Introduction to the Islamic Gold Economy
While the terms “Islamic Banking” and “Islamic Finance” have become fairly common, we expect very few people to have previously heard the phrase “Islamic Gold Economy”. Therefore, it is important to take some time to explain what we mean by the Islamic Gold Economy, and why is it so important.
Up until now, a whole range of literature has been produced on the subject of Islamic economics, and some of the work done in this domain is of good quality and merit. But a common shortcoming in many proposed solutions is that they try to introduce Islamic economic ideas as an island in a larger economic context whose fundamental underpinnings are inherently un-Islamic. We, in contrast, propose to introduce a solution that addresses the very roots of the problem by through an end to end economic system that addresses the root causes of our economic problems. The cornerstone of our solution for an Islamic economic model is that it does not simply stop at recommending interest-free banking, but rejects the whole system of money-creation prevalent today based on fractional reserve banking. We propose the adoption of a 100% gold-backed currency, and abolition of fractional reserve banking and money creation by the banks. An informal broad overview of our proposed Islamic Economic System is presented below:
1. Money
All money, or legal-tender, should consist wholly of a full-bodied commodity (e.g. coins or bars of metal), and all money substitutes (e.g. paper notes or debit cards) would simply be claims equivalent to an equal amount of a physical reserve of the chosen money commodity.
2. Specie
The choice of the physical commodity, or specie, to act as money would consist of gold and silver, as indicated by both the Sunnah, and conventional historical wisdom and universal consent.
3. Parallel Currencies
Both gold and silver would exist as the basis of two parallel monetary systems, or currencies (e.g. the gold dinar and the silver dirham). The exchange rate between the two would be free floating determined by the market. (Government enforcement of bimetallism using a fixed exchange rate may be allowed in special cases, as this idea does not constitute a basic building block of the Islamic economic system, and is more of a discretionary choice of the societies involved).
4. Unit of Money
Irrespective of the name chosen for the currency (e.g. Rupee or Dinar), each basic unit of money in that currency would be permanently defined as being equivalent to a fixed amount of gold or silver. The token or face value of the currency would be directly dependent on its weight, and no seigniorage would be allowed on part of the issuer. (Governments may devise means of charging for the brassage of coins, but this would not be allowed in the form of raising the token price of the coins produced beyond their physical value)
5. Private Minting
As a natural consequence of the adoption of this form of currency, private minting of money becomes legal by law, where the private issuing authority can use market forces to establish their credibility that their issued coins conform in weight to the standard units of money.
6. Money substitutes
Money substitutes, such as paper and electronic, would be allowed to exist, as long as their role is merely to act as warehouse receipts of the physically stored money. At any one time, only a money substitute, or the real money, can be in circulation, but not both.
7. Banks Deposits
Irrespective of whether they are called Banks, or Baitulmaal, some fundamental reforms in the operation of all financial institutions would be made. All accounts maintained by banks would be operated as specific deposit warrants instead of general deposit warrants. One implication of this would be that the deposits maintained by such banks would not appear as balance on the banks books of account. The deposits would remain the property of the depositor, and not just a liability on the bank to repay its equivalent amount of money to the depositor. In other words, this would imply that banks must operate on full reserve and not fractional reserve.
8. Banking Services
All regular banking services would continue as currently, including safekeeping and transfer of money. The banks may charge a fee for these services, but they would not be allowed to reflect customer’s deposits in their own books of account as the bank’s money. This implies that money available to the bank for loans and financing would either come from the bank’s own resources, or that which depositor’s specifically allow the bank to use for this purpose under a contractual relationship. This is to prevent banks from ‘creating money’, as now the money would either be owned by the depositor, or loaned to the bank, but not both.
9. Loans and Financing
All regular banking services regarding issuance of loans and financing of business operations would continue as currently, except that all such contracts will comply with Islamic principles of Murabaha, Ijara, Mudaraba, Musharika, Salam and Istisna etc. But an important difference in these arrangements would be that the bank would only act as brokers or mediator between the lenders (bank depositors), and recipients of the loans. The recipient of the loan would not have a liability to the bank, but to the actual depositors of accounts in that bank who signs up for participation in this particular loan. Banks may either charge a fee for mediating the loan, or become a shareholder in the project thus being financed.
10. Interest
It would be illegal to charge interest on money, and any contract to pay in excess among of money than what the burrower initially took would be considered legally void.
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