LONDON, 13 May – Next month Malaysian Prime Minister Dr. Mahathir Muhammad will address an international seminar on the adoption of the Islamic dinar as the unit of currency for international trade, especially between the Muslim countries.
The two-day seminar, scheduled to be held on June 25-26 in Kuala Lumpur under the patronage of the Institute of Islamic Thought, a Malaysian think tank, hopes to bring together a cornucopia of central bank officials, economists, bankers, businessmen, academics and other interested parties.
Dr. Mahathir, who is also the country’s finance minister, first mooted the idea of an Islamic gold dinar as a standard unit of currency for trade and financial transactions between the 54 member countries of the Jeddah-based trans-national Islamic Development Bank (IDB), last year. This in the aftermath of the currency crisis that hit the Asian countries, including Malaysia, so badly in 1999 and in 2000.
The Malaysian premier, whose government is the most proactive supporter of Islamic finance in the world and which has instituted a dual banking policy, a conventional system operating side-by-side with an Islamic one, cooperating but not interacting, has already hosted a domestic convention on the subject.
The volatility in the currency markets still persist today, and the Muslim countries, many of whom are primary commodities producers, are perhaps amongst those that are most affected. World commodity prices including crude oil, natural gas, palm oil, natural rubber, rice, tea and so on, are quoted on the commodity and futures exchanges in the US dollar.
Not surprisingly, many of the Muslim currencies including the Malaysian ringgit, the Saudi riyal, the Kuwaiti dinar, the UAE dirham, have traditionally been pegged to the US greenback. Malaysia was forced to go down this route in 1999, following the Asian crisis which saw the US dollar and other international currencies such as the Japanese yen and sterling sharply appreciate against the ringgit. However, pegging your currency to a strong international currency such as the US dollar has its upside and downside. When the dollar is strong, then those currencies tracking the dollar, similarly remain strong relative to the other international currencies.
But the greenback itself can be susceptible and has crashed against a clutch of currencies three times in the last two decades in 1985, 1988, and according to some analysts, is currently in the process of decline. So much so that some bankers in London confirm that already US investors are moving into non-dollar assets. Falling US share prices and the steady rise in the price of gold, are two other signs that the once-mighty dollar is on the decline and confidence in US-backed assets is on the decrease. Even the once-troubled euro last week closed at a healthy 92 US cents, almost 10 percent up on its all-time low in October 2000.
Some European central banks are already having to cut interest rates to stem a rush of abandoning the US dollar into their currencies. Part of the problem is that the US economic recovery post 9/11 is an artificially engineered one, and one fueled largely by a flood of foreign funds — currently about $400 billion a year, and projected to rise to a staggering $800 billion a year within four years, if the dollar does not fall. America in a nutshell is living beyond its means. It is spending more than it is saving, and borrowing the balance from abroad.
Various economists over the last few decades, following the Bretton Woods agreement after the World War II and the abandonment of the gold standard, have hankered romantically for a return to a new gold standard or its 21st century equivalent. Is Dr. Mahathir’s call for an Islamic gold dinar unit of currency a mere coincidence, in this respect?
It certainly is not a new idea. Several Muslim economists and prominent Shariah compliance experts have called for such a unit of currency in the past or some sort of return to a gold standard.
In fact, the Islamic dinar does already exist as the unit of currency of the Islamic Development Bank (IDB). But the IDB’s dinar is also indirectly pegged to the US dollar, because one Islamic dinar is equivalent to one special drawing rights (SDR) of the International Monetary Fund (IMF), which needless to say, is quoted in the US dollar. As such the US dollar remains the de facto unit of currency of the IDB even if its accounts and internal accounting is presented in Islamic dinars.
How pragmatic or efficacious is Dr. Mahathir’s suggestion for the establishment of the Islamic dinar?
Malaysia in terms of innovating payments arrangements between developing countries, has set some notable precedents. It was Dr. Mahathir’s current economic adviser, Tan Sri Nor Mohammed Yakcop, also the architect of Malaysia’s Islamic banking system, who pioneered the bilateral payments arrangement (BPA), whereby Malaysia could settle its trading accounts with individual emerging countries such as Chile, Algeria, and Iran, through the two respective central banks, without the involvement of costly correspondent banks in London, New York or Frankfurt. The two countries would allocate a small group of banks in their respective countries to handle the trade transactions which would then be settled between the two central banks on an annual basis.
When Yakcop suggested to expand the BPA into a multilateral payments arrangement (MPA), which was due to be discussed at the Group of 77 developing countries summit in New Delhi in the mid-1990s, it was the mighty IMF that intervened and warned Malaysia that any adoption of the MPA would constitute a contravention of IMF membership rules. The Fund swiftly dispatched a delegation to Kuala Lumpur to press home the implicit threat, and the suggestion never made it on to the G-77 agenda.
Tan Sri Nor never could hide his disappointment over the sidelining of the MPA. Today, he is spearheading an urgent review of Malaysia’s serious corporate debt restructuring situation.
As to the pragmatism or efficacy of the Mahathir suggestion, it is highly unlikely that an Islamic dinar unit of exchange between Muslim countries would take off, at least under present circumstances. Economic disparities; lack of capital markets formation; weak currencies; lack of economic liberalization and reforms; lack of political consensus and unity amongst the Muslim countries; dependence on primary commodities such as oil, gas, palm oil, rice, tea, etc. – these are all factors that would seriously delay any successful implementation of an Islamic dinar unit of exchange.
