Interest Rate vs. Fertility Rate

Solution for Countries to Boost Back Shrinking Populations

In the last few decades global fertility rates have, in general, been on the downward trend, affecting some countries more than others. Fertility rate refers to the average number of children that would be born to a woman if she were to live to the end of her childbearing years. This rate is of particular interest to those who study demographic trends in countries because it tells a lot about the future of the people in concern. For example if the rate is too low, then the population could face a rise in aging population which could find itself difficult to sustain economically. Also over long-periods of time sustained low rates could significantly reduce the size of the population, its culture and so forth. A high fertility rate could also be seen as potentially imposing problems to parents and governments since the young population needs to be nurtured, educated, provided with jobs etc. Hence some countries have imposed one-child or two-child policies at one time or another, for example China and Singapore. Now Singapore is among the countries that have very low fertility rate. Low fertility does not necessarily imply infertility, i.e. the inability to produce offsprings, because it could be due to even fertile people choosing to have few or no children at all. Singapore’s founding premier Mr. Lee Kuan Yew in his book One Man’s View of the World remarked,

“…Is there a country in this world that prospers on a declining population? If I had to identify one issue that threatens Singapore’s survival the most, it would be this one. I cannot solve the problem and I have given up. I have given up the job to another generation of leaders. Hopefully, they or their successors will eventually find a way out.” (p222).

Interest vs Fertility Table cover

Also that if he were to become the premier again, that he would give mothers a baby bonus equivalent to two years of average Singapore salary, just to prove a point that the population would still continue to shrink simply because there has been a mindset change among the people, particularly the young generation.

Indeed, most developed nations are also faced with similar problem and other less developed nations are slowly following suit. It is said that for a society to sustain itself, the fertility rate should be at least 2.11, also known as the replacement rate. We need two children to simply replace the parents and the extra 0.11 to cater for things like infertility, late marriage, postponing childbearing, early deaths, choosing to remain single and so forth. Fertility rates below 2.11 would cause the population size to fall. Table 1 below provides the 2012 fertility rate for some selected countries. Only India and New Zealand seem to have at least the replacement rate.

Interest vs Fertility Table 1

Rates below 1.3 are, apparently, impossible to be reversed back to the replacement level because it would take many decades to do so, and there is no way a population could be economically sustained for that long of period, before it corrects itself. Many advanced and developed nations – including the US, Europe, Britain, Scandinavian countries, Japan, Australia and New Zealand – indeed have fertility rates below 2.11, indicating as though there is a negative relationship between economic advancement and fertility rate. Continued at this rate, these countries could face serious problems in the future from from labour shortages and aging population. Some less-developed countries, including many Muslim countries, have fertility rates much higher than 2.11 prompting migrations from these countries to the developed nations that face population shrinks and thereby labour shortages. Indeed, some quarters have exploited this fact to put fear into the hearts of people, scaring them with things like “Islamic immigration”, “Arabization of Europe” which they term as Eurabia and so forth; that prompted author Daug Saunders to write the book “The Myth of the Muslim Tide” (Vintage 2012) in which he quells such fears.

But what are the factors causing the fertility rates in most countries to dwindle? Indeed even in developing countries where the rates have generally been higher than 2.11, are also falling. Studies have shown many factors as being responsible for the falling fertility rates, including lifestyle changes and government policies. Women with higher education and paid jobs tend to postpone childbearing and have fewer children. Career ambitions could be partly the reason too. Policies like tax credits, cash benefits and childcare supports all help reduce childcare costs. Nonetheless the problem of falling fertility rates seems to persist in most countries. The acceptance of lesbian, gay and transsexual lifestyles in society surely would contribute further to this problem.

This article argues that the globally-prevalent interest-based fiat money system of today is a significant determinant of fertility rate. The reason is as follows. Money in the present monetary system is fiat in nature, i.e. not backed by anything real like gold etc. and comes in the form of paper notes, coins, accounting numbers and electronic records. The accounting numbers including the electronic ones are generally created as money by the commercial banks in the form of loans that carry interest charges. Compound interest, mathematically, is an exponential function that causes money in the economy to grow exponentially. However, since the real sector cannot match this exponential growth of money, it brings about inflation and disparity in income and wealth distribution; which, therefore, can be seen as inbuilt features of the present monetary system.

This ‘inbuilt’ inflation, of course, increases both the cost of child-rearing and also the cost of retirement. Accordingly, living costs, education and healthcare costs are rising fast. A recent article in the Star daily (19 April 2015) reported that Malaysians in general must save 20% more of their income over and above their EPF savings in order to retire comfortably or otherwise risk of not having enough for retirement. Hence, having children can be seen as an opportunity cost of retiring comfortably. These factors, therefore, prompt people to have fewer children or even choose not to have any children at all. In many circumstances this also prompts the women folk to go to work to supplement family income. Hench, double income and multiple jobs are now necessities for many families. Their ‘over-working’ culture leaves less time for family togetherness and hence them having less children.

Generally, financial inclusion of all people is an important factor for broad-based economic development. Financial inclusion refers to the state where individuals and firms have easy access to basic financial services. Nonetheless, interest-based financial inclusion could prove ‘deadly’ for economies because most people are likely to become net borrowers and faced with the tradeoff choice between children and retirement. Of this, Mr. Lee Kuan Yew said that Singapore will ‘fold up’ if its citizens do not procreate. In 2012 Singapore and Malaysia had fertility rates of 1.3 and 2.0 respectively (Table 1). Table 2 below provides the Fertility Rate and Financial Inclusion Index for 35 countries. These countries comprised the sample in an IMF working paper study mentioned below.

Interest vs Fertility Table 2 part 1

Interest vs Fertility Table 2 part 2

The correlation coefficient between the financial inclusion index and the fertility rate is a negative 0.53, which is statistically significant.

Accordingly, I contend here that interest rates do negatively affect fertility rates, which if go unchecked can have disastrous effects on nations and the culture of their peoples in the long run. Accordingly, it may be beneficial for nations to consider interest-free financing modes. It is my strong view that nations that aspire to solve their shrinking population problem must first abolish their interest-based monetary and financial system and replace it with systems that are based on risk-sharing principles. I hope Europe, the US, Japan, Singapore and others that are faced with shrinking population problem would replace their interest-based monetary system with interest-free systems to ‘save’ their populations and unique cultures. In this regard, Islamic finance comes to mind and indeed is something all nations can consider. This article, however, provides just a preliminary suggestion to the possible link between interest-rates and fertility rates. Further research into this would surely shed more light.

Prof Dato’ Dr Ahamed Kameel Mydin Meera
Managing Director
Z Consulting Group

Response to Dr. Shaykh Abdalqadir as-Sufi’s article “The Islamic Dinar – A Way-Stage Passed”

By the Dinar and Dirham Technical Group

The above article appeared in the Shaykh’s website, posted February 14, 2014, in which the Shaykh declared, near the end of the article, that he now is dis-associating himself from all activities involving the Islamic gold dinar and silver dirham (hereinafter DnD).

His disappointment seemed rooted in the fact that after decades of hard work and planting the ‘tree’ to push the DnD as an instrument of Taken Zakat had not come to fruition.  In his words, a Taken Zakat must fulfill the following:

  1. An appointed Amir
  2. That Amir’s appointment of Zakat Collectors
  3. This resulting in a collected and assessed amount of Zakat
  4. The gathering of the Zakat in a Bayt al-Maal
  5. The immediate distribution of the Zakat to the legally worthy recipients

And that the DnD initiatives so far did not achieve these.  Hence the Shaykh writes:

“a newer and wider method must be adopted on a global scale PRIOR to the return of a local Halal functioning community which restores Islam by the door of Zakat….I call on an end to its [DnD] new institutions and productivity. The defence mechanisms of today’s late capitalism and its crisis management surrounding the buying, moving and minting of gold have surrounded it with prohibitive pricing and taxation. It is time to move beyond it. This is capitalism’s pyrrhic victory. Ahead lies vast expansion for the post-terrorist and post-political stage of Muslim growth.”

The Dinar and Dirham Technical Group (DDTG) is not a part of the Shaykh’s Murabbitun sufi order.  Nonetheless, we viewed ourselves as part of a larger group that strives to bring back the DnD as part of the Islamic socio-economic order.  This because we have reasoned and determined that the present fiat money system is nothing but embodies profound riba and prevents the attainment of a true Islamic socio-economic order, i.e. the maqasid al-Sharia are not attainable in this present system.

What the DDTG strives for is not so much bringing back physical gold dinars and silver dirhams into society as medium of exchange, even though this is a desirable event.  But rather its true struggle is to bring back gold and silver as measure of value in economic exchanges and transactions.  These are very much two different things.  Trade and commerce ultimately involves the exchange of goods and services.  What is missing in the present global monetary system is a real measure of value that can promote exchange justice, stability and sustainability.  Fiat money is a virtual measure of value and carries with it the Ribawi gene.  On the other hand, gold and silver is in line with what great scholars of past like al-Ghazzali and ibn Khaldun remarked in their works, i.e. God created the two precious metals as measure of value, i.e. against which the value of all other goods and services are measured.  The Holy Qur’an describes these two metals as of having precious value not only in this world but also in the Hereafter, i.e. Jannah.

While the DDTG recognizes the DnD as the ultimate measures of value, it also recognizes that other measures of value are also possible.  They simply need to have the characteristics needed to play the role of measure of value.  The following hadith of the prophet (saw) itself gives four other such items.

Abu Said al-Khudri reported Allah’s Messenger (s.a.w.) as saying:  Gold is to be paid for by gold, silver by silver, wheat by wheat, barley by barley, dates by dates and salt by salt, like for like, payment being made on the spot.  If anyone gives more or asks more he has dealt in riba.  The receiver and giver are equally guilty.Sahih Muslim

Hence what the DDTG strives for is to establish real measures of value.  These necessarily must be commodities or services having their own intrinsic value.  Symbolic money is acceptable so long it is redeemable for some real commodity or service.  The DDTG would like to see not only dinar and dirham instituted but also other real money concepts – like commercial barter exchanges, complementary currencies, etc. – to coexist so as to increase the strength and resilience of the whole monetary and economic system.

Hence the DDTG recognizes that the fact, Shari’a principles of muamalat, zakat, mahr, hudud etc. are based on gold and silver as monetary standard has hikmah behind it.

Nonetheless, in this regard the DDTG recognized that it is virtually impossible to revive back the gold dinar and silver dirham their monetary role so long the legal tender law is not ‘loosened’ a bit.  This is because, in the presence of legal tender law, Gresham’s Law would kick-in, i.e. inferior money would drive out good money.  Hence paper money and other fiat money would drive the gold dinar and silver dirham out of circulation.  This is exactly what happened in Kelantan.  Only in the absence of legal tender law or with some ‘loosening’ of the law that the dinar and dirham has some chance of succeeding.

When the gold dinar and silver dirham of Kelantan were first introduced in 20 September 2006 I was invited to give the keynote address.  At that time Umar Vadillo was not even in the picture yet, and I stressed the point that the DnD can be introduced mainly as an inflation hedge only and not as money, i.e. as means to protect one’s savings from being eroded by inflation.   Nonetheless, Kelantan later relaunched its ‘first’ dinar again on 12 August 2010 as though the 2006 event did not take place.  This time the launch was through a company, the Kelantan Gold Trade, led by Umar Vadillo.

As expected, the venture failed as per our discussion above.

But nonetheless, we at DDTG are confident of the true role of the Islamic gold dinar and silver dirham; and what is needed to achieve the objective.  The task ahead is not an easy one because money and financial systems are tricky and intertwined with global power play.  We are talking about complementing paradigms or even complete paradigm shifts.  Hence, this will take time.  But, we are confident that by the Grace of Allah SWT the gold dinar and silver dirham will ultimately resurface, and contribute to socio-economic justice, peace and abundant prosperity for all – Muslims and non-Muslims alike;   in the near future.  We just need to be focused, steadfast and patient.  Truth, honesty and willing to listen to other opinions are other quality traits one should develop in one’s self to contribute to this success.

The path to Glorious Islam again is not through fighting armies but rather through eradicating RIBA in all its forms in society.  We hope Shaykh Abdalqadir would reconsider his statement as gold, silver and commodities with intrinsic value are sunnah money.  The struggle against RIBA is a multifaceted one and the ummah’s strive to re-establish the gold dinar and silver dirham is warranted and a legitimate right action.

The Dinar and Dirham Technical Group

[1] The Dinar and Dirham Technical Group is an informal group of academicians, sharia scholars, lawyers, practitioners, businessmen, college students etc. from the Nusantara, led by Dr Ahamed Kameel Mydin Meera, a professor and Dean at the International Islamic University Malaysia.  The group occasionally meets basically to discuss the DnD intellectually, to determine the DnD standards and their historical role, to describe the true role of DnD in Islamic economics and discuss strategies to actualize the implementation of DnD given the current local and global socio-political and legal conditions.

Ownership Effects of Fractional Reserve Banking: An Islamic Perspective

Fractional reserve banking (FRB) is the basis of the present-day monetary systems. In most countries, Islamic Banking and Finance too operates under this principle. This article argues that the FRB has effects on the ownership structure of assets in the economy, and that this effect violates the Islamic principles of ownership. It argues that money creation through FRB is creation of purchasing power out of nothing which brings about unjust ownership transfers of assets in the economy, to the bank effectively, paid for by the whole economy through inflation. This transfer of ownership is not based on human effort by taking on legitimate risks and neither with the knowledge nor the consent of the initial owners. These violate the ownership principles in Islam and tantamount to theft. It also has the elements of riba. On the same basis, Islamic governments should not create fiat money since this is equivalent to taking assets of the people, rich and poor alike, forcefully without compensation. It is, therefore, important that Shariah scholars come up with a fatwa on both the fiat money and the fractional reserve banking system. Such a fatwa is urgent and pertinent before Islamic banking and finance, that operate under these systems, takes a course that may prove to be difficult to reverse later. The Islamic economic and finance system cannot be founded upon a money system that is fundamentally equivalent to theft and riba.

Introduction and Objectives of Paper

Fractional reserve banking (FRB) is the term given to the banking system practiced in almost all countries today. Indeed, it’s a simple system that governs the working of the present-day monetary system[i]. In most countries, Islamic Banking and Finance too operates under this principle. This article argues that the FRB has distributive effects – i.e. effects on the ownership structure of assets in the economy, and that this effect violates the ownership principle in Islam while inflicting profound injustice on the economy and society. It shows that FRB creates ownership out of nothing, without work and taking on legitimate risks; thereby transfering ownership wrongfully. The paper also shows that FRB has elements of riba that goes against the maqasid al-Shariah; and therefore can be termed illegal or haram from Islamic perspective. If the arguments are valid, then the paper has profound implications for the validity of FRB from Islamic perspective, including the operations of Islamic Banking and Finance under the FRB framework.

This paper is divided into six sections. The current section gives the introduction and objectives of the paper. Section 2 discusses the principles of ownership in Islam while Section 3 describes the FRB process. Section 4 then argues why FRB is unacceptable from the Islamic perspective. Section 5 discusses other justifications given by scholars in favour of the FRB. Section 6 briefly discusses if seigniorage of fiat money is riba, and finally, Section 7 concludes the paper.

Ownership as the Basis of Wealth in Islam

The concept of ownership is an important principle in the Islamic faith. As God created man as the Khalifa (vicegerent) on Earth, He endowed him with ownership (milikiyyah) rights over properties (mal) so that he can execute his duties and obligations to himself, family, society and God in a halal and just way. The object of ownership, i.e. mal, must be “something of value, permissible and capable of being possessed.” (Qadri, 1973). It can be tangible or intangible like intellectual property.

Ownership can be private or public and it refers to a bundle of rights. Montias defines it as “the word ownership refers to an amalgam of rights that individuals may have over objects, or claim on objects or services” and that “these rights may affect an object’s disposition or its utilization.”

[2] Rights include the right to own, to possess, to utilize, to exclude others, to secure income, to security, to dispose, and obtain compensation if damaged and so on[3].

Ownership is based on the following three principles (Abd Mokhtar Yunus):

         i.            Allah is the supreme owner of everything.

Knowest Thou not that to Allah belongeth the dominion of the heavens and the earth? and besides Him ye have neither patron nor helper.

(Al Baqarah, 2:107)

A consequence of this verse is that in Islam the human effort is the unique basis for creation of ownership.

       ii.            Man as servant and Khalifa of Allah is endowed with relative and conditional ownership. Allah created the earth and universe for the human kind for the purpose of fulfilling the function of Khalifa (vicegerent) and to benefit from it, as revealed in the following verses.

It is He who hath created for you all things that are on earth; Moreover His design comprehended the heavens, for He gave order and perfection to the seven firmaments; and of all things He hath perfect knowledge.” (Al Baqarah, 2:29)

Believe In Allah and His apostle, and spend (in charity) out of the (substance) whereof He has made you heirs (mustakhlafina). For, those of you who believe and spend (in charity), for them is a great reward.”  (Al Hadid, 57:7)

Conditional ownership in the sense that man cannot do whatever he likes with the property owned. For example, he cannot bequest more than one third of his property and the Qur’anic injunction that there is a share of others – the poor and needy – in one’s wealth.

      iii.             An individual has his own importance and role in the Islamic economic framework. He is responsible for fulfilling the duty of Khalifa of Allah on earth and achieving the happiness for himself and for the society. For this purpose, Allah has gifted humankind with many abilities and rights; one of them is the right of ownership.

 “O ye who believe! give of the good things which ye have (honourably) earned” (Al Baqara, 2:267)

 and in another verse,

 “ See they not that it is We who have created for them – among the things which Our hands have fashioned – cattle, which are under their dominion?” (Yaasin, 36:71)

At the same time Islam has established limits for the creation, utilization and transfer of ownership in order to protect the interests of the individual and the society at the same time. From these, we can deduce that ownership has an important socio-economic role.

“And do not eat up your property among yourselves for vanities, nor use it as bait for the judges, with intent that ye may eat up wrongfully and knowingly a little of (other) people’s property.”

(Al Baqara, 2:188)

The endeavor of man to satisfy his needs is a necessity that is rooted in his nature. However, the satisfaction of these needs should not be free of any limitations or regulations, for the necessities or wants of people are often conflicting and divers. The absence of any limitations or regulations on ownership would surely lead to disorder, injustice and concentration of wealth in the hands of a minority.

There are many definitions of ownership in Islam. Elkorafi states that the ownership is a legal statement, from the point of view of Sharia, on something or on its utility that gives right to whom it is granted to use the owned thing and to get compensation for it. According to Ibn Ashat, ownership is the ability of acquiring the legal right to use something and/or its utility by someone or his representative by proxy. Sadr Alsharia states that ownership is a legal relation between a person and a thing that gives him right to use it and prevent others from using it. Ibn Taymia states that the ownership is “the legal ability to use something”. Khafif defines ownership as the legal ability that allows someone to exclusively use and benefit from something.

We may summarize the above definitions by saying that the ownership is a legally defined relation between a person and a thing and /or it’s utility that one can use only in halal ways and prevent others from using it unless by proxy and the owner of the thing can get compensations for it.

As mentioned earlier, in Islam the ownership is regulated at all its stages – the creation (or sources), the utilization and the transfer of it. The next section discusses the principles that govern the creation of ownership.

2.1 Limitations on the Creation and Sources of Ownership

This section discusses the sources or causes of ownership from Sharia point of view. Ownership can be divided into three categories: 1) ownership of the things that had no previous owner, 2) ownership of things that are already in existence and had been previously owned by others and 3) ownership by proxy. The first one is related to the creation of new ownership, the second is related to the transfer of ownership which we discuss in the next section. In Islam the halal means of creating new ownership are as follows (Abadi ):

  1. Reviving a dead land that is not owned by anyone, by working it.
  2. Discovering a treasure.
  3. Producing something (agricultural, industrial, scientific, intellectual, and so on)
  4. If a person owns an animal that gives birth to another animal, the latter becomes the property of the owner of the former. In other words, any product of an owned thing is owned by the owner of that thing (like fruits of an owned tree, produce of a slave etc.)
  5. Own something as a result of hunting or fishing.
  6. Return on investment – profit from trade, product of employees, etc.

Agriculture is regarded by many scholars as the most halal way that can be used to create ownership, for in agricultural the principles of Tawakkul and Ikhlas are stronger.

2.2 Labour and Effort, the Basis of Ownership

 As discussed earlier, Qur’anic injunctions reveal the human effort as the basis for creation of ownership in Islam. The traditions of the Prophet (p.b.u.h.) also attest to this.

The Prophet (p.b.u.h.) is reported to have said,

“Nobody has eaten better food than the food that resulted from his efforts; the prophet Daud a.s. used to eat from the work of his own hands.” ( Sahih Al Bukhari)

and in another hadith,

“Whoever revives a dead land he has a reward (adjr) for it. ” (Musnad Imam Ahmad)

It is clear that the underlying principle of these sources of creation of ownership is the human effort (physical or intellectual). Thus, human effort is the principal halal way for creating ownership in Islam. Allah has, in the Qur’an, exerted people to work:

“And when the prayer is finished, then may ye disperse through the land, and seek of the bounty of Allah. and celebrate the praises of Allah often (and without stint): that ye may prosper.” (Al Jumu’a, 62:10)

“..others traveling through the land, seeking of Allah’s bounty; yet others fighting in Allah’s Cause.(Al Muzzammil, 73:20)

The Prophet (p.b.u.h.) was once asked, what was the best and most preferred means of ownership. He responded by saying that it is the work of a man by his own hands and any licit trade. (Atarghib wa Atarhib).

Also, in a well-known hadith, the Prophet (p.b.u.h.) said:

“A worker should be given his reward before his sweat dries.”

The above traditions show clearly the importance given in Islam to human efforts and also the importance of a just distribution of wealth in society.

Prominent Muslim scholars of the past have also emphasized the importance of human effort in creating ownership. Al Ghazzali said “Allah has ordered us to fulfill our needs and the needs of our family, this is possible only by creating ownership through work; what is necessary to complete a duty (wajib) is also a duty (wajib)”. This shows that work is wajib in order to create halal ownership of things that we consume. Even things that are eaten and fed to one’s family must be owned first according to Shariah legal means, otherwise it can tantamount to consuming haram things.

Therefore, ownership for oneself and the family is one of the most important duties (wajibat), for it is rooted in man and it keeps oneself away from harming others by taking the wealth of others wrongfully.

2.3 Limitations on Transfer of Ownership

 Transfer is the most common way of acquiring ownership and Shariah gives great importance to the willingness and consent of the owner in the transfer of ownership. There are two basic Shariah principles in the transfer of ownership. The first one says that it is not possible to force one to own something without one’s agreement or prior acceptance, while the second says that it is not possible to take possession of something that belongs to another without his agreement or prior consent (Abadi). Among the most important halal ways of ownership through transfer are as follows (Abadi):

  1. Trade, i.e. exchange
  2. Compensation – salary, commission etc.
  3. Inheritance
  4. Zakat and Sadaqa
  5. Hiba or gift
  6. Mahr or dowry
  7. Wakaf
  8. Dia for death
  9. Khal’a
  10. Ghanima – war booty

Transfers can be classified into the following categories:

  1. Transfer of something from an owner to an owner with compensation (like in trade) – that is mutual exchange of ownership.
  2. Transfer of something from an owner to an owner without compensation (like heritage and hiba).
  3. Transfer of something from an owner to a non-owner with compensation (like debt).
  4. Transfer of something from an owner to a non-owner without compensation (like slave delivery, sadaqua).
  5. Transfer of something that is not owned to a non-owner (like reviving a dead land without owner).

It is to be noted that any transfer where the ownership of one of the parties or both is not halal, is not valid from Shariah point of view (Abadi).

2.4 Haram Means of Ownership

 The principal haram ways of ownership in Islam are as follows (Abadi):

  1. Hoarding (storing goods until price rises)
  2. Overpricing
  3. Riba
  4. Corruption
  5. Theft (taking possession of assets of people secretly without their permission or agreement.)
  6. Cheating on the quality of a product
  7. Gambling
  8. Some trade practices like Bay Al Gharar
  9. Forced and unfair possession of the assets of people without their permission and/or agreement
  10. Any means that harm the individual or society

3. Money, Seigniorage and Fractional Reserve Banking (FRB)

In most of human history, commodities played the role of money in facilitating exchange in the economy. Mankind used all kinds of things as money; from beads, shells, salt etc. as money but the dominant were gold and silver. Nevertheless, following the demise of Bretton Woods in 1971, money today is predominantly takes the form of paper notes, coins (known as state money) and accounting records (created by banks as money through fractional reserve banking). Unlike in the gold standard or Bretton Woods, ‘modern’ money is not backed by or redeemable for gold and hence the term fiat money. This brings the issue of seigniorage, which is the benefit one gets from the first use of fiat money, i.e. the free purchasing power which new money, not backed by gold or anything with intrinsic value, carries with[4]. Indeed, it’s the seigniorage that is at the centre of the discussion of this paper relative to the Islamic concept of ownership. Seigniorage is inherent in currency notes and coins, money created through fractional reserve banking and interest charges; and this paper discusses the ownership effects embedded in these.

Let us now revert our discussion to the concept of FRB. As mentioned earlier, banking systems in almost all countries operate under the fractional reserve system. Fractional reserve banking simply means that a commercial bank needs to keep a fraction of the deposits of its customers as reserve, while the rest can be lent out. As simple as it sounds, within the fiat monetary system, it incredibly has profound implications for the economy and society. This fraction is determined by the central bank and is known as the statutory reserve requirement (SRR). In Malaysia, as of October 1, 2006 the SRR ratio as set by the Bank Negara Malaysia was 4 percent of deposits. The reserve requirement is the proportion of deposits which the banking sector must keep as reserves to fulfill withdrawal needs. Nevertheless, under this system, an original deposit of RM1,000 for example, enables the banking sector to increase deposits to a maximum amount of RM25,000 (which is RM 1,000 divided by the reserve requirement of 0.04). This new money creation is achieved through credit creation that is purely an accounting semantic that does not involve any ‘real’ money[5]. Notice that for the original RM1,000 deposit, an additional RM24,000 deposit (credit money) is created by means of loans[6]. When a loan is extended, it does not reduce the deposit of any of the depositors at all, because it is new money created into the economy. As a result of this new money creation, the original RM1,000 deposit is now equivalent to 4 percent of the current total deposits of RM25,000, i.e. the required reserve ratio. Therefore, the basic money supply in a nation consists of currencies and coins, normally termed as M0, and credit money which is also called bank money. The total of these two is termed as M1. Therefore, central banks use the SRR to control the money supply in their respective economies. During the 1997 economic crisis, for example, the Bank Negara of Malaysia[7] reduced the SRR from about 13 percent to 4 percent in order to increase the money supply in accordance to its expansionary monetary policy. Nonetheless, as innocent as the system may seem, it has profound distributional effects in the economy.

4. Ownership Effects of FRB

The ownership effects of FRB can be expounded as follows. Consider a businessman approaching the bank with a business plan, seeking a business loan – to buy land, building, machinery etc. Approved, the bank creates new money through fractional reserve banking and loans it out to the businessman at interest. The Islamic bank would use the newly created money to buy the assets from the economy and resell it to the customer at profit. The implications are as follows. The businessman uses the loaned money to buy the land, building and machinery that he wanted. He now owns these assets[8]. Now the question is: Initially, neither the bank nor the businessman owned the assets. The bank did not even have the money then. But the businessman/bank became the owner of the assets after creating money out of nothing, through the FRB process. From the real economy perspective, every such transfer of asset, which is not a gift, inheritance or likewise, must be compensated for. If so, who then paid for the assets? Diagram 1 explains this.

FRB Transfers Ownership Through Inflation

FRB Transfers Ownership Through Inflation

Note that the introduction of new money had transferred ownership of assets. But there is now more money in the economic system than before. Ceteris paribus, this is inflationary[9]. Those holding money would have to forego some purchasing power of their money. They can now only claim less real things in the economy. Indeed, the total of the real purchasing power lost by the economy as a whole equals the total value of assets transferred to the businessman/bank. In other words, all subjects in the economy paid for the transfer of wealth through inflation, i.e. through increased price levels. Table 1 gives the growth in the monetary aggregate M1, which is the total of currency in circulation and demand deposits, for thirty two selected countries for the period 1993 to 2004. Clearly for all countries the monetary aggregate grew at a higher rate than the real economy itself, measured by the growth in real GDP. Comparing the growth in money and the real economy, the third column gives the implied inflation. Therefore, in all these countries transfers of ownership of assets have been taking place financed through inflation. The worst of these countries is Turkey and Brazil, with implied annual inflation rates of 66.66 percent and 39.73 percent respectively.

Hence when inflation is a monetary phenomenon, i.e. due to increase in money supply, it therefore is a ‘tax’ on the economy – a hidden tax on the rich and the poor alike – that, indeed, transfers wealth. Accordingly, when inflation is a monetary phenomenon, not all market participants are losers. It’s a zero-sum game that actually redistributes wealth and ownership of assets in the economy, where the loss to one is a gain to another. It basically transfers ownership of assets from the economy as a whole to those who create fiat money – a one-way transfer similar to gift, inheritance, tax etc. but here with the absence of knowledge and consent. Contrarily, when inflation is due to real phenomenon, for example due to a fall in the real output, then the whole economy bears the reduction and therefore is not a zero-sum game. In effect, when a bank creates money through FRB and lends it out, in the real economy, it actually takes possession of assets of others by force, neither with their knowledge nor consent[10], and lends them out to others, for a return.

Monetary Aggregates for Selected Countries

Monetary Aggregates for Selected Countries

From Islamic perspective, is it justified that the bank takes possession of assets of people and lend them to others for productive or consumption purposes, whenever someone shows the need for these assets? For example, when one needs a house, the bank creates new money and uses it to take possession of the house from the developer and loan it to the participant at some interest or sell it at profit as in the case of Islamic financing?

We contend that this clearly violates the ownership principles in Islam. This is indeed equivalent to theft, i.e. taking possession of assets belonging to others without their knowledge and permission. It can even be termed as being worse than theft because in a theft, the thief takes the risk of being caught and punished. However, under fractional reserve banking the theft takes place within the legal provisions and hence FRB may be termed as ‘legalized theft”. It also has elements of riba for it is purchasing power created out of nothing, neither with work nor assuming any risk. All these clearly contradicts the Qur’anic verse Al Baqarah 188 that commands Muslims not to eat up the properties of others in conceit.

5. Other for-FRB Arguments

Other arguments generally put forward in support of FRB are

a. The money multiplier brought about through FRB increases liquidity in the market.

More money may bring about more liquidity but can this be justified by transferring wealth unjustly and indiscriminatingly among the subjects in the economy – especially if the argument that FRB is similar to theft is true? The priorities of the Islamic economic system which is based on the maqasid al-Shariah must be always kept in view when solutions of any kind are sought. In this case, therefore, liquidity cannot be justified when the means of achieving it does not protect the wealth of people.

b. Money supply increased through FRB stimulates the economy through increased demand and thereby increases the real output.

Some scholars argue that, when the money supply is increased, and if the real output were to increase too (e.g. due to a rise in productivity) then the price levels may not increase, i.e. non-inflationary. This is true, but then the moral question comes up again, i.e. On what moral or legal grounds should the bank take ownership of any productivity increase in the economy? The benefit should go to those who are responsible for the productivity increase, i.e. the firms and workers[11].

c. Some quarters propose that if that is the case, then, why not rest the money creating and lending power with the government alone, for example, by nationalizing banks[12]. In this way everyone including the poor would technically own the loans and money created in the system. Also in this way the government could use the newly created money in a ‘shuratic’ way in areas most beneficial to all like building infrastructure, schools, hospitals, social welfare etc.

 While nationalizing banks may accrue the benefits of new money to the government that supposedly represents the people, the question remains: Can the government take ownership of assets of its subjects forcefully, without their knowledge and consent and lend/sell them to others at interest or profit . In other words, is it justified for governments to impose a ‘hidden tax’ on the poor and the rich alike through inflation and take possession of assets[13]? Indeed in Islam, even the government is subjected to its rules of ownership. It cannot take possession of assets of the people wrongfully. Its income from zakat and other levies are meticulously calculated and carefully implemented. In zakat, for example, only those with wealth equal or beyond the nisab are required to pay. The poor are exempted from such levies. The system ensures that not a single soul is wronged. Fiqh Muamalat governs and ensures a just exchange of ownership in trade and business activities. Faraid go very meticulous on how transfer of wealth should take place in the case of inheritance.

 Zakat and sadaqat are encouraged as transfers of ownership from the rich to the poor. The poor is never forced and burdened in the Islamic system but the FRB does tax the poor too. Meera (2002, 2004) contend that the seigniorage of fiat money including that created by FRB is responsible for significant global socio-economic problems.

d. Controlling the money supply by regulating the statutory reserve ratio provides monetary policy flexibility.

 This may sound like a valid reason but we contend that this characteristic is necessary in the current monetary framework because of the fiat nature of all national currencies. The kind of automatic adjustment process that existed under the gold standard is absent in the current global monetary system[14]. Indeed, even in the present monetary system most developing nations’ monetary policies have become subjected to the decisions by the developed nations, thereby enjoying neither flexibility nor independence of monetary policies.

e. Some quarters argue that nations issue money based on gold and foreign currencies reserves they have, like those placed with the IMF. Therefore, money is not created out of nothing but rather is backed by those reserves.

 The fallacy of the above argument is that when we say money is backed by gold or anything, it is redeemable for that thing, e.g. when the dollar was redeemable for 1/35 ounce of gold in the Bretton Woods system. When there is no specific per unit redemption then there is no backing[15].

f. FRB allows the managing of the international competitiveness of a nation’s exports. By increasing or decreasing the money supply, wages and the price levels can be affected accordingly.

 Its is true that monetary policy can be used to improve competitiveness of exports. But the question is at whose expense? If competitiveness is achieved by reducing wages, then the increased exports is achieved at the expense of the workers. This again has distributional effects.

 Additionally, just how much export competitiveness is enjoyed by developing nations vis-à-vis the developed nations in the current set up? The frequent failures of WTO talks and mass demonstrations during its meetings are the result of dissatisfaction among the mostly disadvantaged developing nations in international trade negotiations.

6. Ownership Effects of Interest Charges in a Fiat Monetary System

The ownership effects of interest charges are quite straight forward and easy to see. An interest charge basically imposes on the borrower a payment of additional ‘free’ purchasing power over and above the principal amount loaned. It’s ‘free’ because the interest is charged without regard to and independent from the risks borne by the borrower.

In a fiat monetary system, loans are not repayable in the aggregate because the interest portion that need to be paid does not exist in the form of money. Therefore, in aggregate, the interest portion must and can only be paid in real terms, i.e. in the form of goods and services. To illustrate this, say a central bank pushes 1 billion of its currency into the economy with an interest charge of 20 percent per annum. This 1 billion would exchange hands in the economy, creating value and wealth in the form of goods and services. This would show-up in the form of increased assets amount in the balance sheets of individuals and businesses. But the total amount of money in the system would still be 1 billion while the system is required pay back 1.2 billion. Since the 0.2 billion does not exist, at the end of the year, the system as a whole will default and the interest portion can only be paid, therefore, in the form of real assets and services (that can come from both the previously owned assets and the newly created ones). Therefore, in the current fiat money system, interest transfers ownership of assets by the mere design of the system – someone simply got to default on the loans and repayment made in the form of real things. This is the reason why collaterals and guarantors are important for banks.

When loans are repaid by means of instalments, the default is somewhat camouflaged. For instance, in the above example if the borrowers are allowed to repay the 1.2 billion in monthly instalments of 0.1 billion, the banking system could spend back monthly the 0.1 billion received thereby acquiring goods and services. This money can later be used to pay again to the bank. The system would appear as though not defaulting but in the process goods and services would have transferred to the bank, just like in the earlier example when goods and services got transferred after an obvious default.

It is therefore clear that interest transfers ownership of wealth by the mere design of the system, while refusing to take any risks involved in the process of creating value and wealth. That interest is riba is therefore quite obvious. What is not so obvious is whether the creation of fiat money itself is also riba.

7. Is Seigniorage of Fiat Money Riba?

Having discussed the effects of FRB, can the seigniorage of fiat money be considered as riba? We assert that it is. Consider Diagram 2 below:

Seigniorage of Fiat Money and Riba

Seigniorage of Fiat Money and Riba

If a bank lends out say $1,000 at an APR of 10 percent, the borrower must repay $1,100 at the end of the year. The additional $100 is regarded as riba because it is additional purchasing power acquired without assuming any risk. But what if the original principal amount of $1,000 is created out of nothing, as in FRB and currency notes and coins? It gives free purchasing power that is ten times the interest charge, and is assumed immediately, unlike the interest money that is received only a year later[16]. This free purchasing power that is many times more than the interest itself and acquired without assuming any legitimate risk is indeed riba. It is pertinent and urgent in current times therefore, that scholars of Shariah deliberate on this and come up with a fatwa on fiat money and fractional reserve banking. Since Islamic banking and finance operate under these systems, such fatwa is urgent and pertinent before Islamic banking and finance takes a course that could prove difficult to reverse later.

8. Conclusion

This paper looked at the fractional reserve banking system from the perspective of Islamic principles of ownership. It argued that money creation through FRB is creation of purchasing power out of nothing. In the real economy, this brings about ownership transfers of real goods and services from the economy to the bank effectively, paid for by the whole economy through inflation.

This creation of ownership or transfer of ownership does not take place with the knowledge and consent of each and every initial owner; and the transfer takes place without assuming any legitimate risk. The transfer is also not based on human effort or product of labour. These violate the ownership principles in Islam and tantamount to theft. It also has the elements of riba that is even worse than interest charges. Scholars have identified this as a source of significant socio-economic problems including unjust distribution of wealth and poverty.

On the same basis, we can deduce that, not only the creation of money by FRB is not halal but the process of creating fiat money itself is not halal as well. Indeed, a bank note of USD100, for example, has a purchasing power of 100 USD but the cost of its creation might not exceed say 80 cents, so the difference, 100-0.80=99.20 USD, i.e. the seigniorage, is a purchasing power created out of noting without any human effort.

On the same basis, we can say that even the government should not create money out of nothing because it is equivalent to taking assets of people without compensation. In Islam, the ownership is protected even against the government. The government can take the assets of people in only very specified, prescribed ways like the zakat, and in other cases it has to give compensation.

Therefore, fiat money and FRB are anti-thesis to Islamic economics and finance. Accordingly, this paper asserts that Islamic banking and finance operating under fiat money and fractional reserve banking is unacceptable or even could be termed haram since it violates the principles of ownership while having the elements of theft and riba.

One may argue that the modern financial system has made the economy more efficient. But the price humanity had to pay for this efficiency in terms of loss of ownerships, unjust distribution of wealth and damage to the environment probably outweigh any efficiency gained.

It is not easy, of course, to point finger at established systems like the fractional banking system. But established systems have floundered and collapsed in the past – for example, like socialism in Russia. Now capitalism is, indeed, showing similar signs of faltering, with long established firms and banks showing sign of distress and even collapsing. Analysts normally attribute this to firm-specific factors, but from earlier arguments, we do assert here that the financial structure in the economy, in particular the fractional reserve banking system has a lot to do with it.

After a series of corporate financial distresses, particularly during the 1997 East Asian financial crisis, corporate governance has become an in-thing in this part of the world, with the determination to instill transparency and check corporate scandals and frauds. But are we bold enough to recognize fractional reserve banking as profound  fraud[17]?

The authors Ahamed Kameel Mydin Meera and Moussa Larbani are Associate Professors at the Department of Business Administration, Faculty of Economics and Management Sciences, International Islamic University Malaysia. The authors would like to record their gratitude to their colleagues Assoc. Prof. Mohamed Aslam Haneef and Mustafa Omar Mohamed for their invaluable comments and suggestions.

The pdf version of this paper can be downloaded here.

[1] Nonetheless, we find that the FRB is not understood by many, or perhaps is not much of a concern to, including even those who are trained in the areas like Economics and Finance.

[2] Montias, The Structure of Economic Systems, p.116

[3] Mustafa Omar Mohamed, Foundation of Islamic Economics course notes, Faculty of Economics and Management Sciences, International Islamic University Malaysia.

[4] We have dealt extensively with the concept of seigniorage elsewhere and do not intend to discuss it further here. Please see Meera (2004), Meera and Larbani (2006a and 2006b).

[5] Not even paper currency or coins. When a loan is extended, the borrower is recorded a double entry, one debit and one credit. The debit denotes him as a debtor to the bank for the loan taken, while the credit entry denotes him as a depositor, to the amount extended to him. These are simply accounting entries that do not involve the movement of any physical currency notes.

[6] This is how banks create money out of thin air. Money is created when banks extend loans. Hence money in most part is only accounting entries in the books, electronic or otherwise.

[7] Malaysia’s central bank.

[8] The real owner of these assets is, indeed, the bank for if the businessman fails to pay back the loan then the bank can take possession of those assets.

[9] Quantity theory of money says that money supply is directly proportional to price times real output, i.e. M ∝ PY. When money supply, M is increased, when the real output, Y stays constant, the price level, P, rises, i.e. inflationary. Price levels can also rise when real output, Y falls. For example, due to a fall in output as a result of natural disasters like flood or due to fall in the productivity levels.

[10] Since FRB is a legalized institution, even if one knows one’s wealth is being taken by force and that one does not consent it, one indeed can do nothing about it, i.e. cannot demand compensation or anything like that.

[11] This like someone saying, “Please give me the right to bring forth money out of nothing. With it I can have purchasing power to demand the goods and service that you produce. With that, the economy as a whole would have more goods and services. Isn’t that good?”

[12] Meera (2004) suggests the nationalization of banks as an intermediary step towards a total 100 percent reserve requirement system based on real money.

[13] Some individuals and organizations, like the Christian Council for Monetary Justice, Britain, suggest that the government use this inflation ‘tax’ of new money and push this new purchasing power through the poorer sections of the economy – like funding orphanages, homes for the elderly, hospitals etc.

[14] See Duncan (2003) for a discussion on this.

[15] This is like a government saying, “I have some gold therefore I have the right to issue fiat money and impose a  forced tax on the people.” Is this a reasonable argument?

[16] According to the principle of time value of money, in today’s terms, the value of the $100 interest received at the year-end is less than that amount with regard to its purchasing power today.

[17] After teaching and advising state leaders on economics for over 70 years, the late Harvard professor John Kenneth Galbraith wrote his last book titled, The Economics of Innocent Fraud. We recommend it for wisdoms into the workings of present-day economic and financial systems.


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Fiat Money and Economic Degradation of the Malays


This article argues that the wealth of the Malays in Peninsula Malaysia has been systematically plundered away from them through the interest-based fiat money banking system. This is also true for other Bumiputras that includes the indigenous people of the peninsula and East Malaysia and the early Arab and Indian Muslim trader-settlers. The process has been going on since the first private banks were established in Penang since 1860’s up till now. This has serious socio-economic-political effects for the Malay race, Islam and the country as a whole. Accordingly, the article calls upon the government, NGOs and concerned public to put a stop to this plundering process and thereafter take proactive and affirmative actions to reverse the process in order to establish socio-economic justice by promoting peace and prosperity in the country through an equitable distribution of national wealth among all races.

Fiat Money and Economic Degradation of the Malays

1.0 Introduction

This article demonstrates one aspect of many aspects of fiat money, i.e. how the indigenous people of a nation can lose considerably in the fiat monetary system. A number of nations can be taken as examples to show this. We take the case of Malaysia for this article.

If we notice over the years, Malaysia has transformed tremendously with respect to its socio-economic-political aspects. The Malays who basically owned most, if not all, of Peninsula initially are now very much economically disadvantaged. On the other hand, the Chinese community in particular has been growing in economic affluence relative to other races. The statistics of billionaires in Malaysia attest to this fact. This economic disparity has, in turn, brought about a number of socio-economic problems to emerge within the Malay society – economic distress, poverty, low self-esteem, low academic performance, drug addiction, mat rempit, teen problems etc. Accordingly the government had tried some affirmative actions including the New Economic Plans to address the issue. These brought about some limited benefits but nevertheless the problems are still present and seem ever growing. For the Chinese however, their economic affluence has also gradually been enthroning on them more political representation[1].

This article argues that the above socio-economic-political dynamics as observed in Malaysia are very much rooted in the interest-based fiat money system. It argues that the money and banking system in Malaysia has been much unfair to the Malays and has assisted in the plundering of the wealth of the Malays, that has been going on for about 15 decades now. Basically it argues that the banking system in Malaysia has indeed caused significant socio-economic disadvantages to Malays[2] over the years since the first private banks were established in Penang, in the 1860’s.

1.1 The Objective

This article is based on historical facts and observation of Malaysia over the decades. It is intended to stimulate some thought process, with no malicious objectives like creating racial disharmony. On the contrary, it is hoped that this article contributes towards realizing racial harmony, equitable distribution of national wealth, lower levels of corruption and much reduced levels of socio-economic related problems.

In Section 2 the article reasons why the banking system in Malaysia has brought about significant socio-economic disadvantages to the Malays. Section 3 discusses the soicio-economic-political effects of fiat money system. Section 4 provides some measures the government can take to halt the plundering and reverse the process. The last section concludes the paper.

2.0 Interest-based Fiat Money Banking and the Malays – The History

Malaya was originally inhabited by the orang asli, the indigenous people, and by the Malays[3]. With sultanates scattered all over Malaya, they essentially ‘owned’ Malaya. The orang asli basically lived in the tropical jungles while the Malays lived in kampongs. They lived a simple but gracious communal life, with agriculture and fishing as their main livelihood.

Malaya was a land of ‘milk and honey’. It attracted the early Arab and Indian Muslim traders to this country. Arab traders are known to have come to the Malay Archipelago even since the early 7th century. They are known to have reached Sumatra in 674CE, i.e. just few decades after the advent of Prophet Muhammad (peace be upon him) in Arabia. Indian Muslim traders on the other hand are known to have come to the Peninsula Malaya, particularly to Kedah, since the 12th century. Their influence in the court of the Malacca sultanate is also well documented. Parameswara, the founder of Malacca embraced Islam in 1411. The local Malay community was predominantly agri-based and the business acumen of the Arab and Indian Muslim traders complemented this. Accordingly, the early Indian Muslim and Arab traders had vibrant businesses in Malaya and were much welcomed by the local people due to their common religion, Islam.

The religion of Islam was therefore the guiding and uniting factor. In accordance with Islamic principles, the money used in trade and commerce were real monies – mainly tin ingots, gold and silver coins[4]. Under such real money systems every commercial exchange involved the exchange of a real thing for another real thing, i.e. goods or services, of equal value. Hence this constituted a just and fair exchange system. The precious metals played the role as measures of value in trade and contracts.

Malaya being a peninsula rich in natural resources also attracted colonialists and later Chinese and Indian immigrants. The Portuguese, Dutch, Japanese and English were here at certain times in history, however, the influence of the English was the greatest. The British East India Company first established a British Settlement in Penang, in 1786. Later, Penang, Singapore and Malacca were amalgamated as the Straits Settlements in 1826, with Penang as its capital[5]. They brought in the Indians to work in the rubber plantations while the Chinese mainly for the tin mines, the two main economic activities of that time. Immigration to Malaya was easy because the Malays were simple, tolerant, religious people with high moral values. In real economics, the coming of all immigrants including the Arab and Indian Muslim traders is good since their immigration increased the economic activity and the distribution of the economic pie, all of which increased the economic wellbeing of all.

However, things started to change with the introduction of first private banks in Penang. The Mercantile Bank, which later became a subsidiary of the Hong Kong Bank (now HSBC), set up its business in the 1860’s and Chartered Bank (now Standard Chartered) in 1875. These first private banks issued their own private banknotes. The government had no official banknote issues yet. Only in 1897, when the Board of Commissioners of Currency was established, the Government of Straits Settlements was authorized to issue currency notes. But the notes issued by the two private banks, i.e. the Chartered Bank and Hong Kong Bank, also circulated among the government-issued notes. However the rights to issue notes by these banks were terminated in 1921. In 1938 the Board of Commissioners of Currency Malaya was established with the sole power to issue currency for the whole region. In 1952 the board became Board of Commissioners of Currency Malaya and British Borneo which continued to issue currency even after Malaysia’s independence in 1957. The board was officially closed only in late 1979. Since then currency was issued solely by Bank Negara Malaysia; but however, most money was actually created by the commercial banks through the fractional reserve banking system.

All the above, i.e. the issuance of private bank notes, the Board of Commissioners of Currency and the Bank Negara Malaysia with its fractional reserve banking were all based on interest-based fiat money system and were all detrimental to the economy of the Malays. We argue this in the next section.

2.1 A Principle of Fiat Money – Losing through Seigniorage

One of the principles of fiat money is that the seigniorage of fiat money benefits the first user of the money. Since fiat money is not backed by gold, or anything of value for that matter, it is cheap to produce but carries with it purchasing power created out of thin air. It is this cheaply produced purchasing power that is sought after by counterfeiters of money. However, when banks issue their own currencies, they get this seigniorage. Their issuance of fiat money carries with it purchasing power created by taxing the whole economy through inflation. Not understood by many is the fact that the right to create fiat money effectively places the ownership of national resources and assets, in the hands of the banks. We have argued in Meera (2005) that creation of fiat money itself is riba and that it goes against the maqasid al-Shari’ah. Hence countries can lose through seigniorage if they allow the fiat money of another nation or notes issued by private institutions to be used as money in their land[6].

Secondly, the banks give out the freely created fiat money as loans – to individuals, businesses and government – that carry compound interest charges. And interest is strongly condemned in Islam.

Therefore, when the first banks in the peninsula were established and issued their own private banknotes at interest, most if not all Malays, Arab and Indian Muslim traders[7] did not want to have anything to do with it. However, neither they nor the Muslim leaders put a stop to this activity in their land. In our opinion, this is the biggest mistake made by the Malay Muslim leaders of the time with regard to Islamic monetary principles, the effects of which are so apparent in the current socio-economic-political conditions of the Malays.

2.2 Financial Exclusion and Continuously Reduced Relative Financial Inclusion

The issuance of fiat money at interest by the early banks and authorities totally excluded the early Muslims – Malays, Indian and Arab traders – from dealing with the banks. This was a systemic financial exclusion of the Muslims. Accordingly, we also note that in that period, i.e. late 19th and early 20th century saw an influx of Chinese immigrants into Malaya who were comfortable with the interest-based fiat money banking. Hence, most newly created fiat money went to this group. This phenomenon systematically yet continuously increased the financial inclusion of the Chinese traders while continuously decreasing the relative financial inclusion of the Muslim group. This phenomenon is further accentuated by the fact that the Chinese community has the tendency to circulate money within its own community.

Hence the interest-based fiat money system had, over the decades, decreased the financial inclusion of the Malays, Indian Muslim and Arab traders while at the same time increasing that of the Chinese community. This phenomenon has been taking place exponentially since interest-based fiat money grows exponentially. Hence simply by the structure of the monetary system, relative money and wealth of the Malays, Indian Muslim and Arab traders must have reduced exponentially, while that of the Chinese community increased. Of course, with increased wealth and money, the Chinese community could further expand their business, explore new ventures, send their children for prestige higher education overseas etc. Indeed, most Malays did not even have a bank savings account even until into the 1970’s[8]. This shows the long duration of relative financial exclusion the Malays, Indian Muslim and Arab traders endured.

3.0 The Socio-Economic-Political Effects of the Prolonged Financial Exclusion

Fiat money takes away the wealth of the original indigenous people, in our example the wealth of the Malays, by creating inflation in the system. Accordingly, now after about 150 years since the establishment of the first banks in Malaya, considerable wealth, particularly land, has been transferred away from the Malays. The Malays are now very much economically disadvantaged, with most of them occupying the lower rung of the economy, many even falling into the poverty category. Accordingly, as expected from this, socio-economic problems like unemployment, crime levels, drug addiction, mat rempit, lower academic achievements and other social problems are relatively high among this group. There is a huge gap in relative income and wealth distribution between the Malays, Chinese and others, with the Chinese community enjoying a much higher and disproportionate share of the economic pie. The Chinese community is undoubtedly a hard-working business community but it dominates most commerce and trade very much assisted by the structure of the banking and financial system with only little due to differences in skills, labour productivity or business acumen. Basically, huge wealth transfers have been taking place up till now, simply financed through inflation.

Figure 1 below provides the estimated money supply in Malaysia created by the commercial banks in the form of loans, for the period 1973 to 2011. Note the exponential growth depicted by the graph.

Fiat Money and Economic Degradation of the Malays

The Bank Negara Malaysia data show that the amount of Broad Money, M3, in year 2011 was RM1.24 trillion. Out of this RM53.49 billion was currency in circulation. The difference, RM1.19 trillion is estimated as the amount of existing money created by commercial banks out of thin air, through the fractional reserve banking. In 1973 this amount was only RM6.6 billion, implying an average growth rate of money creation by the commercial banks as being 14.7 percent per annum. The issue here is who were the beneficiaries of all these humongous amounts of money created by the commercial banks? Were the amounts equitably distributed among all races? The manner in which the total money supply is distributed among all the races in the country could indicate to us the level of financial inclusion of each race. The Bank Negara Malaysia perhaps could shed some light on this.

The economic dominance of the Chinese community is also bringing about a gradual increase in their political representation in the country.

3.1 Involvement of Malays and Muslims in Interest-based Financial Transactions

The continuous disadvantage of the interest-based fiat money system to the Malays, Indian Muslim and Arab traders had caused this group to finally be involved in interest-based financial transactions. To be continuously involved in trade, for example, Muslim businessmen still had to deposit and keep their accounts with the banks. Under the fractional reserve banking system, this allowed the banks to give out interest-based loans many times the original deposit amounts to others.

Due to the non-Islamicity of the banks, the ownership and management of banks were naturally dominated by the non-Muslims. Hence Muslims in general, traders or otherwise, became only ‘victims’ of such system. Creation of fiat money cause inflation in the economy, that is borne by everyone irrespective of whether one had any dealings with the banks or not. Therefore, the Malay and Muslim traders while faced with gradual economic exclusion had to, at the same time, bear the burden of inflation. Nevertheless, such prolonged economic exclusion gradually forced the Malays and other Muslim traders to be involved in interest-bearing financial transactions for economic survival purposes. Many started to take loans for housing, vehicle purchase and business financing. Many also started to get employment in banks. In the current banking system, some of the chairmen or chief operating officers of the conventional banks are Malays. They began to basically ‘ignore’ something that is strongly prohibited in their religion.

Expectedly, the Muslims were therefore excited when the first Islamic bank, i.e. Bank Islam, was established in 1983. Nonetheless, not many understood the mechanism of the fractional reserve banking system under which Islamic banking works and how it still continued to be the linchpin for the relatively very low financial inclusion of the Malays, Muslims and the indigenous people.

3.2 The Loan Office – The Kingmaker of the Fractional Reserve Banking System

While the central bank controls the fractional reserve requirement for the commercial banks, it’s indeed the loan office of a bank where money is created out of thin air and distributed to whomever it deems fit. Hence, one can see the politics in banks for the control of the loan office. The authority to create money out of thin air is a supreme power enjoyed by the loan officers; a power that is not even directly vested with the Prime Minister.

As mentioned earlier, some of the top management positions in the conventional banks are held by Malays. However, this or even the ownership of the bank does not matter much. What matters most is who gets the newly created money and this is under the direct control of the loan officers. They are indeed the kingmakers of the fractional reserve banking system.

Accordingly, due to the significant socio-economic-political effects of fiat money, the racial composition of the loan approving officers is of utmost important, even though we may assume that they would act professionally in their job. However, from the earlier days, the number of Malay loan officers would have been very low for Malays and Muslims due to the interest-based nature of banking.

Hence the control of loan office, the tendency to circulate money within the community and the limited liability law, we contend that the Chinese business community got the lion’s share of this freely created money and hence their ever increasing relative financial inclusion. This was indeed the real force behind the rise of the Chinese community relative to other communities and its ultimate economic dominance in the country. However, note that the Chinese community attained this all through legal means.

3.3 Shrinking Economic Pie for the Malays and Others

While the wealth of the Chinese was rising largely assisted by the financial system, the economic pie for the Malays and other races was, accordingly, shrinking. The graph in Figure 1 shows that the trend of this is exponential. This gross inequality in wealth distribution among the races has indeed caused a series of socio-economic-political problems to emerge. We attribute this gap to the occurrence of May 13, 1969 ethnic riot. Even though the Malays maintained their political grip after the event, the inequality in wealth distribution continued to grow under the maintained banking status quo. Indeed most cities and urban areas are now ‘owned’ by the Chinese community. Take Penang for example, while once it entirely belonged to the Malays, now the whole island is practically gone from them. Indeed many Malay public servants, like teachers, are requesting that they be transferred to the mainland because they could no longer afford a decent home on the island. This indeed is a systematic push executed through the banking and financial system. Similar are the stories for Johor Bahru, Kuala Lumpur, Ipoh, and other cities and towns. Note the skyrocketing price of real estates in these urban areas. This phenomenon not only pushes out the Malays and indigenous people away from the urban areas but also erects an unseen barrier of entry; and of course all these have political implications.

3.4 Rise of Corruption among Malay Government Officers

Over the last few decades we also notice complaints from the public regarding rising corruption among government officers who are mainly Malays. We attribute this, also to the imbalance in wealth distribution among the races. This is because while the Malays commanded political power and authority, others had the upper hand in business and wealth – a ripe recipe for bribe giving and bribe taking. The power-welding but economically lesser Malay officer is likely to be tempted to take bribe to match the economic wellbeing of his wealthier counterpart. We are not condoning bribery here. Bribery is indeed an act of betrayal to the nation, where for every bribe-taker there is a bribe giver, both of whom are wrong of the act. It is sad to note that the disparity in wealth ownership had even changed the nature of Malays who once sported high religious and ethical values.

3.5 Affirmative Actions to Counter Imbalance in Wealth and Income

The former Prime Minister, Dr Mahathir Mohamad is well-known to have taken some affirmative measures to counter the economic imbalance between the races, particularly in favour of the Bumiputras. Among which, he sent large numbers of Malay students overseas under the New Economic Plan, under the banner of uplifting the socio-economic status of Bumiputras, with the hope that they would return back with improved educational and socio-economic skills. Indeed this policy paid off and created a respectable pool of middle-income and high-income Bumiputras. Also, he privatized some government entities with the hope of creating some top Malay businessmen who could match and be at par with counterparts from other races, particularly the Chinese, even if not to match them in number.

However, the continuously shrinking economic pie for the Malays and other Bumiputras made the government unable to sustain those affirmative policies. Some Malays and other Bumiputras had to be left out. This appears to have also created some self-centered Malay politicians and rich businessmen who seem to have forgotten their own kind, amassing wealth and economic power for themselves.

3.6 Political Effects

All the above socio-economic effects of fiat money in turn have effects for politics. We assert here that it’s this continued gradual economic deprivation of Malays that has caused many to resort to the opposition political parties, very apparent in the last election, with the hope that these parties would help them overcome their economic woes. But with the current banking structure in place, the opposition parties too would not be able to solve their problems either. The Chinese, on the other hand, went all out for the opposition, not due to economic deprivation but rather it was their one-time life chance to assume more political control that could take them well on their way to achieve political dominance in the country as well.

4.0 Addressing the Root Cause with Proactive and Affirmative Policies

For all the above observations, particularly the socio-economic downfall of the Malays in Malaysia, we would point our finger at the banking sector as the root cause – for creating huge gaps in income and wealth distribution among the races through its unequitable distribution of large amounts of freely created fiat money. Fiat money creation by the banking sector is indeed a humongous ‘give-away’, particularly when given under the limited liability law (please read our article Fiat Money and Interest Groups that appeared in the EDGE, 1 April 2013, p56), compared to the warranted government give-aways to the Bumiputras, that are meant to assist them wade through the tribulations and pressures caused by their economic destitution[9].

It is now time for the government to halt and reverse this trend of gross inequality in national wealth distribution among the races, caused by the banking sector for about a century and half now. The government should take stock of this inequality using data obtainable from Bank Negara Malaysia or otherwise and thereafter take proactive measures. Among the immediate policies we have always recommended is to nationalize all commercial banks in order to immediately halt this destructive trend. Nationalizing banks can also help overcome the government’s budget deficit because money created out of thin air would now be publicly-owned rather than privately owned as is the case in the present setup. This is of highest priority and of paramount importance. This was also the main resolution of the 3rd Annual World Conference on Riba, 2012. In the US, this initiative is being championed by the Public Banking Institute under the leadership of Ellen Brown[10]. North Dakota has public banking and hence is the only state in the US that is not financially distressed in the current economic turmoil in the US.

As to reverse the process, policies could include, for example, officially gazette the use of the government’s oil and gas revenue for assisting the economically-deprived of all races. This would expectedly include a good chunk of Malays, other Bumiputras, Indians and also some deprived Chinese.

We believe that through such policies, the national wealth could be more equitably distributed among all races. This in turn would promote a more stable and vibrant economy, bring back Malay unity, forge racial harmony, significantly reduce bribery, crime levels and thereby promote peace and prosperity for all.  Only when we solve these and accordingly level the economic playground could we then talk about meritocracy and so forth; otherwise with the present dynamics of things, the Malays and the indigenous people would likely be reduced to ‘slaves’ in their own country.

The Malays allowed themselves to be economically dominated even though they have the political power simply because they are highly tolerant people, molded by their religious beliefs. Consider we reversed the roles, i.e. say the country was initially inhabited by another race, and the Malays were immigrants who later assumed economic dominance, would the other race have tolerated that as the Malays have?

In short therefore, the government needs to take proactive actions to ascertain that the wealth of this land of ‘milk and honey’ is more equitably distributed by increasing the financial inclusion of the Malays and other affected ones in order to take this country forward towards achieving its developed-nation status in 2020.

5.0 Conclusion

In summary, the establishment of private banks beginning 1860’s, and later the Board of Commissioners of Currency Malaya, and thereafter the Bank Negara Malaysia with its fractional-reserve-based commercial banking, all of which could issue money out of thin air, started a built-in process of economic ‘ruin’ of the Malays, the indigenous people and the Muslim traders. The introduction of fiat bank notes by the early banks under the interest-based system neither favoured the Malays nor Muslim traders. This is because interest taking and giving are forbidden in the religion of Islam. In earlier days, Muslims did not even want to work in the banks. Accordingly, the banking structure favoured the non-Muslims, particularly the Chinese who comprised a large business community. This tremendously increased the economic affluence and educational levels of the Chinese way above the Malays and other races.

Therefore, the mere creation of fiat money by the above entities caused a systematic shrinkage in the relative financial inclusion of the Malays, the indigenous people and the Muslim traders. Interest-based loans further caused a financial exclusion. This has caused huge wealth transfers away from the Malays financed through inflation, and their economic deprivation up till now. In turn, this has brought about the socio-economic-political effects as we see it in Malaysia today.

It’s now up to the government, NGOs and the people to take the necessary steps to correct the situation.

[1] Indeed, all indications show that in the Chinese expectation the GE13 was to have overthrown the BN government and institute a new government, which would reward the Chinese with a higher political representation taking them towards more political dominance as well.

[2] The arguments presented are also true for other indigenous peoples of Malaysia and the early Indian Muslim and Arab traders who settled in Peninsula Malaya.

[3] The Malays comprised of local people of the Malay Archipelago, who had also intermixed with Arabs, Indians and other races, particularly during the long rulings of Hindu kingdoms in this part of the world. The Sri Vijaya Empire ruled Indonesia, Malaysia and other parts of Southeast Asia for more than 2000 years. However, almost all of them converted to Islam after the advent of Islam to this part of the world, with some pockets remaining Hindu like in Bali.

[4] Coins made of tin, silver and gold were used as medium exchange in trade and commerce in the peninsula. Since tin was a local natural resource, early money was tin ingots, used both domestically and for international trade. The first coins of tin were issued by the Malacca sultanate around 1445 CE. Kelantan had also issued gold coins, also from the 15th century known as Kupang. The kijang gold coins of Kelantan had the motif of the kijang deer embossed on it, which now represents the logo of Bank Negara Malaysia.  Johor too had gold coinage from the 16th century. Kedah had Egyptian gold dinars, Spanish silver coins and Chinese copper coins even as early as the 15th century. Domestically they produced coins of tin, used for smaller denominations. From 17th century Kedah minted its own gold and silver coins. After capturing Malacca in 1511, the Portuguese issued coins of gold, silver and tin-lead alloys. The Dutch too issued silver coins in Malacca. The British East India Company issued coins of copper (1/2 cent and 1 cent) and silver (1/4 dollar and ½ dollar) as mediums of exchange. Hence in summary real money was the norm then in the peninsula.

[5] The Straits Settlements was placed under direct British control as a crown colony in 1867.

[6] Examples include dollarization and the use of Singapore dollar in Pulau Batam or Brunei.

[7] These earlier Muslims were relatively highly religious peoples.

[8] Government officers used to receive cash pay-cheques because they generally did not have bank savings accounts. Only after the government ‘convinced’ them, that there is no riba in it, that they first started to open accounts in large numbers with the Bank Simpanan Nasional (BSN), a government-owned financial institution established in 1974 after taking over the Post Office Savings Bank. The BSN is a development financial institution that does not create money out of thin air through the fractional reserve banking system.

[9] We attribute this fact as one of the reasons for not so effectiveness of the NEP.

[10] The author of the book “The Web of Debt”.

Fiat Money and Interest Groups

The domain of political economy is the struggle for wealth and power.  These two normally go hand in hand; if one has power one can command wealth and wealth can also lead to power.  In time immemorial, mankind has fought countless wars and battles with the intent of gaining wealth and power, i.e. authority over people and control over resources.  If one wins a battle, these two domains are what one basically obtains.

In the present world context, nonetheless, one need not go for wars and battles to get hold of these two domains of political economy.  There is another way though, that is the control or authority over the credit creation of an economy.  This is because in the present global system, money is mostly created out of thin air, in the form of loans.  This new money takes the form of mere accounting entries in the books of commercial banks, and is loaned out to borrowers at interest.  Since this involves the creation of new purchasing power, the loan officer of the bank is indeed being entrusted with a very responsible function within the economy, i.e. to allocate resources of the nation in the most productive, just and efficient manner.  Misrepresentation or abuse of this power would surely end in misallocation of resources, with potentially disastrous consequences in the long run.  This can be very costly considering the fact that allocation of resources in a fiat monetary system is attained by creating inflation in the economy.  Consequences of misallocation can, therefore, be very damaging to the economy, society and the political structure.

Fiat Money and Interest Groups

Keeping in mind that wealth and power are interlinked, this article shows how it is possible to manipulate the fiat money system in order to attain the two domains of political economy, i.e. wealth and power.

In most of human history, money had always been linked to something real, and therefore had intrinsic value of its own.  Gold and silver were the preferred precious metals, against which the values of all other things were measured and exchanged.  Money, as we know it, were simply standard units of these measures of value.  For example, in the near past, 1/32th ounce of gold was made equivalent to one US dollar under the Bretton Woods system; a gold dinar in the Islamic monetary history was equivalent to 4.25 grams of gold and the silver dirham equivalent to about 3grams of silver, and so forth.

Mankind’s linking of money to valuable commodities like gold and silver is a consequence of a learned behavior, i.e. one that ensures fairness and justice in economic exchanges of goods and services, among all people and nations.  In this way, even though money was used in economic transactions, the transactions were essentially barter, i.e. exchange of value for equivalent value, as shown in Diagram 1.

Fiat Money and Interest-Groups Diagram 1

After the demise of the Bretton Woods system in 1971, the entire global monetary system is now on a fiat money regime, i.e. money that is no longer linked to gold or silver.  Fiat money is, therefore, not redeemable any longer for gold or silver from the central bank or the authority that issued it.  Since then, in the current system, paper money (and now electronic money) that practically has no intrinsic value is now being exchanged for real goods and services in the economy (Diagram 2).  People and businesses accept fiat money because, for one, it is made legal tender by the authorities, and two, they know they can exchange it back for other things in the economy.  The problem with fiat money lies, however, with the first use of the money, i.e. the attached seigniorage.  Seigniorage is the benefit obtained from the first use of the fiat money, which is also the benefit derived by those who counterfeit money.  Seigniorage of fiat money is the name of the grand political game that is being played on a global scale.  It has tremendous implications for the economy, society, environment and political power.  Fiat Money and Interest-Groups Diagram 2I will restrict myself to the discussion of only one important implication of this seigniorage of fiat money, i.e. its implications for wealth and power.  We mentioned earlier that loan officers of banks are entrusted with the ultimate power to create money out of thin air and loan it out to those who, in their opinion, would bring about the most desirable allocation of resources.  In this, rests a considerable yet subtle power to control the wealth of a nation.

It is a known fact that every nation has different competing interest-groups, divided along different political affiliations, religious beliefs, ideologies, races or even social classes.  These different interest-groups can indeed use the fiat money system as a tool to attain an upper hand in their struggle for the control over a nation’s wealth and political power.

Amschel Bauer Mayer Rothschild (1838) is reported to have said: “Let me issue and control a nation’s money and I care not who makes its laws”.  This statement underscores how ultimate political power rests within the power to create money.

Accordingly, in the current fiat money system, the ultimate game is which interest-group gets to borrow most money within the limited liability framework; and keep circulating the money within the group, as much as possible.  In this way, therefore, if defaults happen, then the borrower is protected through the limited liability law.  But the money, however, by then would have been pushed into the interest-group and kept circling within it.  Indeed, it is even in the interest of the group to systematically declare bankruptcies.  Hence, over time, significant national wealth would ultimately accumulate within this group, i.e. the group that wins the game of who can borrow the most fiat money from the financial system under limited liability (See Diagram 3).

 Fiat Money and Interest-Groups Diagram 3

An informed interest-group may strategize itself in order to win this game; like even strategically placing its people in decision-making positions within bank loan offices.  Groups that lack strategy or ignorant of this game at all, are bound to lose their wealth and power to the winning group.

Do such games actually take place in the countries of the world?  Is it happening in Malaysia?  Judging from humanity’s struggle for wealth and power throughout history, in my opinion, it would be naïve to believe otherwise.  I tell people, show me the distribution of loan advancements and I will show you the wealth distribution in the nation.  And with wealth comes power.  Hence the interest-group that wins this game would, over time, also accumulate political power.  This can push some groups towards economic and political deprivation, creating inequality including poverty.  This is how, in my opinion, in some countries the wealth of the indigenous people, especially in colonized countries, had been plundered away.  Central banks and authorities who have the data can research on this wealth distribution effect.

Nobel Laureate, Joseph E. Stiglitz, in his latest book The Price of Inequality, argued how such inequality endangers the future of societies.  The seigniorage game discussed earlier is none other than a powerful means for rent-seeking that brings about continuous gross inequality within the subjects and interest-groups within the economy.

Hence it is important, in my opinion, that fiat money be fairly distributed among the different interest-groups in an economy, if equitable wealth distribution and social harmony are desired.  In today’s situation, difference in labour productivity alone cannot explain the wide gap that exists in income and wealth distribution among subjects and also different interest-groups in most countries. Wealth and power, the two domains of political economy, are indeed being transferred unjustly through the inherent ‘flaws’ of the current fiat money system, which enables systematic rent-seeking to take place.

Accordingly, prolonged effects from past decades of the fiat money system have caused serious inequalities to exist in most countries of the world, both developed and developing.  Therefore, a planned correction of wealth distribution is necessary in all these countries.  Few brave leaders of past have done it before.  Napoleon Bonaparte is reported to have pointed out, “Terrorism, war and bankruptcy are caused by the privatization of money, issued as a debt and compounded by interest “.  Accordingly, he cancelled all debt and interest in France, but then had to face the Battle of Waterloo (1815).  Much earlier in history, Joseph (Prophet Yusuf, peace be upon him), as adviser to the king of Egypt, also cancelled all debt in the nation and redistributed wealth among his people.  Jesus Christ (peace be upon him) too is reported to have claimed that he had come to cancel all debt and free all slaves, i.e. to proclaim the Jubilee Year of the Jewish tradition.  But cancelling debt and redistributing wealth is a humungous political task that is easier said than done.

When one analyzes the whole thing, one cannot but conclude that the cause of inequalities that exists in much of today’s societies is rooted in the fact that fiat money, which is a virtual wealth is equated to real wealth.  The world needs to put an end to this; and institute a measure of value and money that is based on something that is real.  Gold and silver can prevent such ‘looting’ of the economy.  Hence linking money back to gold and silver is inevitable to establish a just, stable and sustainable economic system, with equitable distribution of income, wealth and power among the people.  And yes, as Stiglitz puts it, inequality is not inevitable.


The Finance Cooperatives: The Way Forward in Islamic and Conventional Finance.

Case for Gold Dinar Idea

I refer to the letter “Gold dinar impractical” (The Star, July 6) where Goh Hoe Hoe of Penang argued that the gold dinar initiative by the Kelantan government as impractical.  From an economic reasoning this would be true so long the legal tender law stands.  The paper notes would drive the gold and silver coins out of circulation, known as Gresham’s Law in economics.  However given the current global monetary and economic crisis faced by the world, significantly due to the effects of the dollar and euro crises, it is worthwhile to give the gold dinar idea some consideration.  The matter is not of the concept but rather how to implement it.

Many are of the understanding that the gold dinar initiative calls for every transaction to be carried out using gold or silver coins.  This, of course, is impractical.  However, this can be easily overcome if, as some point out, gold and silver are correctly used as measures of value in economic and business transactions.  Hence the electronic media and the internet should be heavily used in the gold-silver system in order to minimize the use of physical coins.  It is more of a netting process, very much as in the bilateral and multilateral payment arrangements.

Case for Gold

The implementation of the gold-silver money should go simultaneously with the fiat money system so that the public is given a choice.  People should be given the freedom to choose their money without any one being forced to accept one kind of money over others.

It’s a kind of barter trade as Mr Goh puts it, but it would not face problems normally associated with barter because the precious metals would play the role of money.  Rather the system would be fair because it exchanges value for value.  The problem with fiat money is that it gives unfair benefit to its first user – a strong reason for the criminality of counterfeiting notes or coins.  Notwithstanding this, commercial banks, that are mostly privately owned, are given the right to create money out of thin air through the fractional reserve banking system.

With electronic payment systems of today, the divisibility problem would not arise.  It is possible to transfer even 0.001gm of gold or silver between accounts, which are about 16 sen and 0.003 sen respectively.  In the classical system, the copper coins, i.e. the fulus, played the role for such small transactions.  The stability of the value of gold and silver over long periods of time and as hedge against inflation has been much proven in academic research.

At the international level, such gold-linking would bring about a just, stable and sustainable monetary and economic system.  Even foreign exchange risk would disappear.  Indeed many economists are of the view that it’s the removal of the gold link in 1971 that brought about the demise of the Bretton Woods, as the root cause of the present dollar and euro crisis that is threatening the world with hyperinflation and serious recession.

Accordingly, in 2010 the former President of the World Bank, Robert Zoellick, called for major world economies to consider adopting a global reserve currency based on gold as part of structural reforms to the world’s foreign exchange regime.   Indeed, much earlier in 1997, Nobel Laureate Robert A. Mundell predicted gold’s return as international monetary unit in this century.  Nonetheless, it is important to note that gold money is not in the interest of the banking system and some political quarters, because it denies them the right to create money out of thin air as they enjoy it now.
Accounting and tax issues are a matter of modifying existing rules and regulations.  After all even today central banks do sometimes settle among themselves in gold.

Hence the impracticality argument for gold dinar is not of concept but rather of will and method of its implementation.

As Good as Gold

The Edge, 25 February 2004

Bernard Lietaer, a former senior executive at the central bank of Belgium who was instrumental in the design and implementation of the European Currency Union (ECU) that led to the birth of the euro, wrote the following in his book The Future of Money:

“Unless precautions are taken, there is at least a 50-50 chance that the next five to 10 years will see a dollar crisis that would amount to a global money meltdown. Currently, the monetary crisis has spread to three continents. Robert Rubin, the then US Secretary of Treasury, adds: ‘The number of countries experiencing difficulties at once is something we have never seen before.'”

Lietaer’s view is now being echoed by others, including Richard Duncan, a former consultant to the International Monetary Fund (IMF), in his book, The Dollar Crisis (John Wiley, 2003), and the chief economist at IMF, Kenneth Rogoff, who warned of a possible dollar collapse due to the unsustainable US trade deficit growth.

As Good as Gold

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Speech by The Prime Minister Of Malaysia On October 23, 2002

The Hon Dato’ Seri Dr Mahathir Bin Mohamad at the Gold Dinar in Multilateral Trade Seminar IKIM Hall, Kuala Lumpur On October 23, 2002

I would like to thank the organisers for inviting me to speak at this seminar on the Gold Dinar in Multilateral Trade. I hope I can help to make clear the idea and the concept of the Gold Dinar. For some time now the Muslims and their countries have become synonymous with backwardness, authoritarian and frequently unstable governments and lately with terrorists and terrorism. Yet Islamic states were not like that before, nor were Muslims involved in acts of terror. In fact Muslim countries were where the persecuted of Europe, in particular the Jews, sought refuge. The pogroms and the inquisition in Europe forced the Jews to migrate to the Muslim countries in North Africa. Yet before that when Muslims ruled Spain, the Jews, the Christians and the Muslims were able to live together in peace.

Photo Courtesy of

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