The Value of Money: Rupees Value in terms of 2005 Gold Prices

The numerical value of Money:

The value of money is a subjective analysis. Mathematically the value of money is its numerical value. The numerical value in itself has no meaning without its description. For example 100 Rupees has no meaning unless people go to market and try to exchange it with other goods and services. So value of money is concerned with how much goods and services money can buy. The value of Rupees in 2005 is not the same as its value in 2014. It is not that the goods prices have increased, rather the value of rupees have declined.

Can orange or bananas be summed together?

Here is a source of widespread confusion. More of something in a lending contract is riba or interest. Here something must be identified. Even mathematician will consider a description is necessary for justification of an increment. For example four plus four equal eight does not mean that eight is more than four. Only when four and eight is described it is possible to say that eight is more than four. That is four bananas plus four bananas equal eight banana. And not, four bananas plus four orange equal eight bananas. Hence money must be identified in order to apply Islamic rule of riba or interest. During prophet’s time-period, there existed two different currencies that are Dirhams and dinars. Dirhams were silver money whereas dinars were gold money. Merely words have no meaning unless they are defined and described.

Description of Money is necessary in Islamic monetary contracts:

 

Because money is not defined or described, it is senseless to compare monetary contracts of different time period. Nobody will vote that 1990 100 rupees have same contents/value as its value in 2014. Following information gives value of money/description of money in terms of Gold.

 

 It can be found that the value of money remained 20 %  jan 2010 onwards as compared to its value in Jan 2005

What is Islamic about Current Accounts? Deposit products of Islamic banks.

Current Accounts:

These deposit products are based on the principle of loan contracts whereby the depositors will receive payments on demand while the banker can utilize this money for the purposes of lending and investing activities in riba free modes of banking.

Like conventional banking, Islamic banks are also involved in money creation process and maintaining payment system in the economy. There exist simultaneity issue in money creation process; in one way, each unit deposited in the current account in Islamic bank, the banker under normal circumstances extend 60% of it in lending activity whereas the remaining in investing activities so each unit deposited brings almost twice money in the system, the Islamic banker convince both his depositor and its investor/borrower that they both own the same money at the same time.

Now look at the other way of the relationship, when someone ask one unit of money from Islamic banker, the banker need not do anything else, it simply bring money out of blue albeit managing some cash almost 5% of loan amount from interbank Islamic money markets.

Generally the current account works on the principle of loans without interest payments (qard hasan) however, these loans are utilized by Islamic bankers in Islamic modes of finance, and nonetheless, Islamic bankers generally do not lend money on this principle.

For all practical purposes current accounts are considered as money. Excepting its function as unit of account which is done by reserve currency/ legal tenders, the current accounts act as object of exchange in trading activities such as buying goods with currents accounts, they also are means of payment both productive and non-productive and for gift purposes such as payment of civil servants. In case of bank run as it happens in the conventional banks anywhere in the world, the Islamic banker will also be unable to make its current accounts liquid. What is Islamic about Islamic bank current accounts? It is their use of money in halal mode of finance or investing activities and the use of profits of Islamic banks for Muslim cause.

Islamic Finance Instruments: Modarabah

About Modarabah Contracts:

This is a kind of partnership where one partner gives money to another for investing in a commercial enterprise. The investment comes from the first partner who is called “Rab-ul-Maal” while the management and work is an exclusive responsibility of the other, who is called “Mudarib” and the profits generated are shared in a predetermined ratio.

Excerpts taken from Meezan Banks Guide to Islamic Banking by Imran Usmani

Salient features of Modaraba:

    The owners of capital and the management of capital are completely segregated. The manager of capital may not include or invest their capital in the modaraba. The owner may not specify how to operate the business, however; they can keep an eye on the manager (the Mudarib).

In case of loss to modarabah, the owner of capital suffer losses whereas the modarib may not receive any remuneration for conducting business. In case of profit, the owners and the managers of capital enjoy the benefit in pre-agreed proportions.

In most of the cases, the owners of capital enjoys limited liability of the business conducted by the modarib.

Tax Benefits of Modaraba:

In pakistan modaraba is exempt from income tax if 90% of income is distributed to the modaraba certificate holders

Below is the list of Modarabah Management Companies and listed Modarabah Instruments:


List of Modaraba Management Companies in Pakistan

1. A.R. Management Services (Pvt) Ltd.

2. A.R.T. Modaraba Management (Pvt) Ltd.

3. Allied Engineering Management Company (Pvt) Ltd

4. Al-Noor Modaraba Management (Pvt) Ltd.

5. Al-Zamin Modaraba Management (Pvt) Ltd.

6. B.R.R. Guardian Investment (Pvt) Ltd.

7. BankIslamic Investment (Pvt.) Limited

8. Constellation Management Company (Pvt) Ltd.

9. Crescent Modaraba Company Ltd.

10. E.A. Management (Pvt) Ltd.

11. Fidelity Capital Management (Pvt) Ltd.

12. Global Econo Trade (Pvt) Ltd.

13. Habib Bank Financial Services (Pvt) Ltd.

14. Habib Modaraba Management (Pvt) Ltd.

15. I.B.L. Modaraba Management (Pvt) Ltd.

16. National Bank Modaraba Management Company Ltd.

17. Paramount Investments Limited

18. Premier Financial Services (Pvt) Ltd.

19. Prudential Capital Management Ltd.

20. Punjab Modaraba Services (Pvt) Ltd.

21. Royal Management Services (Pvt) Ltd.

22. Standard Chartered Services of Pakistan (Pvt) Ltd.

23. KASB Modaraba Management (Pvt) Limited

24. UDL Modaraba Management (Pvt) Ltd.

25. Islamic Investment Bank Ltd.

Listed Modarbas

1. Imrooz Modaraba

2. Tri-Star Modaraba 

3. Allied Rental Modaraba

4. Al-Noor Modaraba

5. Al-Zamin Leasing Modaraba

6. Unicap Modaraba

7. Trust Modaraba

8. B.R.R. Guardian Modaraba

9. Crescent Standard Modaraba

10. Modaraba Al-Mali

11. Modaraba Al-Tameer

12. Modaraba Al-Makatib

13. Modaraba Al-Istetmar

14. Constellation Modaraba

15. Elite Capital Modaraba

16. B.F. Modaraba

17. Fidelity Leasing Modaraba

18. Treet Manufacturing Modaraba

19. Habib Bank Modaraba

20. Habib Modaraba

21. IBL Modaraba

22. National Bank Modaraba

23. Paramount Modaraba

24. Equity Modaraba

25. Prudential Modaraba

26. Punjab Modaraba

27. Pak Modaraba

28. Standard Chartered Modaraba

29. KASB Modaraba

30. UDL Modaraba

31. Islamic Modaraba

Islamic Liquid Investments: Sukuk, an alternative Islamic Tradable Debt Instruments

The capitalist banking system cannot operate without a liquid tradable debt market. The fundamental function of a banking system is to guarantee a payments and settlement system and provide liquidity to the market economy. Accepting deposits and extending loans is primary function of a banking system. A banker leverages its capital or net assets and makes profit from the difference in interest paid to depositors and the interest received from lending money. However, this process left the banker with illiquid loan portfolio in its balance sheet. To circumvent this issue, the banker maintains adequate investment grade highly liquid sovereign or corporate bonds that are tradable in secondary financial markets such as interbank money markets.

For Islamic banker, the maintenance of liquidity using conventional bonds is un-Islamic as the selling of bonds constitutes riba/interest in islam. In its simplest form, selling of debt by discounting is prohibited in Islam. In Islam, a debt should be exchanged without any beneficial considerations. Hence, selling or exchanging debt is counterproductive to Islamic banker as it will not yield return to them.

Nonetheless, the Islamic banker has devised instruments that do not defy the rules of Shariah and truly provide the functionality that investment portfolio of a traditional bank requires such as the provision of liquid assets, tradability of investments, and investment grade instruments etc. These instruments are so called sukuk.

Sukuk Certificates represent proportionate beneficial ownership in underlying physical or real assets. In essence they are asset backed securities. As they are asset backed their market value changes due to changes in the underlying asset and therefore they can be traded in secondary markets. Considering a pragmatic approach, these bonds behave like ordinary sovereign bonds. And they actually act similarly in repurchase agreements as any other repo instruments.

Consider for example Pakistan International Airlines Sukuk certificates. How do they act like highly liquid investment grade Islamic financial instrument for the purposes of liquidity management? The PIA has no net equity, in fact, it has negative equity. So, how do its underlying net assets have positive value? It seems that sukuk certificates are merely a renaming of government securities to make them feel Islamic and nothing else.

Islamic banks in pakistan and their products

Article 38(f) of the Constitution of the Islamic Republic of Pakistan provides: “The

State shall …. Eliminate riba as early as possible.”  And this provision has led to the making of Islamic banking in Pakistan based on the principle of riba free banking. Riba can be defined as ‘an increase’ in a debt contract. In other words, in a debt contract, the exchange must not be a greater amount due to the borrower. The principle in debt contract in Islam is based on the principle of equality or at least on the principle of similarity.

However, the abstractness of capitalist money poses serious threat to the principle of equality. Both on the grounds of the existence of the issuing state of the capitalist money and that the abstract money can only be defined in monetary exchange ex-post and therefore even in the medium term such as five to ten years monetary exchange/ debt cannot be ascertained a priory that it is based on the principle of equality. For further discussion as to the nature of money in Islam versus Capitalism visit: http://capitalistmoney.blogspot.com

Following is the list of Stand Alone Islamic banks in Pakistan:

Meezan Bank Ltd

http://www.meezanbank.com

Al Baraka Bank Ltd

http://www.albaraka.com.pk/

Burj Bank Ltd

http://burjbankltd.com/

Dubai Islamic Bank Ltd

http://www.dib.ae/en/index.htm

BankIslami Pakistan

http://www.bankislami.com.pk/

In addition to the above stand alone Islamic banks, there are other conventional banks that have Islamic bank branches and windows through which Islamic mode of financing occurs. Please visit the list of private banks in Pakistan.

Following are some products offered by Islamic banks

            Musharakah

            Mudarabah

            Diminishing Musharakah

            Murabaha

            Salam

            Istisna

            Istijrar

            Ijarah

            Ijarah wa Iqtina
            Sukuk

Islamic Banking: the folly of Murabahah Financing

Murabahah is a particular kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred, and sells it to another person by adding some profit thereon.

The following excerpts further clarifies the method of financing taken from the Meezan Bank's Guide to Islamic Banking,DARUL – ISHAAT Karachi, 2002, by Muhammad Imran Ashraf Usmani

"The Bai' Murabahah involves purchase of a commodity by a bank on behalf of a client and its resale to the latter on cost-plus-profit basis. Under this arrangement the bank discloses its cost and profit margin to the client. In other words rather than advancing money to a borrower, which is how the system would work in a conventional banking agreement, the bank will buy the goods from a third party and sell those goods on to the customer for a pre-agreed price."

It is in principle selling of goods/commodities on deferred payment basis or in installments. As such there is no riba component in this transaction if it is applied in full faith.

Now look at what happens in Islamic banking case. In effect, the selling of goods carry on mark-up/riba/interest over the cost of goods sold. This is because the cost of goods sold for a banker given it's the level of financing must be different than the cost of goods sold for its customer. Take for example the case of Murabahah finacing for a Vehicle. The bank has three options to determine the cost of goods sold; first, it could be ex-factory price, second, it could be whole sale price, third, it could be retail price. Pragmatically, the option the bank choses are that of its customers. If the customer is an individual it charges the retail price as its cost of goods sold and if its customer is wholesaler it charges the wholesale rate.


Instead of revealing its true cost of goods, the banker appoints its customer as its agent to purchase the goods for the bank. This is mere a concoction to full fill the requirement to reveal the cost of goods sold however, a closer inspection would reveal that the customer do not act at the capacity of the banker but at his own capacity to purchase the good for the banker with a view to repurchase the same from the banker, albeit with mark-up. And therefore, the cost of goods incurred was that of customer and not the banker.


For the customer, as the cost of goods incurred belong to him and not the banker, if he had cash he would not have purchased the good from the banker using a mark-up over the cost of goods i.e. Murabahah financing. In effect the mark-up is riba/interest/financing cost or cost of not having money to purchase the good or the cost of loan to purchase the good. When does this method of financing will not constitute riba/interest or mark-up? This would occur when the banker reveals its true cost of goods sold. A cursory look would reveal that for Islamic banker with billions of rupees worth of Murabaha and professional financial consultants and marketing and purchase departments, its cost of goods must be less than that of its customer.


Conclusion:


Recent practice of Murabaha financing as the Islamic mode of finance should be considered an Islamic one if the cost of goods sold by the banker actually reflect the cost of goods to the banker and not its customers. Otherwise it's merely a concoction to circumvent traditional method of financing to Islamic method of financing.