C onventional money is conceived as an IOU either as (a) interest-bearing credit created by private banks, based upon an amount of regulatory capital; or (b) non interest-bearing credit issued by a central bank and essentially backed by the tax base of the issuing nation. Historically, only one such fiat currency at a time has been adopted globally as an international means of exchange, and while the US dollar took over from sterling after the Second World War, its credibility is now destroyed, and alternatives are being urgently sought. Any currency which is redeemable for value (as opposed to another claim over value) is undoubtedly Islamically sound, and while many advocate currency units redeemable for gold, the supply of gold is too restricted and the market too subject to manipulation, for it to meet the needs of a modern globalized economy. For domestic transactions, I advocate units redeemable in land rental value. For cross-border transactions I advocate units redeemable for energy, particularly electricity, and carbon-based fuels, such as natural gas, gasoline, heating oil and fuel oil. Exchange transactions would take place subject to a mutual guarantee of bilateral credit within the framework of an International Clearing Union, and they would be priced by reference to a value standard or unit of measure, consisting of a fixed amount of energy, which I term as a ‘Petro’. In this model Gulf states (and other states such as Norway, Russia and Venezuela) would be in a position to “monetize” natural gas reserves, future carbon fuel production and electricity produced by new renewable energy installations, simply by issuing units redeemable in energy, priced against the Petro. In this way, the Islamic world could lead the creation of a global reserve currency based upon intrinsic value, rather than the completely useless fantasy currencies being created in worthless carbon dioxide, or equally worthless claims being created without limit by the US Federal Reserve Board.
CHRIS COOK:
A t present the major Islamic money markets are in Malaysia and Indonesia, but they are local currency denominated. Bahrain issues 90-day Salam Sukuk, but they are not traded although they provide a useful short term instrument for Islamic banks based there. The Bahrain-based International Islamic Money Market is not actually a market; rather it approves Shariah compliant instruments for potential trading. The Dubai International Financial Centre will be offering liquidity management services to Islamic banks, but it is not clear how successful the scheme will be. However, it will be dollar-denominated and internationally focused, so it could have significant potential. If the Saudi Arabian Monetary Agency takes the initiative, it could have the greatest impact internationally, but at present it uses conventional monetary policy instruments, notably re-purchase agreements. The new GCC Central Bank which opens in Riyadh next year could also have a major impact, but it is unfortunate that the UAE and Oman will not be joining the monetary union.
As long as the institutions operating in the Islamic financial markets are relatively small and locally focused, Islamic money markets will not grow beyond national borders. In order for a truly international Islamic money market to develop, Islamic financial institutions will need to move away from the currently popular bilateral agreements towards more significant levels of standardization. This will ensure a level playing field and reduce cost, which will in turn assist in building a global market place. DR NATALIE SCHOON: Head of product management, Bank of London and the Middle East
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