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Mahathir urges use of gold standard

Source : Mushtak Parker | Arab News
LONDON | 21 Nov 2010

Malaysia's elder statesman Mahathir Mohammed, the favorite politician of the Muslim man in the street and former prime minister, is never far from controversy.

Addressing the 5th International Shariah Scholars Forum, which was held in Kuala Lumpur recently in conjunction with the Global Islamic Finance Forum (GIFF) 2010, Mahathir in an outspoken attack stressed that the "collapse of conventional banking, finance and the monetary system has exposed their weakness and the ease with which they can be abused."

At the same time, in a stark warning to Islamic banks, he bluntly advised them to avoid getting involved in unethical practices in their pursuit to compete with conventional banks. Islamic banking in its current nascent stage, he added, cannot afford any disaster at a time when the industry is trying to gain acceptance as an alternative to conventional banking.

Mahathir is no stranger to Islamic finance. Although not much credit is given to this fact, it was him and his successive governments in the 1980s through to the 1990s and early 2000s that consistently supported the establishment of Malaysia's Dual Banking Model - a conventional banking system operating side-by-side with an Islamic banking system - cooperating but not interacting.

Malaysia has never looked back since then. Today its Islamic financial architecture is the most developed in the world, complete with enabling legal and regulatory framework; a financial sector master plan, of which 90 percent has been implemented; accounting standards; an Islamic interbank money market (the only one in the world); a thriving government Islamic sukuk and notes issuance program; consumer protection and awareness policies and a Shariah-compliant deposit insurance scheme.

In 1998 he also steered Malaysia out of the Asian financial crisis without resorting to the International Monetary Fund (IMF) with a cap in hand begging for a bail-out. The Malaysian solution vindicated Mahathir's policies because it turned to be highly successful, perhaps to the secret admiration of the IMF officials.

As such, on both fronts, the wily Mahathir does know a little what he is on about. The fact that Islamic banking has not yet been abused does not mean it will never be subject to the excesses of its conventional counterpart, which so nearly brought the global financial system to collapse at the onset of the current crisis.

"There are so many greedy people among Muslims as there are among the followers of other religions. If Islamic banking is to grow and become a good alternative to the current banking system, it is important there be installed proper regulations and supervision by inspectors who themselves must be under supervision. The strong growth of Islamic banking today is because the Muslims have a lot of money. They have so much money that they don't know what to do with it. There are relatively few opportunities in the Muslim World for investment. Apart from property development Muslims don't have many industries to finance or to invest in," said Mahathir.

He berated Muslims for not fully supporting the Islamic banking sector. In the past when there was no systemic alternative to conventional banking Muslims had to accept this. But since the advent of contemporary Islamic banking in the 1970s, Muslims now have a choice, and yet they are not making full use of Islamic banking. "Much of the billions earned by Muslim countries are used to buy (riba) bonds in the United States. Even if a Muslim buyer of bonds refuses to accept interest it must be regarded as un-Islamic. This is because investing in banks is the same as lending money. Once money is lent one ceases to have control over its use," he advised.

Islamic finance faces a great future provided the industry maintains ethical practices and avoids dubious products; its supervision by governments is effective; it concentrates on financing productive business activities and thus impacting positively on the real economy; and it rejects betting on futures and manipulation of the market. Similarly, while the executives should be well-compensated, they must never award themselves unreasonable pay, compensation and bonuses. "These are tough conditions, but if they are not met then Islamic finance may meet an early grave," he warned.

Mahathir during his office also mooted the idea of the launch of an Islamic gold dinar. The governments of both Prime Ministers Mahathir and his then successor Abdullah Badawi did toy with the concept of the Islamic gold dinar (IGD) to be used to settle accounts between participating Muslim central banks. One of the architects of the IGD concept, which is effectively a metallized version of the Bilateral Payments Arrangement (BPA) pioneered by Malaysia, is Nor Mohamed Yakcop, the former Second Minister of Finance and currently a minister in the Prime Minister Najib Abdul Razak's office.

The BPA is a unique bilateral payments and trade settlement arrangement between Malaysia and developing countries which at the time bypassed the need for costly correspondent banking in London, New York and Frankfurt. Under the IGD, there would be an IGD exchange which uses the gold dinar as the accounting unit for trade between Malaysia and its trading partners. Malaysia even set up a company promoting the gold dinar, IGD Practice (Labuan) Sdn Bhd. The company has a 34 per cent stake in the Kazakhstan Gold Mining Corporation, which in turn owns the Artul Trud Closed Joint Stock Company, which operates the Bolshevik Gold Mine, said to be one the largest in the world.

Mahathir's call came with recent renewed calls for reverting to some form of gold standard in the international monetary system by no less a person than Robert Zoellick, the president of the World Bank, who recently proposed the use of gold as a reference standard for a new international currency system.

Mahathir himself rejects the idea of using the gold standard for national currencies. This he stressed is no longer practical.

"The place for gold is the settlement of international trade, which involves large sums of money. Payment in physical gold would be inconvenient because of its bulk. The actual payment in gold could be minimized by a clearinghouse system where the trade between two countries would be by contra in which the deficit country will be indebted to the surplus country. Obviously the amount would be quite small relative to total trade and can be paid in gold. Even then it should be by crediting and debiting in the books of the central banks operating the clearinghouse. Carried forward to the following month, or year, the payment can be through the deficit country exporting to the trading partner the amount of goods or services worth the amount owed in the books ," he explained.

Indeed, he pointed out that the clearinghouse system has worked for the settlement of cheques. Through the above mechanism, the need to move physical gold does not arise, except in very special circumstances. The system would effectively be a kind of barter trading in which the value of the goods or services would be quoted in an international unit of gold or by weight of gold.