GOLD DINAR IN INTERNATIONAL TRADE: STRATEGIC POSITIONING IN INDONESIA MONETARY SYSTEM

(Paper dipresentasikan di Seminar Akademik Ekonomi Pertama - Universitas Indonesia, 2005. Dipublikasikan di Jurnal Tazkia Islamic Finance & Business Review)

Ditulis dengan Co-Author Handi Risza Idris

Abstract

Paper ini mengelaborasi implikasi dari ditinggalkannya standar emas, sejak runtuhnya sistem Bretton Wood hingga diterapkannya sistem uang kertas (fiat money system). Sistem ini berdampak pada terjadinya krisis finansial dan ketidakadilan dalam transaksi perdagangan internasional. Bisa dinyatakan kalaulah sistem moneter yang berlaku sekarang masih dipertahankan, maka praktek-praktek spekulasi, manipulasi dan arbitrasi dalam pasar valas akan selalu tumbuh subur. Dengan alasan inilah, paper ini mendesak untuk mempraktekkan sistem ekonomi yang berbasiskan sistem emas; mengembalikan peran emas dan perak sebagai alat transaksi, sistem nilai bagi barang dan alat pembayaran jasa yang akan menyelematkan masyarakat global dari ketidakstabilan sistem moneter yang berlaku sekarang. Dalam konteks transaksi perdagangan internasional, paper ini mencoba menawarkan konsep Bilateral Payment Agreement (BPA) dan Multilateral Payment Agreement (MPA) berbasis emas sebagai salah satu cara alternatif bagi pelaksanaan perdagangan dalam sistem moneter Indonesia. Indonesia adalah negara Muslim terbesar di dunia yang memiliki potensi menjadi pioner yang mengimplementasikan secara efektif transaksi perdagangan internasional dengan emas khususnya antara negara-negara Muslim. Proposal penggunaan emas sebagai alat pembayaran perdagangan dengan pola BPA dan MPA tidak akan merubah mekanisme yang telah berlaku. Perbedaan terletak pada penggunaan emas/dinar sebagai alat transaksi perdagangan menggantikan mata uang kertas.

Keywords: Gold Dinar, Bilateral Payment Agreement (BPA), Multilateral Payment Agreement, Fiat Money System.

JEL Class: E42, F13


1. INTRODUCTION

Indonesia has an opportunity to be establishing to implement successfully the utilization of gold within the prospect of international trade settlements. It is divided essentially into several sections. Section two introduces the reasons rationales of using gold for international trade. Section three traces and defines gold, gold dinar and international trade, and the settlement aspects. Section four discusses the Implementing the gold dinar in bilateral payment arrangements (BPA) and Multilateral payment arrangements (MPA). Section five, Issue relating to the utilization of gold in International Trade Settlements and the last section is conclusions and policy recommendations.

2. RATIONALES FOR USING GOLD FOR INTERNATIONAL TRADE

Since the early days of Islam to the height of its empire, Islam paved the way to vast business opportunities and international trade. The mainstream of Islamic economy was trade and this was aggressively pursued during the first 800 years of its inception. A combination of several economics and political factors, including the ability to mobilize adequate resources, were responsible for the increased prosperity of the Islamic world. These factors provided a great boost to international trade. Islam treats the world as a single entity separated by artificial borders only for the limited purpose of preserving each race’s culture and heritage. The middle ages have established a highly sophisticated international financial network established supporting between Muslim communities. This system appears to have been the most extensive and highly developed of the time, and remained so until the banking system created by the west finally outstripped in the 16th century.

In an effort to inter-alia, forge Muslim cooperation in the international trade arena and as a key initiative to prevent a repeat of the currency crisis that maligned Asia in 1978-1998. According to Dr. Mahatir Mohammad, he proposes that the gold dinar be used for international trade. He highlighted that paper currency had no intrinsic value, making the exchange rate “arbitrary and subject to manipulations as we saw during the Asian financial crisis. The uses of gold dinar is seen as first step move toward unifying the currency used in commercial dealings between the Islamic countries and it is also a first step move toward placing the shariah in a prominent position in our monetary system as implemented during the time of prophet Muhammad s.a.w and the rightly guided caliphs.

The shariah has attached many illegal injunctions relation to these two precious metals including in relation to the minimum value oh theft, payment of diyah, zakat and overall transaction. The prophet s.a.w himself has approved the use of gold and silver as money and he permitted the use of the roman and Persian gold and silver coins. Gold and silver became extricable linked to Islam as a system of currency through the prophets approval and through the link with the hudud of Allah and zakat. For example, the prophet mentioned:

“zakat can be paid on money only if the nisab exceeds 20 gold dinars, and that hudud can be implemented on a theft only if what he stole exceeds a quarter of a dinars”

Islam has, since it’s beginning, taken the view that the only currency which should be used determine the price of good consist of gold and silver. This is due to the fact that gold and silver are two precious metals, which can best function as a medium of exchange, measures of value and store of wealth for the human community. The quran informs us that these precious metals will always be desired by mean:

“Alluring to men is the love of things they covet, women and sons, hoarded treasures of gold and silver, and highly bred horses, cattle and land.”
(Surah Ali Imran, 3:14)

Ibn Khaldun’s thinking that was potrayed in his book “The Muqadimah” is also illuminating (Ibn. Khaldun, Muqadimah, Vol. 2, at 353-354):

“God created the two mineral stones, gold and silver, as the measure of value for all capital accumulations. Gold and silver are what the inhabitants of this world, by preface, consider treasures and property to consist of. Even if, under certain circumstances, other things are acquired, it is only for the purpose of ultimately obtaining gold and silver. All other things are subject to market fluctuations, from which and silver and gold are attempt. They are the basis of profit, property and treasure.”

The prophet s.a.w forbade Muslim from using utensils made of gold and silver or using decoration or as male jewelers. These prohibitions reflect the temperament and disposition of Islam. Gold and silver metal should only be used for coinage (M.S. Sanusi. It was also reported that the prophet s.a.w prayed for the continuation of the gold standard for the ummah to exist as a prosperous community. The Prophet s.a.w has said “the prophet s.a.w has said “ a time of certainty coming over mankind, in which there will be nothing left which will be use save dinar and a dirham” (Musnad Imam Hambal)
In effect, it is clear that using gold (and silver) in general, and for trade in particular, is a paradigm that is very much encouraged and pivotal for the muslim ummah.


3. HISTORY OF GOLD DINAR AND INTERNATIONAL TRADE
3.1. GOLD DINAR

History of reveals that gold and silver coins of different denominators from different countries were in circulation in Arabia in the pre-Islamic period. This was because the Arabians were basically merchants who traveled to the roman, Byzantine and Sassanian empires and caravans from other countries also passed through Arabia. Mecca at that time was a cosmopolitan town and a center for foreign exchange and credit transaction. Barter transactions, involving a diverse array of goods from many parts of the world, were not easy to negotiate. For this reasons, gold and silver coins of various origins were widely in circulation among the Arabs.
During the lifetime of the prophet (s.a.w) the minting (sikka) of money was still at a primitive stage. The prophet (s.a.w) himself did not establish a mint, as existing supplies of imported Byzantine gold coins and Arab –Sasanian silver coins were sufficient to meet the limier local demand. The prophet (s.a.w) noticed that trade and business were appraised in gold and silver which was used as currency (thanam ra’ij) but did not forbid people from dealing in it. He did, however, issue a few amendments.

For example, coins of the same metal should not be exchanged except when of equal weigh and the possession is passed on simultaneously. Credit in currency exchange transaction was prohibited as this may lead to riba. He permitted the exchange of dirhams for dinnar with the conditions that the exchange must take place simultaneously at the price of the day.

At the time of the prophet (s.a.w) a monetary system predominated which used gold dinar coins weighing 4.25 grams and silver dirham coins weighing 2,975 grams. After the death of the prophet (s.a.w) neither the first caliph, Abu Bakr (r.a.a.), or the second caliph, ‘Umar ibn – Khattab (r.a.a), made any alteration to the system. However, when the Muslim ruled territories became vast, problem set in. matters came to a head after a dispute between Umayyad Caliph Abd al –Malik and the kind of Byzantium over the used of Byzantium coinage. As a result Abd Malik ordred the minting of Islamic dinars and dirhams. The new gold and silver coins with with arabic legends were introduced about the year A.H.75. The weighing of these coins was in conformity with practice of the prophet (s.a.w) with regard to the obligation of paying zakat without loss of excess. Thus, the prophet’s tradition was followed and the Islamic community agreed to the new currency with quranic quotations on the coins. So Islamic dinar became the basis of the Islamic monetary system.

According to the Islamic law, the dinar is a specific weight of 22-carat gold equivalent to 4.25 grams with a parameter of 23 millimeters. This standard has been set since the era of prophet Muhammad s.a.w and continues to be recognized and used by the world Islamic trading organization (WITO) until today. Another currency inherited from the Islamic tradition is silver dirham, which is a specific weight of silver equivalent to 3 grams. One dinar is equivalent to approximately RM 165 while one dirham is equivalent to approximately RM 2.65. History revealed that for around 2,500 years the universal currency was made up of small pieces of gold and silver called coins. They had survived for two millennia despite numerous attempts by many governments to manipulate them and replace them with their own medium of exchange (Umar Vadillo, “The return of the Gold Dinar”).

While they serve the same needs of an economy, the gold dinar system is in absolute contrast to the existing fiat money system. Amongst the major differences between the two systems are as follows:
Dinar
Fiat Money
Is commodity – based, ie. Based on gold and silver. Therefore it has intrinsic value.
Is based on supply and demand. Has no intrinsic value.
Does not need a government to issue it, in fact, it does not need rules or regulation, laws or official control. It only needs the individual freedom to possess and use gold and silver coins. With an implicit elimination of all taxes imposed on their use.
Issued and managed by governments by means of the political and economics process. Thus, it can be expended and contracted at will, and as such as it can be inflated to complement the tax income.
A naturally international currency notwithstanding different names and various weights standards. After all, an ounce of gold is an ounce of gold whether minted in the form of sovereign or eagles.
Only recognized within the boundary of the issuing government. May lose its value totally upon collapse of the government or crisis in the economy.
Cannot be inflated by printing more of it; cannot be devaluated by government decree, and unlike paper currency it is an asset which does not depend upon anyone’s promise to pay
All forms of paper assets: bonds, shares, and even bank depositors are promises to repay money borrowed. Their value is dependant upon the investor’s belief that the promise will be fulfilled.

3.2. INTERNATIONAL TRADE

Generally, international trade involves the flow of good and services across national frontiers. International trade has grown dramatically in the last fifty years. In great measure, this is because the world’s nations have cooperated in eliminating protectionist domestic legislation and in promoting the free exchange of goods.
International trade is an essential element in the process of globalization in a word that is fast becoming a “borderless world” or a “global village”. It is deemed beneficial since the gains from trade can be obtained through increased specialization, the realization of comparative advantage, diffusion of international knowledge, and increased efficiency in the domestic economy. Trade openness can drive growth both directly, through its impact on resources allocation and efficiency, and indirectly, by raising the returns to investment. Consequently, any sort of protection that restricts trade is considered as a source of distortions in international markets and should “ideally” be eliminated.

The establishment of the world trade organization (WTO) on January 1st, 1995, as a successor to the General Agreement and Trade (GATT) plays an important role in promoting free trade in the globalization process. Its primary objective is to advance trade liberalization and provide a secure world trading system. The WTO is devoted to the institutional and procedural structure that will facilitate and in some cases, are necessary for effective implementation of the substantive rules that have been negotiated in the Uruguay round second, the WTO will essentially continue the GATT’s institutional ideas and many of its practices in a form better understood by the public, media, government, officials and lawyer. Third, the WTO structure offers some important changes for assisting the effective implementation of the Uruguay Round (Jacson, JH)

An important consequence of the agreement in the WTO is that the playing field has now been leveled for all countries regardless of where the country stands in the international economic scenario. Developing countries will have to complete with the developed countries on an equal footing. The question that arises now is how this will affect the developing countries, particularly the Muslim countries, given their status quo in the international markets and the recent debacle in Cancun (Ruzita and Alavi).

4. IMPLEMENTING THE GOLD DINAR IN BILATERAL PAYMENT ARRANGEMENTS AND MULTILATERAL PAYMENT ARRANGEMENT

Bilateral or Multilateral Payment Arrangement (BPA or MPA) is one of the alternative ways available for international trade settlement. Generally, BPA is a system of monetary obligations arising from trade between pairs of countries. Under this arrangement, approved authorities, normally the central banks participating countries that have entered into such an arrangement will pay each other or guarantee payments for imports undertaken by corporate and individual residents in the respective countries. Effectively, this arrangement converts the commercial risk relating to trade into a sovereign risk. The objectives of the arrangement are mainly to promote bilateral trade and to foster closer bilateral economics and banking relationship. Under the conventional system of BPA, the exporter is paid in this local currency to his country’s central bank or designated bank while the importer pays in local currency to his country’s central or designated bank. At the end of the agreed period, the bank will contra their account to determine which country has a deficit and the balance in the trade would be settled in an agreed currency by both parties.

4.1. BILATERAL PAYMENT ARRANGEMENT

The BPA gold dinar model is shown in table 1. When Indonesian trades with Malaysia, for example, the gold accounting is kept through the medium of the central banks and only the net difference between the two is settled periodically by way of transfer of an equivalent amount of gold. Hence every transaction in essence involves gold “movement”. A physical transfer of gold from one country to another is not necessary though, but only a transfer of beneficial ownership in a gold custodian’s account.

Table 1: Gold in Bilateral Payment
Gold Dinar (Million)
Export to
Indonesia
Malaysia
Total Export
Indonesia
X
2.0
2.0
Malaysia
1.8
X
1.8
Total Import
1.8
2.0
3.8


The custodian role can be played by the Islamic Development Bank (IDB), the bank of England or preferably by some other non-interest – based non – money-creating institution. The role of the gold custodian should decreased the probability of default by any of the parties involved, increased efficiency and thereby bring confidence into the system. However, any gold that needs to be settled can always be brought forward and used for future transactions and settlements. Where it is not possible to transfer the gold, payment can be made by way of an equivalent amount in other acceptable currencies using real time gold price as the exchange rate.

Table 2: Gold in Bilateral Payment
Gold Dinar (Million)
Countries
Export
Import
Net Payment
Indonesia
2.0
1.8
+0.2
Malaysia
1.8
2.0
-0.2


As example, consider that Indonesia and Malaysia sign bilateral payments arrangements where trade balance are to be settled every three months. Say, in particular three-month cycle, Indonesia export 2 million gold dinar worth of good and services to Malaysia while importing 1.8 million gold dinar (see table 2). Hence and Indonesia has a surplus trade of 0.2 million gold dinar with Malaysia and Malaysia need to settle only this difference of 0.2 million gold dinar (see table 2). The actual payment can be by way of the Malaysia central bank transferring 0.2 million ounce of gold in its custodian’s account, say, in the bank of England in London, to Bank Indonesia’s account with the same custodian. The important point to note here is that, under this mechanism, a relatively small amount of gold (0.2 million gold dinar) is able to support a much larger trade value (3.8 million gold dinar). In other word, we optimize the use of foreign exchange. Even countries with little or no foreign exchange reserves can participate significantly in international trade under this mechanism.

However, the amount of 0.2 million gold dinar could be used for settling future trade imbalances between the countries and hence a physical gold transfer between the countries is not necessary. This simple structure considerably reduces. If not eliminates, exchange rate risk.

4.2. MULTILATERAL PAYMENT ARRANGEMENT

The Multilateral Payment Arrangement (MPA) is similar to the BPA, but it involves more than two countries and, therefore, makes the whole system more efficient. Let’s illustrate this using three countries, namely Indonesia, Malaysia, and Brunei (see table 3).

Table 3: Gold in Multilateral Payment Arrangement (MPA)
Gold Dinar (Million)
Export to
Indonesia
Malaysia
Brunei
Total Export
Indonesia
X
2.0
1.5
3.5
Malaysia
1.8
X
2.0
3.8
Brunei
1.7
1.7
X
3.4
Total Import
3.5
3.7
3.5
10.7

Let us assume that the volume of trade between Indonesia and Malaysia was the same as in the BPA example, and we add the additional trade of these two countries with Egypt, as shown in table 3 above.
Now a total trade of 10.7 million gold dinar takes place among the three countries but with a net payment of only 0.1 million gold dinar. The only payment required is for Brunei to pay Malaysia 0.1 million gold dinar (table 4).



Table 4: Gold in Multilateral Payment Arrangement
Gold Dinar
Countries
Export
Import
Net Payment
Indonesia
3.5
3.5
Nil
Malaysia
3.8
3.7
+0.1
Brunei
3.4
3.5
-0.1


This mechanism can be refined further, whereby the credit or debit outstanding at the end of each quarter is forwarded to the subsequent quarters and the final settlement is made only at the end of the year. The advantage of this is that a net import position for a country during a particular quarter may be offset by a net export position in the subsequent quarter, so that, for the year as a whole, the payment flows are further minimized.

The above example answers the often-asked question: are the existing gold reserves enough to support the growing volume of international trade? Is that in most cases gold would only play the role of a unit of account. Only the net balances remaining in the matrix of trade need to be settled in gold. David Richardo, the famous 19th century economist, wrote that in his Principles of political Economy and Taxation (London, 1817), when money is working at the peak of efficiency, the central bank need not hold any gold. We may not expect such peak efficiency, but some gold should be there to settle balances. Nevertheless, central banks need not hoard large amounts of gold like in Fort Knox. The efficiency could be further improved if trade experts sit together and analyze the export potentials and import needs of every participating country and thereby come up with a more efficient trade matrix. The international financial institution may not favors such multilateral payment arrangements because they significantly reduce the participating countries depended on international fiat reserve currencies.

5. ISSUE RELATING TO THE UTILIZATION OF GOLD IN INTERNATIONAL TRADE SETTLEMENTS
5.1. INTERNATIONAL TRADE FRAMEWORK USING THE GOLD DINAR MECHANISM

It has been reported that the gold dinar will be used, initially, for settlement of trade on the basis of bilateral payment (BPA). As mentioned earlier under a BPA, instead of bringing back report receipts to Indonesia, Bank Indonesia has an agreement with the corresponding central bank of trading countries to offset bilateral trade and settle the balance with each other. Trades are paid, or will pay to their respective central banks, in local currency. A BPA is usually undertaken when the importing country is a new market, or has no correspondence with the commercial banks in Indonesia, or is perceived to have high sovereign risk.

For this reason, it is important that a number of countries join hands to make a joint effort towards establishing the gold dinar mechanism. These countries will trade with one another thus creating a sufficient critical mass and market for them to encourage other countries. Eventually the BPA will be converted into a multilateral payments arrangement (MPA), with the participation of as many countries as possible.

The MPA functions in a similar fashion as the BPA, but it involves many countries and therefore would preferably involve in addition, a central depository, functioning very much like a clearing house to the central banks. No doubt the BPA and MPA; constituting a legally binding obligation; is sufficient to facilitate the aforesaid aim, but the need to create a system that will accept trading in gold dinar is essential to encourage the participation of more countries.

5.2. THE INFRASTRUCTURE FOR THE IMPLEMENTATION OF THE GOLD DINAR SYSTEM

The establishment of a body or organization which is to be entrusted with the regulation and holding of the gold dinar is essential. Whether the trading in gold dinar will take on a physical or electronic form, it is imperative that there be a mechanism that accepts and regulate trading in gold dinar. As can be seen earlier, the international trade between bilateral or even multilateral parties would be facilitated by the BPA or the MPA, which would dictated that the payment which had to be honored by the countries would be limited to the difference between the value of imports versus exports between the countries. A suitable centralized body may need to be established to manage the accounting arrangement, especially in multilateral trade.

Furthermore, where payment is to be rendered with gold dinar, physical delivery or the dinar may not be feasible. Therefore, the issue that must be addressed before the implementation of gold dinar becomes a reality is its lack of mobility. This however can be easily overcome with the establishment of holding body, entrusted with the holding or custodial task of the physical dinar. The gold dinar mechanism would primarily involve the task of settling the accounting arrangements between the countries and the custodial task of the physical dinar. Careful planning is needed to ensure that when the mechanism is in place, there would not be any major problems that could undermine its implementation.

Ideally, there are three major entities that will carry out significant roles in the gold dinar transactional matrix:
1. Central Bank
The central Banks of each country will have to play a substantial role in ensuring the viability of international trade in gold dinar. Essentially, the Central Bank will have two major roles in the “Gold Dinar Mechanism”.

Firstly, as a regulating body to manage and supervise gold dinar trading in each country. In international trade, the transport of gold dinar would be very minimal. Through BPA and MPA, the imports can be balance by the exports and the difference settled in gold dinar. The Central Bank can be provide a guarantee for the gold require for the payments of the balance can be made through accounting arrangements between the central banks.

The proposal is that the exporter can declare the agreed priced in dinar to the importer and to central Bank in his country. The central bank will then pay the exporter in its respective national currency based on the gold dinar exchange rate prevailing at the time of the transaction. At the importer’s end, he would pay to his country’s central bank in its national currency equivalent of the agreed price in gold dinar. At the end of a certain agreed term, the central banks will total up the value of the exports and imports between the two trading countries in dinar. If there is no balance, then the country with a surplus will have a credit account against the country with a deficit. The difference can be paid in dinar or the country with a surplus can hold the dinar for future purchases from the country in deficit.

Based on the aforesaid, it is vital that the central banks of parties interested to trade in gold dinar are able to come to an agreement as to the manner or scheme as to the accounting arrangement. This is especially important to minimize the physical transport or even the transfer of the beneficial ownership of gold dinar. Perhaps central bank could come up with standard policies in relation to trading in gold dinar to ensure uniformity in international trade. Relevant global organization such as the Islamic Development Bank (IDB) or the Islamic Financial Service Board (IFSB) can facilitate in fostering the unity for the Central Bank of Islamic Countries to take on a unanimous stand on providing a standard mechanisms for the use of gold dinar in International Trade among OIC member countries.

The second role to be carried out by Central Banks would be as a custodian of the dinar on behalf of its owners. Central Bank would be the best establishment to undertake this dinar custodial role as prospective dinar users will be comforted in knowing that their physical dinar is being deposited for safe custody with their country’s own regulator of financial practices.
Furthermore, central bank not only has the capacity to act as a custodian for the physical dinar to persons who may seek to acquire or dispose gold dinars. This can be done in the respective country’s national currency or any foreign currency to be determined by the particular central bank.

2. Central Depository
In a multilateral trade environment, the mechanism for trading in gold dinar would essentially be much like in a bilateral trade scenario. However, as more countries would be involved, the process gets a little complicated. To ensure manageability in multilateral trades, it is proposed that a central depository for a group of trading countries, most preferably in a Muslim country be set up. The central depository would be very much like a clearinghouse to balance the deficit and surpluses for the trading countries at the end of a stipulated time. Participating central banks will have a good custodian account, similar to a foreign exchange account, to finance bilateral payments. The proposal is that trading countries can deposit gold dinar in the central depository by way of the custodian account. Subsequently, all deficits and surpluses of trading countries will be balanced and the transfer of the beneficial ownership in the gold dinars be effected accordingly.
In essence, the role of the central depository would be very much similar to those central banks in each country, i.e the provision of transfer and custodial services. The only difference would be that it would be providing these services to participating central banks on a large scale.

3. Other Financial Institution
Although most of the dinar transaction would take on an electronic form as opposed to physical form, the value of the dinar traded electronically must also correspond with existing dinars. Aside from the central depository mentioned above, facilities for depositing the physical dinars are important, primarily due to its lack of mobility.

Another possible alternative is for the existing financial institution to operate and engage in dinar deposit for its customers. However, these roles will have to be premised on completely different objectives and aspirations in contrast to conventional cash deposits or ordinary gold deposits. This is because the dinar is both a valuable commodity and a currency for its owner, and in that respect, the bank’s role will primarily be that of a custodian of the dinar for the customers. The dinars must be kept free from lien and any encumbrances, as this will defeat its capability as a medium of exchange.

Possibly, financial institution may charge a service or custodial fee but in accordance with Islamic banking principles, the bank may impose no other charge, nor the customers on the dinar deposits earn ca interest. Based on this, it is probable that financial institution may not be too enthusiastic in offering this service. Furthermore, significant expenses will be incurred in ensuring suitable physical infrastructure to maintain the dinars, especially in term of storage capacity.

6. CONCLUSION
Whilst the use of gold dinar in international trade is noble and certainly the right moves in line with the teachings of Islam, the current monetary and financial regime in force around the world may not be accommodative to this idea. As such the implementation of gold dinar in international trade not only require a very strong political will on the part of the Muslim state but also undivided support from ummah. Some skeptics argue that the dual pricing system would impose an extra cost on Islamic traders, making them less competitive. There is no reason to expect Islamic business to accept payment for good and services in dinars when the prices of other goods and services software fro the US, say, or machine tools from Japan are still set in dollars. Unless use of the dinar is to be enforced, it is difficult to see why the international business sector should adopt the currency. If enough countries signed up, then insisting of the use of dinar could work for a time. But economics initiatives imposed from above governments have a poor record of success. Take soviet-style socialism, or even the euro, whose economics foundations are being called into question with Germany’s breach of the stability –and-growth pact limiting nations’ budget deficits and debt. Of course, there is always oil. If the Islamic oil-exporting countries from Libya to Indonesia were to get together and agree to price their exports only in dinars, the rest of the world would have little choice but to pay for its energy imports in gold.

Therefore, for the implementation of the gold dinar system, central banks need not stock up gold reserves as suggested by some international agencies. It would be better to start small with whatever gold reserves are already in the possession, of a small group of participating countries. Countries with little gold reserve could trade with gold producing countries like South Africa, Mali, Russia, etc. in order to increase their gold reserve. In this way, problems can be tackled while they are still small without placing undue demand pressure on the existing gold market. If all developing countries rush into implementing the gold dinar, this may only increase the international gold price substantially. However, observing the present global financial scenario, in our opinion, it is better for countries and individuals to have a good portion of gold reserve and savings.

Nevertheless we can learn a lot from the gradually but firm development of Islamic banking globally which has proven viable and successful. We should not expect instant triumph by trying to change our monetary system overnight. Rather a tactful and prudent approach should be taken in order to ensure that the use of gold dinar only brings positive impact on our economy. Education on its use at all levels, from the governmental agencies, public and private business as well as banks, are vital for extensive acceptance by the target users.

The bilateral and Multilateral payment arrangements may not affect the national currencies much since the gold dinar only replaces the international reserve currencies like the US dollar for settling international trade. Let us prepare ourselves to the advent of gold dinar as a multi-faceted business tool for international trade and our commitment to the successful attainment of this noble objective should be a serious one and not something mentioned “en passant” for purposes of verisimilitude only.

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