarities with the gold dinar in the sense that both the currencies are based on the real value of goods and services they represent (gold dinar representing the intrinsic value of the gold, and the Recipco’s proposed currency representing the value of goods and services excessively produced by businesses).
As these ideas are seen as radical by many, including Islamic bankers, it is important that the governments take a proactive role in implementing these proposals. As the government of Malaysia is spearheading an initiative to develop tools for liquidity management for Islamic banks, gold dinar and the issuance of a currency based on excess capacity may not be entirely abstruse concepts.