GOLD DINAR - USING BILATERAL PAYMENT ARRANGEMENT OR ELECTRONIC PAYMENT SYSTEM1 WRITTEN BY: NURADLI RIDZWAN SHAH BIN MOHD DALI nuradli@kms.uniten.edu.my BAKHTIAR ALRAZI HANIFAH ABDUL HAMID UNIVERSITI TENAGA NASIONAL

ABSTRACT2 The Malaysian Prime Minister Datuk Seri Dr Mahathir Mohamad first expressed interest in a universal currency that could help unite Muslim countries after attending the OIC summit in Doha, Qatar in November 2000. This led to an international conference entitled "Stable and Just Global Monetary System - The Islamic Dinar" organized by the International Islamic University in August 2002. After much research and consultation, a gold-based currency, called the ‘gold Dinar’, was put forth as a viable solution, and was expected to be implemented in 2003. This paper is an extension of the previous paper entitled "The Implementation of Gold Dinar. Is it the End of Speculative Measures?" published in the Journal of Economic Cooperation, SESRTCIC, Turkey volume 23, 2003. No 3. Keyword: Gold Dinar, Bilateral Payment Arrangement, Electronic Gold Payment System Introduction Several seminars and conferences were held in matters pertaining to gold Dinar in order to create the awareness of the government’s agencies, public and private sectors on the return of the gold Dinar as an international payment system. The seminars and conferences are also intended to find the best system or mechanism to ensure that the implementation of such system would not affect one’s economy. Currently there are two systems; one proposed by the Malaysian government (Bilateral Payment Arrangement3 & Multilateral Arrangement) and the other is by private gold currency electronic payment companies such E-Dinar and E-Gold. These trading systems are available for the importers and exporters in order to use the Dinar as trading settlement currency. The Malaysian government, in implementing the Bilateral
. Proceeding of Student Conference on Research and Development (SCOReD)Conference UNITEN, 4th and 5th December 2003. Universiti Tenaga Nasional. The authors wish to express their appreciation for many scholars and practitioners who made extensive comments on earlier drafts especially to Shaharuddin Zainuddin (AAOIFI), Jaafar Rihan (Central Bank of Malaysia), Dedy Syukma (Ekonomi-syariah egroup), Maimun Simun (Multi Media University), Rahmat Hernowo (Indonesia), Pengiran Haji Abdalhamid Evans (Director, Dinar & Dirham International Sdn Bhd), Norizaton Azmin (Multi Media University), A.L.M. Abdul Gafoor (Appropriate Technology Foundation, Netherlands), Samudjo (PT Apexindo Pratama Duta Tbk), Jaffer Manek FCCA FCEA (Director, Affilica International), Agus Nizam (Indonesia) Editor : Siti Norazila Bte Komar (Uniten)
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Bilateral Payment Arrangement - Letter of Credit (BPALC)

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Payment Arrangement – Letter of Credit (BPALC), however will still use the local currencies for domestic use. The gold currency will be used for international trade only. In the latter system of the electronic payment system companies, the usage of the gold Dinar could also be extended for the domestic users since payment and receipts of currency could be done electronically without having to convert the gold currency to Ringgit if both domestic users have the gold currency accounts. As for the BPALC, the Special Economic Advisor to the Malaysian Prime Minister, Tan Sri Nor Mohamed Yakcop, has stated that Malaysia will start using the gold Dinar in its trade with some Islamic countries by the middle of 2003. This statement was expressed after opening an international conference on "Stable and Just Global Monetary System: Viability of the Islamic Dinar" at Putra World Trade Center in Kuala Lumpur in August 2002. He went on to state that the percentage of the American dollar used in the world trade suggests that the world is highly depending on the American economic condition. A fall out in the America’s economy will drag all other countries along. Furthermore, the US Dollar is not immune from crisis because it is also defenseless against speculation activities. Furthermore, he questioned our undue reliance on the US Dollar since it is merely a piece of paper with no intrinsic value. What is the difference between a 5-Dollar bill with a 5Ringgit bill? Is the paper used for the Dollar made from a special type of paper, and thus carrying a higher value than the Malaysian Ringgit? Mechanism of Gold Dinar In the next section, both systems, the BPALC proposed by the Malaysian government and E-Dinar representing the gold currency electronic payment companies would be discussed. Bilateral Payment Arrangement (BPA) According to Nor Mohamed Yakcop (2002), the Gold Dinar in the BPA system will not exist in physical form during the transfer of goods. The member countries could settle amongst themselves on the net amount due to each other at certain period of time. The transfer of goods would merely be defined in terms of gold. For example, if one gold Dinar is equivalent to one gram of gold, and if the price of one gram of gold is at US 10.72 per gram4, then the value of one Gold Dinar will be of US$10.72 per gram or equivalent in other currencies, on the basis of the prevailing exchange rates (Yakcop, 2002). The process is illustrated as follows: • BPA is where the total trade between two countries are computed over a fixed period of time and only the balance between the total value of exports and imports paid in an agreed currency (Bank Negara Malaysia). Within the country a central agency would collect payments from an importer in local currency and pay an exporter also in the respective local currency. The balance between total exports and imports can be paid in the currency of the exporting country or in other acceptable currencies. Alternatively, the central agency or Central Bank could retain the balance in order to pay for future transactions. This will eliminate the need to hold foreign currencies or the US

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The exchange rate as at 22 April 2002 as quoted at http://www.e-dinar.com

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dollar. The BPA system is illustrated in the Appendix (Bank Negara Malaysia). • Based on the BPA framework, Central Banks of member countries will establish credit lines in gold Dinar. Member countries can settle amongst themselves the net amount due to each other at certain period of time i.e. 6 months. The surplus or deficit position arising from trade transactions of the member countries may also be used against future imports or exports or to be kept as balance in the gold Dinar account of the central bank (Bank Negara Malaysia). A Central Depositary (CD) that will act as a clearing house need to be established should the BPA transforms into multilateral payment arrangement to assume the payment function and custodian of the gold Dinar account. Therefore, the CD will monitor the net settlement and maintain gold Dinar account balances of each member country (Bank Negara Malaysia).

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Example Malaysia and Indonesia signed a bilateral payments arrangement, under which trade balances will be settled every 3 months and the trade will be denominated in gold Dinar. The value of one gold Dinar is defined as 4.25 grams of gold. Example: Export and Import between Malaysia and Indonesia Exp. to/Imp. Malaysia Indonesia Total Import From Nil 10 million Gold Dinar 10 million Gold Dinar Malaysia 20 million Gold Dinar Nil 20 million Gold Dinar Indonesia Total Export 20 million Gold Dinar 10 million Gold Dinar 30 million Gold Dinar From the table above, we could see that the total worth of exports is 30 million Gold Dinars and the payment of gold needed to settle the transaction is only 10 million gold Dinars. In this case, the actual payment of 10 million gold Dinars can be transferred from the Central Bank of Malaysia's account to the Central Bank of Indonesia's account at the custodian bank. The Central Bank of Malaysia can transfer the actual payment of 10 million ounce of gold from its custodian's account to Central Bank of Indonesia's custodian account. Under this mechanism, a relatively small amount of 10 million gold Dinars is able to support a total trade value of 30 million gold Dinars (Yakcop, 2002). If the above bilateral trade succeeds, the countries could go in multilateral trade5 arrangement, which could increase the total volume of trades by using minimal amount of gold Dinar. A suggestion from A.L.M. Abdul Gafoor is to use natural resources such as oil as a redemption medium to the Gold Dinar. He mentioned in a group discussion at IBFNET, “The ability to redeem the proposed currency in oil (a real commodity, unique and universally useful) will make it worth something in tangible terms, and therefore may eventually even develop into a reserve currency”. Applying this principle to our case, the 10 million gold Dinars due to Indonesia could be paid in equivalent amount of oil. The advantage is that no gold metal (or gold Dinar) will need to be shipped from one country to another at any time. In fact, the refusal of
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Multilateral trade is an arrangement between three or more countries in export and import.

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some countries to settle their trade balances by shipping the necessary gold was one of the main reasons for the failure of the old gold standard. A similar fate to the gold Dinar could be avoided by using oil as the redemption medium. (Gafoor, 2003) This is an extension of the BPALC mechanism proposed by the Central Bank of Malaysia, because the redemption will be in oil instead of gold. Let’s look at the example of Malaysia and Indonesia as mentioned previously. In the bilateral arrangement there appears a difference of 10 million gold Dinars that has to be remitted by the Central Bank of Malaysia to the Central Bank of Indonesia after the three months period. As suggested by Gafoor, the conversion and remittance of the 10 million gold Dinar will be in terms of oil equivalent instead of paper money or physical gold. Example: Export and Import between Malaysia and Indonesia Exp. to/Imp. Malaysia Indonesia Total Import From Nil 10 million Gold Dinar 10 million Gold Dinar Malaysia 20 million Gold Dinar Nil 20 million Gold Dinar Indonesia Total Export 20 million Gold Dinar 10 million Gold Dinar 30 million Gold Dinar A favourite question being asked by the public is do we have enough gold & silver reserve to back up the Dinar and Dirham issued? The answer is to revisit the fundamental of economic theory in the demand and supply equilibrium. The price of gold will depend on the demand and supply of the gold and silver. When the demand for gold is high while the supply is low, the price of gold will increase and vice versa. In this case, the price factor will play an important role in overcoming the scarcity problem. On the other hand, if other countries have gold and Malaysia has oil, trading gold with oil will move gold into the economic system. Furthermore, hoarding gold is prohibited in Islam because it disrupts the overall economy. Gafoor suggests that the oil be used as the redemption medium to solve the scarcity problems. The Processes of BPALC System6 1. Sale Contract The Importer and Exporter will agree to sell and buy the specified goods, or products at a certain amount of money and enter into sale and purchase agreement. In the sale and purchase agreement, the nature of the products being traded will be stated in the denomination of gold. Example –Indonesian Importer A wants to import 5000 units of computers from Exporter B in Malaysia. The price per unit of the computer is RM3000 and the price of one gold Dinar is RM173.1287. Therefore the contract price will be 17.33 Gold Dinar per unit which totals to 86,641.09 Gold Dinar. The gold prices will be determined at the market price on the date of the sale agreement and the importer as well as the exporter will convert the gold to their respective currencies. 2. Nominating the importer's designated banks

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Please refer appendix 1 for the flow chart. The price of one gold Dinar is based on 4.25 grams of gold as per 22 April 2003.

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The importer will nominate its designated bank with regards to the application of BPALC. The designated bank chosen by the importer will evaluate the importer’s credit worthiness according to the 5 C’s8 characteristics.

3. Approval of the BPALC a. Upon approval of the BPALC, the designated bank will advise the importer’s central bank on the issuance of BPALC. b. The designated bank will also send the original BPALC to the exporter’s designated bank. 4. Confirmation of Receipts a. The exporter’s designated bank will inform the exporter’s central bank upon the confirmation of receipts of the original BPALC from the importer’s designated bank. b. The Exporter’s designated bank will then inform the exporter upon the confirmation of receipts of the BPALC from the importer’s designated bank as a signal for the exporter that the goods could be shipped to the importer. 5. Shipping Goods. a. The exporter will ship the goods to the importer. b. The exporter will also send the related document such as bill of lading and etc to the exporter’s designated bank. 6. Exporting and payment a. Exporter designated bank upon receiving the documents from the exporter will pay to the exporter the amount of the goods shipped. b. The exporter’s designated bank will then send the documents to the importer’s designated bank. c. The exporter’s designated bank will then request the amount paid to the exporter from the exporter’s central bank. d. The exporter’s central bank will make the payment as requested by the exporter’s designated bank. 7. Letter of Advice a. The importer’s designated bank will inform the importer that the documents have been received. 8. Goods Released a. The importer will make payment of RM15,000,000.00 to the Importer’s Designated Bank for the documents to be released in order to take the goods from the warehouse. 9. Releasing The Documents to The Importer and Debit Authorization to Central Bank

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The 5 C’s are Character, Capacity, Collateral, Condition and Capability.

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a. Upon receiving payment from the importer, the importer’s designated bank will then release all the documents to the importer. The importer will be able to release the goods upon producing the documents at the warehouse. b. Meanwhile the importer’s designated bank will advise the importer’s central bank to debit its account for 86,641.09 Gold Dinar. 10. Payment between Central Banks. a. The exporter’s central bank would advise the importer’s central bank on the total amount of trade of 86,641.09 Gold Dinar. b. The importer’s central bank will remit payment of 86,641.09 Gold Dinar by crediting the exporter’s central bank account in gold denomination. As for the flow of the BPALC using gold Dinar denomination, it is the same as the normal BPA except that the currency used is in gold denomination instead of paper money. This is to avoid the currency risk and the risk associated with paper money such as inflation. The importer and exporter could ensure that their sale and purchase transaction prices are stable because the gold prices do not fluctuate like the paper money as illustrated in appendix 2. As for the central banks of the participating countries, they have to maintain a specific amount of physical gold deposit in a custodian bank, which could be nominated from any one of the OIC countries. At the end of 6 months period, they could settle the trade balance by either shipping the gold or shipping oil instead of paper money. Using The Electronic Payment System With the advancement of the technological era and the availability of Internet connections in almost every home of the middle-income earners, the problems of mobility of the gold currency could be solved no matter how much the amount of gold being transacted. This is because with the usage of the Internet, the gold currency could be paid without physically transferring it to the transacting parties. All they have to do is to open the gold currency accounts and settle off the balance by transferring the ownership of the gold currency from one to the other. The second method, which has been established in Labuan, Malaysia in the third quarter of 2000 with private ownership, is different from the BPALC suggested by the Central Bank of Malaysia in a sense that this system claims that it eliminates the third parties involvement i.e. bank. However, we found that this system still needs the presence of the banks. This is because even though there are no services for LC or trade facilities, the customers, still have to send the money to the company by telegraphic transfer services provided by banks. The service rendered actually incurs cost. However, if the company managed to come up with an online system such as the smart card payment system or using the Internet to affect payment, this will surely relief the customers especially when remitting Dinar in a small amount. The Dinar

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should be a convenient system without having the customers to go to the Banks. It should all be done on the Internet as Associate Professor Dr Hakimi, the coordinator of Gold Dinar Research Group of Universiti Sains Malaysia (USM), says that, "This e-Dinar provides us the convenience of carrying out sales or purchase of goods or all country-to-country financial dealings, domestic dealings and others through the internet" (Utusan Malaysia, 2002). E-Dinar system acts as a real time processing settlement system backed 100% by physical gold9 whereby no credit will appear anywhere in the system. The system requires the importers and exporters to open and maintain an account with the company. The company then provides the importer and exporters the flexibility to exchange their currency to gold Dinar denomination according to the market rate and exchange back the gold Dinar to paper currencies or gold coins as they wish. The proposal of maintaining the existing fiat money would be the reason why the company offers the conversion of gold Dinar to paper money. A problem in exchanging the paper money to the electronic gold Dinar is the transaction period. It normally takes 7 working days to complete the transaction. This is because the money has to be transferred by telegraph to New York first then only it will be transferred to Labuan. This might be due to the company’s policy which only accepts US dollar to be exchanged to the gold Dinar. However, the company claims that they will add all other major currencies in the future. This is the major disadvantage of the E-Dinar system because if I am a resident of Indonesia and would like to buy E-Dinar, I have to exchange my Indonesian Rupiah to US dollar. Only then I can convert the US dollar to Gold Dinar. The question is why wouldn’t the company accept any other currencies other than dollar? This we foresee as a burden for the customers. However, one of the advantages of using this system is that users could transact from home using a secured Internet. In addition, this system is opened to individuals who want to maintain or keep their assets in gold and is not confined to exporters and importers only. This system is actually promoting E-Commerce and one of the viabilities of this system is that the system could build a networking of businesses and inter payment system, which are reliable and accountable in terms of security, efficiency and effectiveness. It has been suggested by Dr Hakimi Ibrahim that the E-Dinar uses debit cards with smart card features to show just how much is left in the account in order to carry out business (Utusan, 2002). If the company could introduce the smart card to the customers, then it would be easier for the customers to transact in Dinar instead of carrying gold. However, since Malaysia will not abolish its Ringgit Malaysia and will keep utilizing the currency for local use, then implementing the debit card in this early stage and in a small scale will be expensive and costly. Furthermore, customers could spend e-Dinar only to any recipients who open e-Dinar account or in other words, they must have Internet access. A. Nizam (2002) says "E-Dinar is good as long as the issuer is a credible bank and this E-Dinar could be transferred to
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Repository in Dubai, UAE.

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real gold or local currency easily and inexpensively. In addition the issuer of E-Dinar must also be well known in its reputation, in order to avoid fraud ".

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1. 2.

3. 4. 5. 6. 7.

Advantages of the BPALC and E-Dinar System BPALC System - Proposed By E-Dinar - Private Electronic Gold Malaysian Government Payment Company Controlled by the central banks of the 1. It is privately owned importers and exporters. The importers and exporters could use 2. Eliminates the needs of the third parties the bank facilities to finance their trade. No physical gold is transferred, only if 3. Open to all who want trade or maintain necessary account in gold denomination Eliminate the exchange losses and 4. Real time processing transaction and no currency risk credit exist in anywhere in the system It is the same as the normal BPA except 5. Eliminate the exchange losses and that it is denominated in gold currency risk It could be designed according to the 6. It is designed according to the syariah law syariah law Suitable for big players in the import 7. Could be catered for the e-commerce and export markets. business (small and medium industry). 8. Advantages for businesses who accept payment in e-Dinar a) Nearly instantaneous clearing and funds availability b) Low processing fee - 1%, or at most USD 50 cents debited in metal 9. Stable store of value and diminished exchange risks 10. Divisibility, security, fungibility, and portability.

Conclusion The usage of Dinar is well rooted in history of the world though it has been abandoned. Great strides are being made in going back to Dinar, with the support of the Government and the encouragement and guidance of Central Bank of Malaysia, to ensure that Dinar becomes a truly viable alternative trading currency among OIC countries. If the OIC countries are to agree to accept the Gold Dinar, evaluation on the capability to implement it must also be conducted. As for the implementation of the gold currency, both systems have their own advantages and target market. Regardless of mechanisms being used, as long as the trade transactions use gold as their medium of exchange, it is acceptable. The electronic gold payment system is a promising mechanism but need more work to be done. The technological or computer literacy plays an important role in ensuring the success of the e-Dinar system. As for Malaysia’s e-commerce industry, the number of players is still small, which is 1 percent from the total online users. Failure in persuading the online users to shop online would become a major problem to the electronic payment system companies because without the online users who

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shop online, then the system proposed will only look good in theory. As for now, the BPA system looks promising because this system transacts in a large scale between exporters and importers in participating countries. The goods imported by the importers then would be resold in the countries to the end consumers. On the other hand, the wholesalers and retailers would buy from these importers and they do not deal with the Gold currency but transact in their local currencies before distributing the goods to the end consumers. However, with the level of acceptance in using the gold currency keeps on increasing, and with extensive promotions in the usage of ECommerce and Gold currency, the electronic payment system using gold as denomination could become a reality in trading system. The mechanisms are only waiting for us to put them in place: it is now the right time for us to act for the sake of the Al-Mighty, His Messenger, ummah and unity of the Islamic countries.

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Works Cited Al Qur'anul Karim Al Hadith Anonymous, "Dinar not confined to countries with bilateral payment arrangement" Utusan Online 3/5/2002 Available: http://www.utusan.com.my/utusan/archive.asp?y=2002&dt=0502&pub=Utusa n_Express&sec=Front_Page&pg=fp_03.htm, 1/5/2002. Anonymous, "Mooting The Usage Of Islamic Dinar As World Currency", New Strait Times - Management Times, 30/1/2002. Anonymous. "Dinar Emas: Malaysia Boleh Guna Dengan Negara Islam". Utusan Malaysia. Kuala Lumpur 23 Oct 2002. Anonymous. "Gold Dinar Transactions Can Be Carried Out Via Debit Cards". Utusan Malaysia. KUALA LUMPUR April 29. Anonymous. Western World Would be Unwise to Ignore Proposal for Gold Dinar Currency Among Islamic Countries; available at www.minesite.com/features_archive (16 December 2002). BBC News, Oil and Gold Prices Surge, http://news.bbc.co.uk, 11 September 2001. Bookwright of Denmark. "A Young Muslim's Book of Money". Available: http://www.bogvaerker.dk/Bookwright/Money.html. Chapra, Dr M Umar. "Monetary Policy in an Islamic Economy" Money and Banking in Islam. International Centre for Research in Islamic Economics, King Abdul Aziz University, Jeddah. 1983. Dato Sri Dr Mahathir Mohamad "Merealisasikan Dinar Emas." Utusan Malaysia. 27/3/2002. Daly, Bill. “Pennsylvania Dutch” Social Credit Egroup. Socialcredit@topica.com E-Dinar Ltd. "History of the Dinar" Available: http://www.e-Dinar.com/en/ Emarketer http://www.emarketer.com/ Hj. Zainal Abidin , Amat@Anwar. Sejarah Penggunaan Matawang Dinar. Proc. of National Dinar Conference. Kuala Lumpur 2002. Kolej Universiti Islam Malaysia, 2002. Jantan, Haji Osman. Pedoman Muamalat dan Munakahat. Pustaka Nasional Pte Ltd. Singapore. 2001. Jason Hommel, Gold & Hypothetical (constant) Growth Rates, www.geocities.com/bibleprophesy/goldrates.htm, 2000. Konac, Enver Hakan. "The East Asian Crisis: Lessons for OIC Countries". Journal of Economic Cooperation 21, 2 pg 15 - 24, 2000. Lietaer , Bernard Global Currency Speculation And Its Implications. International Forum on Globalization (IFG) seminar. 1997. Mark Skousen, A Golden Comeback I, www.libertyhaven.com, 1998. Mushtak Parker; Malaysia Hopes to Start Using Islamic Gold Dinar in Trade available at http://www.arabnews.com/Article (27 November 2002). OIC Fiqh Academy Resolutions: "What Shariah experts Says. Currency Exchange", International Journal of Islamic Financial Services Vol. 2 No.2 available at http://islamic-finance.net/journals/journal6/art3.pdf. Peter S. Rose, Money and Capital Markets – The Financial System in an Increasingly Global Economy, Richard D. Irwin, Inc., 1994. Reports of the working groups on 1) Transparency and Accountability; 2) Strengthening Financial Systems; 3) International Financial Crises, Bank For International Settlements. October 1998.

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Reuters. "Malaysia Plans To Initially Use Gold Dinar Within Small Group" The Star, 2/5/2002. Rohter, Larry. "Freeze On Deposits Is No Holiday, Argentines Find" National. Buenos Aires, April 24, 2002. Siddiqi, Muhammad Nejatullah. Muslim Economic Thinking. "A Survey of Contemporary Literature". Great Britain. Robert MacLehose and Co. Ltd. 1981. Statistical, Economic and Social Research and Training Centre For Islamic Countries (SESRTCIC); Annual Economic Report on the OIC Countries 2001, presented in 17th Session of the COMCEC October, 2001. Vadillo, Rais Umar Ibrahim. The Return of The Islamic Gold Dinar. New Edition, Madinah Press 2002. Yakcop, Nor Mohamed. The Role Of Central Banks In The Implementation Of The Gold Dinar Proposal. International Seminar of "Gold Dinar In Multilateral Trades" organized by Institute of Islamic Understanding Malaysia. 22-23 Oct 2002.

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Appendix 1

Flow Chart of BPALC Transactions10
1 SALES CONTRACT EXPORTER GOODS 5.a DOCUMENTS 4.b BPA L/C 6.a PAYMENT 9.a DOCUMENTS PAYMENT IMPORTER

5.b

8

DOCUMENTS 6.b EXPORTER’S DESIGNATED BANK EDB 6.c.iI REIMBURSEMENT AUTHORISATION OF L/C ISSUED 3.a 13 PAYMENT

3.b BPA L/C

IMPORTER’S DESIGNATED BANK - IDB

REQUEST

OF L/C RECEIVED

ADVICE

4.a

6.c.i

9.b

ADVICE OF PAYMENT A EXPORTER’S CENTRAL BANK - ECB IMPORTER’S CENTRAL BANK - ICB

B

PAYMENT

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Source Bank Negara Malaysia, 2003.

ADVICE

DEBIT

APPLICATION 2

7 ADVICE BPA L/C