In l963 a savings bank based on profit-sharing was
established in the a small Egyptian town. For fear
of being seen as a manifestation of Islamic fundamentalism, this 1st modern
experiment with Islamic banking was undertaken under cover, without
projecting an Islamic image.
In this report we take a brief look at the growing
world of Islamic Financing and Banking, it’s
history, and strict governing laws. We will observe it’s
unique features, implementation strategy and give some background to the
ideology that exists behind the system.
As a result of the un-sustainability, and the debt
associated with this present fiat $US backed global financial system; and in
effort to avoid the booms and busts, evils and injustices created by it,
worldwide today there are many groups, organizations and peoples pushing for
a reestablishment of a sound and stable monetary system. Surprisingly it is
not the west that is leading this move, but rather a global trading network
that has fast become an vast, strategically placed
and connected, sophisticated trading block that decisively controls a
In May of this year (1998), officials in Singapore
announced they would host the Inaugural "Asian Islamic Banking and
Finance Conference" in August. Singapore, keen to host the conference,
believe they are well placed to tap into the fast growing pool of funds from
what potentially may become the largest trading bloc in all history.
From the end of World War 2, through the baby-boomer
years and onwards, global annual use of crude oil skyrocketed. This brought
with it a steady shift of wealth from the high oil consuming nations of the
West into the high oil producing nations of the Middle East. Annually, vast
amounts of US "Petro-Dollars" to pour into Islamic/Arab nations.
By l967 there were nine such banks within Egypt.
These banks neither charged nor paid interest, and invested mostly by
engaging in trade and industry, directly or in partnership with others, and
shared the profits with their depositors. Thus, they functioned essentially
as saving investment institutions rather than as commercial banks.
During the oil embargo days of the 1970’s
"The Islamic House of Funds" was registered. Controlled from
Geneva, it started to accumulate a large portion of this new petro-dollar
Islamic wealth, becoming a vast monetary pool. The aim of the House of Funds
was to build a strong capitol base and to establish
a worldwide network of interest free business and banking services.
The Islamic Development Bank was established in l974
by the Organization of Islamic Countries (OIC) primarily as an
intergovernmental bank aimed at providing funds for development projects in
In the seventies, changes took place in the
political climate of many Muslim countries so that there was no longer any
strong need to establish Islamic financial institutions under cover. A number
of Islamic banks sprang into existence in the Middle East for instance; the
Dubai Islamic Bank (l975), the Islamic Bank of Sudan (l977), the Islamic Bank
of Egypt (l977), and the Bahrain Islamic Bank (l979), to mention a few.
In the Asia-Pacific region the Philippine Amanah Bank (PAB) was established in l973 by Presidential
Decree and was designed to serve the special banking needs of the fast
growing Muslim community. Today it has eight branches including one in Metro
Bank Islam Malaysia Berhad
made its debut in Malaysia in l983. One 1988 report stated there were plans
to open six new branches a year in that nation.
The Islamic Finance House, was established in
Luxembourg in l978, representing the first attempt at Islamic banking in the
Iran completely switched to Islamic banking in
August l983 with a three-year transition period.
Today world-wide there are over 130 banks and
countless more "non-bank" financial institutions.
Most observers of this "Islamic Banking
Phenomena" have been staggered at the speed with which Islamic banks
have sprung up and the rate at which they have progressed.
Islamic banks and financial institutions have been
successfully established in countries where Muslims are a minority including
India, Switzerland, Denmark, Copenhagen, the UK and the Islamic Investment
Company in our own Melbourne, Australia
STRICT LAWS AND
Islamic banking and finance is governed by the strict
"code of conduct."
The essential feature is that it is interest-free.
Islam prohibits Muslims from taking or giving interest (riba)
regardless of the purpose for which such loans are made and regardless of the
rates at which interest is charged.
The prohibition of "riba"
is mentioned in four different sections in the Qur'an. The first emphasizes
that interest deprives wealth from God's blessings. The second condemns it,
placing interest with wrongful appropriation of property belonging to others.
In the third reference it instructs the Muslims to stay clear of interest for
the sake of their own welfare and the fourth establishes a clear distinction
between interest and trade, urging Muslims to take only the principal sum and
to forgo even this sum if the borrower is unable to repay.
It is further declared in the Qur'an that those who
disregard the prohibition of interest are "at war with God and His
Prophet." The prohibition of interest is also referred to in no
uncertain terms in the Hadith or the "sayings of the Prophet". The
Prophet Mohammed condemned not only those who take interest but also those
who give interest and those who record or witness the transaction, saying
that "they are all alike in guilt."
Many writings by scholars of Islam discuss the
issue. Some distinguish between profit and profiteering, arguing that Islam
has prohibited the latter. Some writings have alluded to the 'unearned
income' aspect of interest payments.
The ban on interest does not mean that capital is
without cost in the Islamic system. The system allows for the provider of
capital, through a system of "profit sharing." This is an important
distinction as the lender of capitol also shares in the risk, unlike the
western system today where the bank providing the capitol shares no part of
the risk. If the venture goes bad the bank seizes the assets.
Islamic banks are inclined to be more concerned
about the viability of the project and the profitability of the operation
rather than the size of the collateral. Good projects which might be turned
down by conventional banks for lack of collateral would be financed by
Islamic banks on a profit-sharing basis. As a result Islamic banks can play
an important role in stimulating economic development.
This system of "equity participation" is
where the Islamic bank or financial institution comes in. The bank
essentially manages the funds of the depositors to generate profits under
very strict laws and guide lines.
Unlike our present system of banking in the west,
these guidelines prevent these institutions from employing a "fractional
reserve system". By comparison, official Federal Reserve figures show us
that less than $2 exists within our banks, for every $100 dollars we have on
deposit. The potential for a bank run that exists in the west,
just could not happen within the Islamic Banking system.
These banks, just like conventional banks operate
current, savings, and investment accounts. They provide the broad range of
payment facilities, clearing mechanisms, bank drafts, bills of exchange and travelers checks etc.
International Monetary Fund study by found Islamic banking to be a viable
proposition that can result in efficient resource allocation. The study
suggests that banks in an Islamic system face fewer solvency and liquidity
risks than their conventional counterparts.
Islamic banking has three distinguishing features:
(a) it is interest-free, (b) it is multi-purpose and not purely commercial,
and (c) it is strongly equity-oriented.
RE-EMERGENCE OF SOUND MONEY
From within this emerging financial network, are now coming the inevitable calls for the establishment
of a central controlling body or an "Islamic Central Bank" and a
return to a sound gold and silver backed currency.
In 1998 the US$ dollar is the reserve currency of
the world. Oil can only be bought and paid for in US$. As the US$ fluctuates
and inflates it effects Muslim economies. Many within the Muslim nations of
Indonesia and Malaysia blame the US$ and policies for the 1997/98 Asian
crisis that devastated their currencies.
Illustrating the Islamic push for a gold monetary
system is a publication called "The New Coins of the World Islamic
It outlines the history of the Dinar and Dirham
coins in early Islam History. Sounding more like Free Market Journal on sound
money or the gold standard, it goes on to point out the frailties and
unjustness of our present global monetary system.
The publication points out that, according to the
Qur'an and the Sunnah, the only "lawful
money" is non-usurious gold and silver. In the chapter entitled
"Using Dinars and Dirhams" it demonstrates the stability of gold
and silver over time. An interesting observation is that at the time of the
Prophet, around 600 AD, a silver Dirham would buy a chicken. Today the same 3
grams of silver in England will still buy a chicken
"The New Coins of the World Islamic Trading
Organization" calls for the Islamic World to unite behind the newly
rebirthed Dinar; "When the millions of Muslims start to pay their Zakat
(or tax) in newly minted Dinars and Dirhams, they will put millions of gold
and silver coins into the mainstream of the daily commercial activities of
our communities. That single act will become the most important act this
century, opening the path toward the establishment of our own free currency,
breaking away from the usurious financial system.
"The new standards of the World Islamic Trading
Organization are based on the traditional average weight and measure of the
Dinar and Dirham during Muslim rule"
Historically very strict laws surround the minting
of the Dinar. Since 1992 silver Dirhams and gold Dinars have been minted and
are now in commercial circulation in the UK, Spain, Scotland, Germany and
The World Islamic Trading Organization appears to
have a clear and orderly establishment program for the new currency;
1st The issuing and minting of Dinars and Dirhams
according to the traditional weights and measures under the standards of the
World Islamic Trade Organization.
2nd A call to establish again this gold and silver
coinage as a medium exchange in day-to-day business within Muslim
communities. In Islamic law there is total freedom to buy, sell and possess
any quantity of Dinars and Dirhams.
3rd Facilitating the transport and transference of
gold for international trade by a network of agencies throughout the world.
This infrastructure already exists with the 130 or more financial
institutions and banks globally. This network will be expanded to facilitate
international payments and bank clearing.
4th Changing all paper currencies to Dinars and
Dirhams. This stage is the final transition to Bimetallic Currency.
Today Islam boasts a low-cost large productive labor
force of over 1 billion people. It commands the lion share of the guaranteed
global oil market is the fastest growing trade and finance block in the
world. Islam transcends political and geographical boundaries, maintains
strategic alliances, religious fervor and military might.
It has been the west that has led the entire world
into an era of corrupt, debased and debt backed money along with all it's crippling and impoverishing
effects. It is Islam that is now leading the world in a resurgence of sound
money. Should this not be a call to the west to rise up and lead the world in
a return to just weights and measures; a fair, wealth based monetary system.
Such a system, coupled with all the practical benefits of our modern
technical age and high division of labor, would surely usher in a new era of
freedom, wealth and prosperity not yet seen.
Anglo Far-East Company
by Philip Judge
Philip Judge is the 3rd
generation of a family that has had substantial involvement in the Precious
Metals markets. He has researched, written and spoken on the gold, silver and
commodities markets for over a decade. Philip works in the marketing and
operations department of The Anglo Far-East Bullion Company, an
internationally based Bullion Banking, Investment Management and Financial