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Soalan-Jawapan Praktikal berkaitan Dengan Sistem Kewangan berasaskan Dinar

September 2, 2010

Question by Asif Syiraz…

We hate banks because of their heavy involvement in usury. But some financial services which banks provide are entirely legitimate, e.g. safekeeping of money, (warehousing), and facilitating internal payments through checks (transfer of ownership of warehouse items), and external payments (physically transfering gold from one bank to another) in a secure manner. I assume charging a fee for these services is also halal.
 
If the above is true, then it means that irrespective of whether you call them banks, or baitul maal or anything else, some kind of financial service providers would be a necessity in a modern dinar-backed islamic financial system. I believe e-dinar aspires to be one such institution.
 
Since dinar economy is still in its infancy, (or toddlerhood🙂, I am experiencing a few difficult issues related to its practical implementation, about which I could not find a precedence. So I would love it if someone can enlighten me on these.
 
What is the long vision for the Gold Dinar
 
There are many fiat currencies in the world, each identified by its issuer, and the market price of each currency is different because the “trustability” of each issuring authority is percieved differently by the public. Hence their competing, and fluctating prices. So there is a canadian dollar and an american dollar, an iraqi dinar and a kuwaiti dinar.
 
The important thing is, market price of each currency is different.
Less important thing is its reason i.e. issuing central bank’s stature.
 
Now, for the Gold Dinars, we see that they too will be produced at different places, by different issuers (National government replaced by Amirate and central bank replaced by Mint). Now here too, each issuer will face different circumstances, supply rates, labour costs and hence minting charges.
 
Here too, the important thing is that market price of dinar coins would be different. Less important thing is its reason i.e. minting costs instead of the perception of issuing authorities’ ability to meet its debt.
 
Whenever there exist multiple sets of items in market, which have different market prices, exchange rates develop between them. Not only for currencies, but also for commodities e.g. Barni dates are priced different from regular ones, and Basmati rice are priced different from short grain.
 
1. Is the long term vision of the Gold Dinar that there will exist mutliple regional flavours of Dinars (just like regional currencies), and well-known liquid exchange rates, determined by market forces, will exist between them?
 
2. Or is it that somehow, all issuing authorities will collaborate with each other to issue coins at fixed prices?
 
3. Or is it that there will be only one global issuring authority?
 
4. Or is it that magically, inspite of different market prices in terms of external currencies, people will voluntarily start exchanging them at same price by respecting their gold content alone and ignoring their brand?
 
Value of Electronic Payments
 
The second problem is regarding the nature of the dinar-based financial institution.
 
We all know that banks operate on fractional reserve. We disapprove of this, not because of its eventual impracticality (bank failure) but because of the principle involved. Now let us imagine a time when the Dinar has become a ubiquitous currency, and is used everywhere for transactions, and many more financial service providers come into play like e-dinar.
 
When used at large scale and in businesses, efficient payment processing woud require electronic payment services like e-dinar. Now we said that in a truly Isamic form, such institutions would be more like warehouses, storing our commodity money, rather than like banks.
 
But efficient payment processing services through financial institutions is something we have become used to, and these will need to be simulated in a successful implementation of dinar backed system.
 
But there is a crucial difference in the way we are used to such services, and the way they are being offered by e-dinar.
 
In regular banks, 10 dollars in hand (cash) are exactly equivalent to dollars in bank and a 10 dollar check and a 10 dollar bank draft . And they are interchangable. Deposit 10 dollars and now you have 10 dollars balance. Withdraw from your 10 dollars balance, and you have 10 dollars in hand. Electronic and physical payment mechanisms work hand in hand, and compliment each other.
 
On the other hand, dinars stored in e-dinar are not equivalent to dinars in hand. If you pay 10 dinars in cash to someone, its value is different from paying 10 dinars out of e-dinar. This is like saying that a 10 dollar check is actually 9 dollars of cash. Such a difference in business environment would be pure chaos.
 
A dinar for e-dinar is 4.25 grams of a chunk of gold at the top right corner of a 10 oz gold bar. A dinar for me is the WIM issued coin I hold in my hand. The two are not the same. Which one is the real dinar at whose benchmark I start pricing all my products?
 
Reserve Responsibility
 
The third problem is a more principled objection. eDinar claims that they have 20% of their bullion in coin form at all times. This is basically a “fractional reserve” of coins. Just like bank failures are a possibility but practically never occur, here is a scenario which will surely never occur in real life, but still is a theoretical possibility: If all of edinar customers require it to redeem coins, how will it do that? They do have 100% allocated gold to cover the dinar weight, but they cannot disburse them, unless their bars are converted to coins. Does this represent a true “warehousing” model of an Islamic financial institution? If I store my coins with e-dinar, (like I go and deposit cash in a bank), the electronic form of that deposit will imediately depreciate in value and be reduced to fractional ownership in a gold bar. Is this the correct model for a durable long term implemenation?
 
Looking forward to guidance from everyone.

Answered by Umar Vadillo…

For these answer to be of any use we need some common terminology. So let us start with some definitions. Banks, no good. Banks involve not only usury but as an institution is not acceptable in many respects one of which is the creation of credit. Financial services, that is services derived from credit activity, are no good either. Money and credit must remain separated.

In Islam we have wadiah, the contract of safekeeping, it is not a financial service, since the wakil keeping your property has no right to use it or lend it to others. You give him your property he returns it to you for a fee. Payments through a wakil are known and permitted provided that the legal restrictions are taking into account. To ask someone holding your property in ‘amanah to pay in ‘ayn on your behalf to some other person is known and acceptable. The legal restrictions are more cumbersome when it comes to pay some other person using dayn (a debt or an IOU).  The legal restrictions refer to the limits of transferring debts (see al-Muwatta). Essentially the limits consist of eliminating the possibility of the sukuk (the receipt) to circulate as the specie itself, that is the possibility of the sukuk turning into paper money as we know it today (which is Riba, see al-Muwatta). The transfer of debts (dayn) requires the cancellation of the previous debt by the original issuer: the issuer must be present during the transfer (it is invalid in his absence) and it must be proven his capability to pay (the issuer must have the verifiable funds).

Baitul Mal is the treasury of the Amir. The Amir collects and disperses funds as he wishes. You cannot open an account in the Baitul Mal. It only holds one account, that is the Amir’s. You can open an account in the form of a wadiah, safekeeping. You can open an open an account with a wakil, who will perform any duty you ask him to. So, here we have two basic institutions we can refer to: Wadiah and Wakala, that can be translated as, Safekeeping and Agency. I am not aware of any other way in which you could have an account with someone else. How about ‘amanah?

‘Amanah is trusting in general and is more generic than Wadiah or Wakala. Wadiah is an ‘amanah with the specific purpose of safekeeping. Wakala is an ‘amanah with the purpose of safekeeping plus making payments or selling on behalf of the owner.

The “Dinar economy” is in its infancy. The infancy must be interpreted as the fact that the full implementation of the Dinar requires the existence other institutions (of Muamalat) that they are still missing. The complete implementation of the Dinar (its maturity) will depend on the full implementation of Muamalat. This is similar to building a house, you start from the foundations, then you do the ground floor, then the first floor and then you put the windows and the roof. You need a plan of construction.

 You also need to know what you want to build. Even though on the beginning the foundations don’t look like a house, the architect must have in mind the idea of the full house. Since I started this movement to return to the Gold Dinar and I have been doing most of the thinking, I can call myself the architect, some people call me the “Father of the Gold Dinar”. My model is the ‘amal of the ahl al-Madinah. My sources are the Muwatta of Imam Malik and particularly important, the Mudawanah of Sahnun. This is nothing to do with madhhab, this is to do with ‘Amal, that is, practice. 99% of what you called Dinar economy is my doing. If something is wrong is my fault. If something is right is because I managed to interpret well the ‘amal of Madinah. And Allah knows best.

What is the long vision of the Gold Dinar?

The full implementation of Muamalat according to the original sources.
Fiat currencies are not our way. They are part of banking, they originate from banking and we endure them as a result of the elimination of freedom represented by the crowning of capitalism in our constitutions through three main elements: Central Banks, National Debt and Legal Tender. Constitutions are part of the New World Order envisioned by XVIII humanists. Historically constitutionalism is anti-Khalifate and therefore anti-Islam. Needless to say, Islamic constitutions are like Islamic banks, a complete absurdity.

That the majority of ulema today take this status quo for granted does not disarm the purity of our objectives, it only shows that we are living in dark days. When I started this movement of the Dinar there was nobody who knew or cared about the Dinar, now there are millions. When the light comes the darkness disappears. For defending the return of the Dinar I was called naïve, utopian and all kind of other things. Many of those people have now joined me, others are now silent. I say: Fiat currencies are haram, Central banks are haram, Islamic banking is haram, National Debt is haram, Legal Tender is haram, and Constitutions that enshrine those elements are haram.  And Allah knows best.

Many still disagree with me on those grounds (above) and therefore what follows is irrelevant for them. My concern is not what is haram but what is halal. In search of the halal we return again and again to the practice of Madina. It is impossible to understand the ‘amal of Madina if what is in your mind is the present ‘amal of capitalism. To understand you have to divorce yourself from the present way of doing things and you have to walk the streets of Madina, only then you might understand.

The second element to understand is “what comes before what”, that is, the order of priorities and for that you need to think like an architect. You need to sense what is the primordial core and what is secondary. That is what led me to write about the Core Mechanism of Islamic Trading: Dinar and Dirham, Markets and Qirad. It is all in black and white.
When you intend to replace a system such as capitalism with something entirely new such as Muamalat you need to understand priorities but also the boundaries.

Even though you are starting with something small you cannot compromise the meaning what is halal and what is haram. Therefore if you do something and you want to differentiate it by calling it Islamic it must be Islamic, rather than “almost Islamic” or “our intention is Islamic”. This is not acceptable. If we feel that we still need banks in the initial stages, then we use them, but we should call them “Haram Banks”. Then we are clear. Islam is not negotiable.
Now we can progress. The Idea of Replacing: “National Government replaced by Amirate”. Well, be careful that we don’t fall into nationalist fallacies. The Amirate must be of Dar al-Islam. “Central bank replaced by Mint”: these two institutions have nothing to do with each other. They are totally different. Instead of replacing, we should think in terms of building or growing from zero. This is more like planting a seed and seeing it grow until it becomes a tree, rather than replacing the fruits of the tree.

I decided to start with the Dinar. This is the seed. The first thing is to get gold and mint the coins. There you have the first Mint. I called it Islamic Mint. We had several Mints. Then I decided to create World Islamic Mint as a guarantor of the standards. The standards of Madinah: the mithqal and 7/10 of the mithqal. Then it came the question of the alloys. The Dinar of Madinah was not 999.9 because they did not have the metallurgic capabilities of today. The intention though was to create a pure gold coin, but they couldn’t as we can today. So the ‘amal was a coin mixed with silver (they could not separate silver from gold in those days), but the intention was a pure coin. Should we make a 24k coin or a 22k -as we decided? A 24k coin is too soft and wares out rapidly in circulation. Wearing out is critical because if it falls bellow certain weight is no longer a Dinar. The average life of a 22k gold in circulation is about 15 years, the average life of a 24k gold coin in circulation is about 3 years. The conclusion is obvious. If you mixed pure gold with 10% silver the coin doubles in strength, if you mix it with 10% copper its strength is 20 times bigger. WIM decided to make the standard 22k with a mix of silver and copper (50/50). That is ijtihad.

There is no place for ijtihad regarding the weight, the weight is the mithqal. But what is the mithqal? WIM says 4.25 gr. Since we could not measure 72 grains of barley accurately, we took our weight from non circulating original Dinars that are still preserved in museums. We took the best coins and average their weights. The result: 4.25 gr.

Coins require to be identifiable and as much as possible they should not be counterfeited easily. The first line of defense against counterfeiting is quality. We need to mint at the best quality possible so the number of possible counterfeiters is diminished. Second you introduce security features. They are of two kinds: visible to the naked eye and non-visible. Cost is important, so you need to introduce them according to necessities with the hope of being ahead of counterfeiters. This concern is fundamental for the Mint. It is a responsibility.

The good news is that there are security features that are impossible to counterfeit. WIM has an implementation plan to introduce them gradually without incurring an excessive cost on the final user. Some of the security features are expensive to implement in relatively small quantities.

Bear all those elements into account and you can have a hundred different dinars with different “flavours”. What you cannot expect is people, especially shops, with a list of one hundred different standards and one hundred different prices. Imagine how to deal with mutual exchange of coins. So, the answer to your first question.

1. Is the long term vision of the Gold Dinar that there will exist mutliple regional flavours of Dinars (just like regional currencies), and well-known liquid exchange rates, determined by market forces, will exist between them?

WIM has a single global standard and all the coins have the same design and security features. WIM just recently, made the first change in standards, the Kelantan Dinar has all those features, including new security features. All of the WIM coins will follow this standard by Jan 2011. The old WIM coins will be re-minted into the new standards or will be taken out of circulation. The network of WIM shops with the sticker “We accept Dinar and Dirham” will only accept the new standard coins. E-Dinar will only accept and use the new WIM standards from Jan 2011.

WIM will therefore have a single global standard. All the other coins are seen as gold material. Imam Malik in the Muwatta speaks of coins that are “popular” and coins that are “not popular.” Acceptance is the ultimate text. Nobody can be forced to accept coins that they do not want and do not trust.

Coins will have the value that people decide to give them. And nobody can change that, and nobody should not change that.

2. Or is it that somehow, all issuing authorities will collaborate with each other to issue coins at fixed prices?

That is precisely the job of WIM, we coordinate between all the mints that subscribe to our principles.

WIM establishes what we call a Recommended Retail Price, which means that all the coins have the same ‘recommended’ price worldwide. The advantage is that we can interexchange the coins one to one without exchange fee. This radically increases the acceptability and functionality of our regulated coins.

3. Or is it that there will be only one global issuing authority?

Because of the security features you need to limit the number of minting houses. WIM accredits Mints if they fulfil minimum conditions of quality and can technically introduce the security features. We are in negotiation with a number of them.

4. Or is it that magically, inspite of different market prices in terms of external currencies, people will voluntarily start exchanging them at same price by respecting their gold content alone and ignoring their brand?

People are the ultimate market makers. Mints and WIM can only make claims in regard to the quality of the coins they produce, nothing more and nothing less.

Pricing is to do with what you have in front of you. Imam Malik differentiates three types of gold and silver objects: nuggets (material), coin, and jewelry. Material and jewelry are exchanged without measure. That is to say, the value of a piece of jewelry does not depend on its weight. Same applies to material. Only coins (of the same standard) do.

What makes the coin coin is their ability to function as a means of payment. Thus there is a difference between coin and bullion. There is also a difference in price. We are at a moment in history when we are just starting to use gold and silver coins as means of payment, therefore it is logical to conclude that the value of the coins will depend on their increasing ability to serve as means of payment.

The job of WIM is to increase those functionalities. The job of the people is to price them according to whether that ability is reasonably performed or not. WIM might strive with its standards to improve functionality, but the ultimate price is only established by the users.
 
Value of Electronic Payments

Payment systems in general have to also follow Islamic Law. The basic legal structure of payment systems is the Wakala. This is the model. Electronic payment system refers not to electronic currency, but electronic means of communicating with the Wakil. The means of payment are the physical coins.

The expression back by gold could be misleading, if it is not understood that the payment is made with physical coins that must be present. If we call e-dinar to the unit of payment it must be understood that the payment is made with physical dinars. The e-dinar unit cannot circulate independent of the physical coin.

If you think about the E-dinar project as a building then these are the steps. First the question of the repository:

1) A central repository with a central Data Base
2) Multiple repositories with a central Data Base
3) Infinite repositories with a central Data Base

Essentially the idea is to disperse the stock and avoid as much as possible central repositories. Each step requires a process. On the beginning you build the payment system on a singular repository. It is the easiest. The decentralisation of the repositories has an impact on transfer fees, since it becomes unnecessary to transport gold if you live near a repository.

The Second issue is the type of accounts:
1) Bullion
2) Bullion and coins
3) Only coins and only bullion

The idea is that you progressively eliminate the bullion and transform it into coins as the demand for coins increases. When we started E-dinar, hardly anybody demanded the coins in redemption of their accounts. 99% percent of customers demanded redemption in bullion. This gradually changed as the physical coins gained acceptability on the ground. Consequently E-Dinar has been changing the stock to meet demand.

Since the introduction of the new WIM standard and the stickers, WIM demanded E-dinar to move to the next stage and from Jan 2011 E-Dinar will have “only coins” accounts and “only bullion” accounts. The new accounts will be in display by November this year and will be in full functionality during December, according to what I heard from E-dinar chairman, Dr Habib Dahinden.

With the new accounts available in Jan 2011, all e-dinar units are exchangeable with dinar coins only, one to one. Fees are applicable depending on location of the repository (thus decentralisation), but only in case of redemption and thus the logic of multiple repositories.

It follows that the price of the e-dinar is identical to the dinar. And it follows that the use of e-dinar through a smart card or mobile telephony bears the same value as a physical dinar except the coin is safekept in the nearest repository. There is a fee for the acceptance of the e-dinar unit which is beared by the shop under the terms and conditions of the agreement, but this fee is ridiculously small: 1% or maximum 0.015 e-dinar (for e-dinar transactions), max. 0.5 e-dirham (for e-dirham transactions), whatever the lowest.

Reserve Responsibility

The best reserve system is to hold the dinar in your pocket. Given the fact that some users demand to hold accounts with a wakil in order to facilitate their payments then we need a payment system. Repositories are best the nearer they are to the user. And therefore a payment system should try to come as close as possible to the user.

When you deposit your money with a wakil you must trust him. If you do not, do not do it. The trustworthiness of the wakil is based on his reputation as granted by the community and his performance. Rasulullah, salallahu alaihi wa salam, was well known amongst his people as the AMIN (the trustworthy one).

At the moment e-dinar is an internet based electronic payment and exchange system that facilitates transactions which are 100% backed by physical gold and silver. From Jan 2011 you will see something like this: e-dinar is an internet based electronic payment and exchange system that facilitates transactions which are 100% backed by physical dinar and dirham. And you will also see a differentiation between bullion accounts and coin accounts. The issue has been explained earlier.

WIM has responsibility to inspect E-dinar systems and to award them with being a WIM payment system. If you notice WIM has not yet given its WIM logo to E-Dinar, it will only happen after Jan 2011.

Allah is our Lord. He is the Master of everything in the Heavens and the Earth. He is our Protector and our Guardian. His people are known to Him and they are measured by their actions. Rasulullah, sallalahu alaihi wa salam is our model, we follow his steps and that of his Companions. There is a clear sign for the people who follow him, that is Victory, for Victory is the sign of the selected who abide to the Commands and fulfil them. And Victory belongs to Allah.

P/S: Baca dengan teliti dan cuba fahami secara ikhlas mahu memahaminya.  Tidak faham, boleh bertanya.

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