Egyptians are indeed
right to celebrate the recent dethroning of Hosni Mubarak after a 30-year power
grip. Weary of an oppressive and corrupt
government, precarious economic conditions and a bleak perspective of a brighter
future, Egyptian citizens have finally reached their tolerance limit.
In the past weeks,
other Middle East and North African nations are also experiencing protests from
discontented citizens. Uncertainty permeates the Arab world. What lies ahead is
subject to extensive speculation.
In this article I
shall draw attention though, not to the political aspects of the unfolding
events. On the contrary, we will bring to the fore an important economic
question, largely absent from ongoing debates, that is, the monetary regime in
Islam.
As we will argue
below, over the medium and long term these revolting nations need to focus not
solely on democracy and political considerations, but also on economic freedom.
Free market money and banking, subject to traditional legal principles, are
crucial, if true liberty is to be attained.
Islamic history and
tradition have a long record of recognizing and practicing free market principles.
However, in the present days, virtually all Islamic nations operate under fiat
currencies with fractional reserve banking. A lasting and sustainable economic
recovery can only be possible by returning to a halal[1] monetary system.
Islam and Money
Historians often
struggle to grasp the rapid rise of the Islamic World. In the same manner, the
fall of the Roman Empire still puzzles scholars. Lacking a solid theoretical
basis and analytical framework, compelling conclusions are seldom drawn.
The decline and
ensuing fall of the Western Roman Empire was largely due to the “barbarians
inside the gate”, those responsible for the Empire’s fiscal and monetary
mismanagement. Within a couple of centuries another civilization would emerge
and even exceed the achievements of the western world hitherto. One struggles
to find a field to which the Islamic civilization did not contribute to or
improved upon during the so-called Islamic Golden Age.
Freedom to exchange
benefits all. Sound money reduces uncertainty and facilitates exchanges to take
place. The Islamic Empire provided this very environment, that is, a large free
trade area under a sound monetary system. For almost 400 years, no Muslim ruler
engaged in monetary meddling. This solid foundation was a principle reason
which enabled the grand achievements during that period.
Trade is embedded in
the traditions and teachings of Islam. So is sound money, historically
epitomized by gold.
In an excellent speech
delivered in 1998 where it was urged for the return of the Gold Dinar[2],
Imad-ad-Dean Ahmad[3] notes that “Muslims cannot escape the fact that gold is our money. Even
if we pretend that it is not, we continue to use it in calculating the nisâb[4].
Instead of fighting the will of Allah, I propose that we embrace it”. Zakat is to be paid with honest money or
actual substance, not a promise to pay, hence the use of gold or silver.
Islamic Law does not permit the use of a promise of payment as a medium of
exchange. Prohibition is also extended to fractional reserve banking[5].
Back in that year the then
recent Asian financial crisis still preoccupied the world. Ahmad timely recalls
that “it is not the currency speculators who are responsible for the Malaysian
crisis. [It was] harâm monetary
policy that made the ringgit an unreliable currency”. He continues:
Since the time of the Prophet, gold and silver served a monetary
function and there was no problem abiding by this standard for 400 years. Gold
is the natural monetary commodity which Allah has provided us for an equitable monetary
policy free from the arbitrary or self-serving manipulations of central banks
and politicians.
The difficulty involved in money supply adjustment is natural and
controlled by God. Soft currencies (tokens, paper) are all too subject to the
manipulations of governments seeking to engage in deficit spending or bankers seeking
to increase their interest revenues through fractional reserve banking.
The case for following our Islamic heritage on these matters is moral as
well as utilitarian. The difficulties of finding an effective and sound monetary
policy are obviated in Islam by the monetary regime of the Dinar.
As accurately pointed
out by Ahmad, the discipline imposed by a gold-standard with 100% reserves lies
in the fact that one cannot mask or manipulate the level of savings available
for investments or financing public deficits. Nor is it possible to create gold
coins out of thin air to honor government recurring obligations.
The adoption of free-market
principles was a fundamental factor that made the Islamic world experience a Golden
Age. It was neither a massive government apparatus nor a central monetary
authority.
A note on Interest
Rather than advocating
Islam as a monetary panacea, we only aim at shedding light on some key aspects
of the Islamic tradition and teachings on economic matters. That being said, it
is expedient to make some remarks on the question of interest, Riba, which should not be interpreted as
an exhaustive treatment of the issue.
It is futile to define
what eating pork meat or drinking wine is. One can easily identify if a person
is engaging in any such activity. It is quite another matter with the charging
of interest, which is perhaps the most disputed issue even for some free-market
Muslims. What really is interest?
Some libertarians of
the Islamic faith contend that the Qur’anic
prohibition is not on interest itself, but on usury, that is, overcharging. Since
Islamic law sees no crime in discounting for cash or surcharges for credit in a
typical vendor and buyer transaction, there should be no prohibition either to
a loan issued by an external party. Interest is present in both transactions.
Unfortunately, the
majority of Muslims interprets the prohibition on any form of interest on
loans. Hindered by this sacred restriction, present-day Muslim jurists must develop
sophisticated financial models so as to render them Shariah compliant.
For instance, if a
Muslim seeks to purchase a property but does not have the financial means
needed for the transaction, he may apply for an Islamic home finance solution,
which usually work in the following manner: the bank purchases the property,
which the customer then leases from the bank. Thereafter, both parties engage
in a unilateral promise to sell and buy the property during or at the end of
the lease period. The financial institution is then paid a tariff for providing
the customer with a home finance solution[6].
Modern practice of
Islamic banking reminisce us of Middle Ages’ mechanisms employed to circumvent the
canonical prohibition on the charging of interest on loans, such as the depositum confessatum[7].
Language also contributes in making a
loan more palatable for a Muslim. Instead of advertising it as interest rate
charges, Islamic loans require a “profit rate”. For the layman it is hard to
identify any difference in the essence of a traditional home mortgage and an
Islamic one.
In our present time,
money supply manipulations by a central bank accompanied by fractional reserve
banking renders the debate over interest even more intricate and complex, as
the expected loss of purchasing power from a debased fiat currency becomes
another ingredient in the charging of interest on loans.
Interest is a feature
of human nature. It is the basic concept of time preference, which means a man
prefers the enjoyment of a good in the present to the enjoyment of the same
good in the future. There isn’t anything inherently evil in it. And so agrees a
minority of Islamic scholars. It took years for Catholics to appease their conscience
in this regard. Let us hope the digital era abbreviate this period in the
Islamic world.
Current Monetary Policy
As commented in the
beginning, virtually all Islamic nations currently operate under a fiat
currency system with fractional reserve banking. What is worse, the majority is
pegged to the dollar. It was a prudent policy in the past. Linking the national
monetary unit to the world’s reserve currency meant stability. Not anymore. Thanks to Ben Bernanke.
By pegging their
currencies to the dollar one must abdicate from an independent monetary policy.
That entails following the FED’s every step. Currently, it means expanding the
money supply enormously. China has recently witnessed troubling inflationary
pressures. And so will every nation determined to sink with the dollar.
Bernanke is certainly
not the sole culprit. Alan Greenspan did his part. But rather than blaming
individuals, the underlying problem is obviously the monetary system which
reigns today.
The reckless and
desperate monetary policy of Mr. Bernanke is accelerating the worldwide perception
that something is deeply flawed in our current monetary arrangement. In the
medium term the most likely solution envisioned by Islamic nations is a
de-pegging of the dollar. Over the long term, the only viable and sustainable
solution is a total break-up from the harâm
monetary regime which we all live under.
Conclusion
Both the Islamic and
the Christian faith emphatically condemn theft and fraud and sanctify private
property. The systematic aggression of socialism implies the exact opposite and
it is precisely what we find in modern money and banking.
Socialism has wrecked
the Muslim world. In some Islamic countries the estimates of people living below
the poverty line is troubling. The cost of food has risen sharply in recent
months. Estimated inflation in Egypt for 2009 reached 11.9%, while almost 13%
last year. Additionally, the level of unemployed hovers around 10%. Analyzing
other Muslim countries the picture becomes a visible trend. In Tunisia it is
estimated that 14% of the population is out of work, whereas in Saudi Arabia it
is approximately 11%. And the list continues with Jordan at 13.4% and Iran at
almost 15% unemployed[8].
A considerable portion
of Muslims, unfortunately, blames the pernicious American influence for both
their political and economic imbroglio. Nevertheless, the latter is a
consequence of policies adopted by their own governments. Repudiating American
imperialism will not bring prosperity. It is necessary to repeal the abundant
and harmful socialist policies adopted in these nations, especially in the
monetary regime. Arab dictatorships inflicted poverty and brutal oppression on
its citizens. Replacing them with democracy may indeed end the oppressive part,
but only free market policies can promote economic relief and prosperity to
all.
Recently, British
magazine The Economist featured an article on the gradual change in the Syrian state,
from a centrally planned economy to a more free-market oriented. The
publication focuses precisely on the policies which will enable Syria to become
a “social market” economy. In practice it entails reducing vast subsidies
directed at electricity, fuel, transportation, water and food.
Although the US helped
in maintaining illegitimate regimes in power, bad economic policies are not an
imperialist imposition. They are a self inflicted burden, imposed by the
nation’s own government, be it democratic or not. Ultimately, it is the
economic freedom which will be the decisive factor in the downfall of any form
of government, in the Middle East or anywhere else on earth.
It is imperative that new formed governments
of Egyptians, Tunisians and other Middle East nations are sufficient Islamic
when it comes to monetary affairs, and not only to disapprove of the western
moral decay, or to speak out against the US unconditional support of Israel. That
means adopting a monetary system backed by commodity money with 100% reserves,
in full accordance with the precepts of its legal code.
If Muslims are to
enjoy liberty, peace and prosperity again, they cannot afford to ignore the
consequences of a fraudulent monetary regime. Democracy per se is not capable of limiting government expansion and bringing
about prosperity. Gold per se cannot
guarantee it either. However, the discipline it imposes on governments makes
the metal a much sounder path in the road to prosperity. Furthermore, it
hinders the disorderly and harmful advancement of an inherently unstable
banking system.
Muslims must heed the
teachings of their prophet and the traditions of their history. They ought to
demand their governments to forgo this dishonest monetary arrangement and
really abide by the precepts of Islam. Embracing their faith does not mean
rejecting capitalism. It actually entails adhering to principles which enable
civilization to prosper.
If democracy is the
worst form of government, except for all others, let its effects be restrained
by a monetary regime befitting to Islam and human nature, that is, a free-market
one.
[1] Halal is the Arabic term used to designate something
as legal, authorized, lawful or permitted. It is the opposite of harâm.
[2] Both the Gold Dinar and Silver Dirham are ancient coins from the Islamic
world. Nevertheless, there is a growing movement attempting to bring the old
coins back into circulation so as to have a sounder monetary system backed by a
commodity money. In Malaysia, the states of Kelantan and Perak have either
already introduced or announced to introduce such coins.
[3] Speech given by Imad-ad-Dean Ahmad for the
American Muslim Social Scientists in Chicago, October 30th 1998. Imad-ad-Dean
Ahmad is a palestinian-american scholar and president of the Minaret of Freedom
Institute, a Muslim libertarian think-tank. http://www.minaret.org/OLD/MONETARY.HTM
[4] Zakat, one of the pillars of Islam, is a contribution
to the poor and needy. Zakat is
obligatory when a certain amount of one’s wealth, called the nisâb is reached or exceeded. The nisâb is stipulated at 20 Gold Dinars
(90,8g of Gold) or 200 Silver Dirhams (594g of Silver). It is interesting to
remember that, like the dollar or the pound, both dinar and dirham are used as denominations
for national currencies. Dinar is used in Bahrain, Jordan, Kuwait e in Tunisia,
whereas dirham was adopted for the currencies issued in Morocco and in the
United Arab Emirates. However, nowadays they are just names on a paper and have
no resemblance with the old Islamic coins, the Gold Dinar and the Silver Dirham.
[5] Ayub, Muhammad, Understanding Islamic Finance, 2007, John Wiley & Sons Ltd:
Chichester, England.
[6] Every Islamic financial product must undergo the scrutiny of a Shariah Committee. See an example of a
Home Finance product with the approval of Islamic jurists. http://www.hsbc.ae/1/PA_1_083Q9FJ08A002FBP5S00000000/content/uae/pdf/approval_amanah_home_finance.pdf
[7] “It was a simulated deposit which, despite the declarations of the two
parties, was not a true deposit at all, but rather a mere loan or mutuum contract. At the end of the
agreed-upon term, the supposed depositor claimed his money. When the professed
depositary failed to return it, he was forced to pay a “penalty” in the shape
of interest on his presumed “delay,” which had nothing to do with the actual reason
for the “penalty” (the fact that the operation was a loan). Disguising loans as
deposits became an effective way to get around the canonical ban on interest
and escape severe sanctions, both secular and spiritual.” Huerta de Soto, Jesús,
Money, bank credit and economic cycles, 2009,
Ludwig von Mises Institute: Auburn, AL, p.64.
[8] Other Islamic countries present an even more
precarious situation. However, it would entail analyzing factors which are out
of this article ‘s scope.
Among them: Palestine, which suffers a blockade exercised by the state of
Israel; Afghanistan, Iraq and Pakistan, which are still in the midst of an
endless war. To some extent, we might even include Iran, for suffering under
economic sanctions which certainly harm its development, but which I deem not
to be fundamental in their current economic outlook.
Nota: as visões expressas no artigo não são necessariamente aquelas do Instituto Mises Brasil.
