Malaysia - August 2002

Gold Dinar Can Play Big Role in Global Trade

August 20, 2002

A two-day conference on "Stable and Just Global Monetary Systems" organised by the International Islamic University opened in Kuala Lumpur. The keynote speaker was the economic advisor to the Prime Minister, Tan Sri Mohamed Yakcop, who spoke on "Trade and the Gold Dinar - the next component in the International Islamic Financial System". Below is an extract from his speech outlining how the gold dinar could play a role in international trade

What is the role of the gold dinar?

The proposed gold dinar will not replace the domestic currencies. The domestic currencies (e.g. ringgit) will continue to be used for domestic transactions in the respective countries. The gold dinar will be used only for external trade among the participating countries.

Initially, the gold dinar will not exist in physical form. It will merely be defined in terms of gold. For example, if one gold dinar is equivalent to one ounce of gold, and the price of one ounce of gold is today at US$290, then the value of one gold dinar will be US$290 or equivalent in other currencies, on the basis of the prevailing exchange rates.

The actual settlement for trade can be by way of the transfer of equivalent amount of gold. It will not be a physical transfer of gold from one country to another, but a transfer of beneficial ownership in the gold custodian's account. Where it is not possible to transfer the gold, payment can be made by way of an equivalent amount in other acceptable currencies, but this should be the exception rather than the rule.

How will the gold dinar be used?

The gold dinar will be used, initially, for settlement of trade on the basis of bilateral payment arrangements (BPAs). Eventually the BPAs will be converted into a multilateral payments arrangement (MPA) with the participation of as many countries as possible. The following is an illustration of how these arrangements work:
Bilateral Payment Arrangement (BPA)

  • Two countries, say Malaysia and Saudi Arabia, sign a bilateral payments arrangement, under which trade balances will be settled every 3 months.
  • The trade will be denominated in gold dinar.
  • The value of one gold dinar is defined, say, as one ounce of gold.
  • The Malaysian exporters will be paid in ringgit by Bank Negara on the due date of exports, based at the ringgit/gold dinar exchange rate prevailing at the time of the export. Similarly, the importers will pay Bank Negara the ringgit equivalent of their imports.
  • The Saudi central bank will do the same for its exports and imports.
  • Say, at the end of the three-month cycle on March 31, the total exports from Malaysia to Saudi Arabia is 2 million gold dinar and the total exports of Saudi Arabia to Malaysia is 1.8 million gold dinar.
  • Therefore, for that particular three-month cycle ending on March 31, the Saudi central bank will pay Bank Negara 0.2 million gold dinar. The actual payment can be by way of the Saudi central bank transferring 0.2 million ounces of gold in its custodian's account, in the Bank of England in London, to Bank Negara's account with the same custodian.

The important point to note here is that, under this mechanism, a relatively small amount of 0.2 million gold dinar is able to support a total trade value of 3.8 million gold dinar. In other words, we optimise on the use of foreign exchange. Even countries that do not have a large amount of foreign exchange reserves can participate significantly in international trade under this mechanism.

Multilateral Payment Arrangement (VIPA)

  • The MPA functions in a similar fashion as the BPA, but it involves many countries and is, therefore, more efficient than BPAs.
  • To illustrate the efficiency of the MPA, let's assume that there are 3 countries involved, namely Malaysia, Saudi Arabia and Egypt.
  • Let us assume that the volume of trade between Malaysia and Saudi Arabia was the same as in the example with BPA, and we add the additional trade of those two countries with Egypt.
  • In the earlier example, a total of 10.7 million gold dinar of trade takes place among the 3 countries, with a net payment of only 0.1 million gold dinar.
  • In other words, the only payment required is for Egypt to pay Saudi 0.1 million gold dinar, but the total value of trade among the three countries is substantial, at 10.7 million gold dinar.
  • It is also possible to refine the mechanism further, whereby the credit or debit outstanding at the end of each quarter can be forwarded to the subsequent quarters and final settlement is made only at the end of the year.

The advantage of this refinement 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 minimised.

To summarise, we have spent a good part of the last two decades in establishing Islamic financial systems in our respective countries. I believe the time is now right to complete or complement the domestic systems with an international system - a system that will allow each Muslim country to reach out to one another and strengthen the level of trade - a system that will also allow the ummah to use its collective surpluses to fund each other, and help each other grow.

Islam places great emphasis on the unity of the ummah. Given this opportunity to strengthen our relationships, using the gold dinar, I believe it is incumbent on us as a fardhu kifayah to collectively implement this next component of the International Islamic Financial System.

There is a famous Chinese saying that the journey of a thousand miles begins with a first single step. I do not want to exaggerate, but if we can succeed in increasing substantially the volume of trade among the Islamic countries, the rest will follow.

The promotion of direct trade between Islamic countries, preferably through the mechanism of the gold dinar, could be the initial first step in the proverbial journey of a thousand miles.