W e are now finding that economic growth – mandated by the inexorable mathematics of compound interest inherent in a deficit-based money supply – is running up against the necessary level of energy generally, and oil in particular, to sustain it. I advocate an asset-based global monetary system, consisting of:
This mirrors Keynes’ “Bancor” proposal at Bretton Woods in 1944 and gives rise to a form of currency which is both consistent with Islamic values, and able to replace the dollar with a non-toxic alternative which does not mandate economic growth. Such a global currency would be independent of the development of Islamic capital markets, however. Some 70% of money in circulation in the UK is “deficit-based,” but “asset-backed” by mortgages on properties. Here I advocate the use of “co-ownership” through the new “capital partnership” (aka Musharakah) utilizing legal forms – such as the UK, Qatar or Dubai LLP or the US LLC – to allow investors to share property rental streams (and note that “property” can be extended to include intellectual property). These rental streams have a “value in exchange” on a barter network/clearing union, and to all intents and purposes give rise to forms of property-based national currencies to augment a global energy-based “common” currency. We must free our minds from the concept of money as an interest-bearing “object” and replace it with a combination of clearing union, mutual guarantee and value unit, to arrive at a new, and Islamically sound, monetary system.
CHRIS COOK
A common Islamic currency would be beneficial for the development of global Islamic capital markets as the elimination of foreign exchange risk would facilitate portfolio investment flows throughout the Muslim world.
Unfortunately, a common currency is not feasible unless there is much greater macroeconomic and monetary convergence amongst Muslim countries, and unless capital controls are abolished in all the participating countries. Apart from the GCC countries, most other Muslim countries retain controls to prevent capital flight. For a common currency to be introduced, participating Muslim countries would have to limit inflation to not more than 3%, reduce government debt to 40% of GDP, constrain deficit financing to below 4% of GDP, converge interest rates and adopt similar monetary policies. They would also have to agree to relinquish monetary sovereignty, which is unlikely. The currency union of the GCC countries scheduled for 2010 may succeed, but a wider Organisation of Islamic Cooperation (OIC) single currency is unlikely, given the economic heterogeneity of Muslim countries. PROFESSOR RODNEY WILSON Director of Postgraduate Studies, Durham University
In my view there is no need for a common Islamic currency. The currency being a common currency does not improve, but to a certain extent may only expedite the issuance of notes in the global capital markets. Rather than working on a common currency, it would be better to work on improving the current products we have.
MOHAMED RIDZA
Managing Partner, Ridza Law (Mohamed Ridza & Co)
W ith countries as diverse as Pakistan, Indonesia, Saudi Arabia, Iran and Turkey, it would be almost impossible to create a tradeable currency that is stable in the way that the euro is, because the economic policies and controls of such countries are not also common.
It is entirely probable that a common currency will be implemented within the GCC, but this is only a subset of those markets that would consider themselves Islamic capital markets, it is not motivated by the need to create an “Islamic” currency. The key question is why create a Shariah compliant currency? Is it needed for the development of capital markets? First, are existing currencies not Shariah compliant? Secondly, from a private equity or capital investment perspective, an “Islamic” currency provides no real value in the development of capital funding and market development. However, a common Gulf currency is likely to stimulate trade and improve the currency picture, in the same way the introduction of the euro did for the European Union. The target for this GCC currency solution is 2010, and it is likely to create a currency that can stand on its own without the current US dollar peg, which would be positive for the capital markets, at least in the GCC.
BRETT KING
VP – Global, American Academy of Financial Management
O ne must note that there is no such thing as Islamic currency. A currency is anything that society
commonly accepts as having value. Anything can be currency. At one time gold and silver were the common currency in the Islamic world. Salt, stones and many more things have at one time or another been used as currency. There is definitely a strong desire among economists for a common currency for the more than 50 Islamic countries worldwide. This will, like the European common currency did for the European Union, galvanize more interactive economic activities between Islamic countries. These Islamic countries control a significant component of the world’s natural resources. A common currency would mean that other countries wanting to trade with Islamic countries need to use the currency, thus creating another major trading currency on a par with the euro, yen, US dollar and pound sterling. Would it assist in the development of the Islamic capital market? That depends on how well the relevant country established their respective capital market infrastructure. A common currency would not have any direct impact on development, although it would make it more interesting.
BADLISYAH ABDUL GHANI
Head, Islamic Banking, CIMB Islamic
A common Islamic currency is not a practical solution to the creation of Islamic capital markets. A common currency would require an economic union to occur over the 55 countries comprising the Organization of Islamic Countries (OIC), which are at vastly different levels of economic development. These abundant disparities, when combined with the political challenges posed by such integration, would render the creation of a common currency as moot for the time being.
In any case, the Islamic banking industry continues to be driven in terms of balance sheet strength, profitability and demand by the countries in the Gulf Co-operation Council (GCC). The latter’s currencies are pegged to the dollar, which therefore serves as the de facto currency for the industry. Greater product innovation here will add depth to Islamic capital markets, whilst more proactive regulatory regimes will ensure that the industry is appropriately nurtured. In addition, the creation of liquid secondary markets, actively supported by market makers, will ensure the vibrancy of capital markets. All of these, rather than a unified currency, are the basic ingredients for successful capital markets. In order to ensure the integration of other current and future Islamic financial centers, it is important that regulatory regimes are liberalized. At the very least, such measures should include the convertibility of national currencies, foreign ownership of domestic assets and raising investor confidence about the robustness of local laws protecting such investments. YAVAR MOINI Executive Director, Morgan Stanley, Global Capital Markets
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