THE AGE OF MAN AND MONEY DEGRADATION (A roundup of seminar on conventional versus Islamic banking held at Jinnah Univ

ersity for Women, Karachi on 17 April 2010) Jinnah University for Women carries the distinction of being the first women-onl y University of Pakistan. It was established in 1998 by an Act passed by the Sin dh Provincial Assembly. It is one of a number of educational institutions establ ished through the zeal and life-long dedication of legendry (late) Alhaj Rayazud din Ahmed. The name takes me back to my school days when Rayaz High School used to be a landmark of the vicinity we were settled in Our hosts were Professor Syed Rasheed Ahmed Zaedi, Dean and Chairperson Faculty Business Administration and his team of learned faculty members and highly energ etic students. A few names that my weak memory allowed me to retain are Kiran a nd Nudrat Waheed from faculty ; Roshan Ayesha and Anum from students side. My co -speaker in the seminar was Dr. Mujeeb Beig, a prominent scholar of Islamic Fina nce and a leading practicing Islamic banker. Owing to his preoccupation, Dr. Muj eeb joined us late; so I was the first to do my bit of job which was to apprise the audience comprising students and faculty of my views on conventional banking . The following is the summarized version of my talk. We are living in the age of man and money degradation. The factors responsible f or this condition are: Fiat money system Interest based economy Banks unbridled power to create credit money Expansionary and inflationary nature of world economic model Fiat money system allows a simple piece of paper printed by the government to as sume huge economic value without any intrinsic value. The 1945 Britton Woods sys tem pegged the value of US dollar at $35 to an ounce of gold. Other world curren cies were pegged to the US$. World central banks were entitled, and the US Feder al Reserve was bound, to convert their stock of dollars accumulated as a result of foreign trade into gold. The uncontrolled expansion of dollar resulting from an irrational urge to control world economy put the US in a tight corner when c laims for conversion to gold started rising worldwide. Encouraged by its formida ble military strength, US unashamedly took the unilateral decision of abolishing the convertibility of dollar to gold in 1971, in the Nixon era. That was a bi zarre economic decision that pushed the entire world economy into the grip of p erennial inflation. Pakistan rupee had to undergo a massive devaluation of 131 p ercent. The economies were now free to print as much money as they liked without any gold or any other precious metal backing. The interest based economy and th e fiat money system work in unison to fuel inflation. An interest charge adds to the cost of doing business and since interest has to be paid each year, the pr ices of goods and services keep on rising ad infinitum. As a rule of thumb, the rate of inflation approximates the ongoing policy rate which for the last five y ears or so has remained very high in Pakistan,. (between the existing 12 percent to 15 percent). Besides governments prerogative to throw as much fiat money into the economy as it may wish, the bank s unbridled power to create credit money adds another dimensio n to the inflationary economic model. Presently our total bank deposits stand at around four times the currency in circulation. The corridor between the total r eal money (issued currency) and total bank deposits is represented by the credit money created by the banking system. The conventional banking relies on its cor e business of accepting customer deposits and lending money to the three main s ectors of economy namely corporations, small and medium enterprises (SMEs) and c onsumers. It raises credit money by allowing loans to these sectors from the mon

ey it holds in the shape of customer deposits. The money so allowed as loans ult imately comes back to the banking system in the shape of fresh deposits in the n ame of some other individual or business entity. The total cash position of the banking system remains unaltered but the deposits go up. This is the mechanism t hat has resulted in a gap of around Rs.4 trillion between the total issued curre ncy and total bank deposits in Pakistan. The conventional banking operations are closely linked to the SBP policy rate wh ich is the rate state bank uses for overnight lending to the banking system. The money market that engages in the function of managing inter-bank money flow dev elops its own rate called KIBOR which is naturally pegged to the state bank poli cy rate. State bank s present policy rate is 12 percent and the KIBOR which changes on daily basis maintains its closeness to the SBP rate.Banks use KIBOR plus an a dditional 2 to 3 percent, or so, to charge their borrowing customers. Our banki ng sector is said to be strong and robust as it managed to brave the global fina ncial crisis somehow. But the unfortunate aspect of this scenario is that the st rength of the sector is not as much innate as it is greed-driven. During the las t decade the banks flourished on a copious inflow of liquidity in the shape of i ncreased home remittances after 9/11 and abrupt cuts and rises in the SBP policy rate. During SBP rate falls banks raked money by taking to the consumer credit market thereby earning huge interest money income. They, however, allowed to the ir depositors profit rates as low as 2-3 percent. During the SBP rate rising spr ee, they raised the price of their credit without increasing the rates of profit on deposits proportionately. The state bank, unfortunately, always feigned ind ifference to the atrocity of the banking sector. It was after a lot of hue and c ry that SBP set a minimum limit of 5 percent for profit on saving accounts. Even today, the banking spread which is the difference between the average lending r ate and average deposits profit rate is more than 7 percent which is unethically high. The existing economic model, relying on the fetish of free market capitalism buf fs like the American Milton Friedman rather than the sober economic theories of the Britisher Maynard Keynes or Austrian economists, is expansionary and inflati onary in nature. The economies following this model need to expand on a continu al basis, and if they don t do so, they are doomed - expansion through deliberately created budget deficits that warrant throwing of more money into the economy yea r on year; expansion through banking system that keeps on increasing the gap bet ween total bank deposits and currency in circulation by generating credit money; and expansion through uncontrolled creation of fiat money with zero intrinsic v alue. We are heading towards an era when a truckload of money wouldn t be enough to buy us a loaf of bread. How ? Just see the following table. Commodity/metal Prices in mid fifties Current prices Times Price increase

Flour per kg 33 paisa Rs.38/= 115 times Pulses per kg Re.1/= (or even less) Rs.200/= 200 times Beef per kg Re.1/= Rs.350/= 350 times Gold per tola Rs.100/= Rs.55,000/=* 550 times * gold price updated to 2012 level The astronomical rise in the prices of basic food items and economically importa nt metals without any quality improvement or value addition during the last 50-5 5 years gives an inkling of where we would be after another 50 years. The increa se in the prices of gold could be attributed to resource scarcity as world gold deposits cannot be replenished unless new finds are made. But procurement of a c ontinued rather enhanced supply of basic food items relates to land and animal f ertility which can always be, and is being continuously, improved through techn ological advancement. So what is the logic behind the price increase of such ite ms? This is the satanic power of our economic model that has not only hugely dev

alued our money but also eroded our human values. We are living in the age of ma n and money degradation. In the second session of the seminar, Dr. Mujeeb Beig took the rostrum and benef ited the audience with the latest and hand-on knowledge of Islamic banking. It w as not long after he started that I realized the difference between his approach and that of mine. In retrospect I sounded like a public speaker while Dr. Mujee b took to the role of a dedicated teacher focusing on the basic objective of imp arting valuable knowledge to the students. I felt engrossed in his easy-to-follo w explanation of the basics of Islamic banking. He informed the audience that Is lamic finance restricts itself to asset-based transactions rather than money-bas ed lending which is the function of conventional banking. It was this restrictio n to asset-based financing that saved the Islamic banking from worldwide financi al losses during the recent global crisis. The popularity of Islamic finance in the non-Muslim world owes much to the conceptual and systemic strength of the op erational framework that relies on genuine financial transactions rather than th e use of financial derivatives of dubious utility. Presently the Islamic banking assets are 5 percent of the total banking assets but the potential of this sector and the opportunities to expand its domestic an d international outreach are immense. Dr. Mujeeb briefly discussed the currently -most-used instruments of Islamic financing namely Murabaha, Ijara (leasing) and Diminishing Musharika. He said that Mudarabah is an Islamic business arrangemen t based on bringing together two basic economic factors, skill and capital. The asset management company of a Modaraba provides business skill while the Mudarab ah ccompany itself provides business capital. They share profit and loss in an a greed ratio. He further informed that Diminishing Musharaka is an emergent Isl amic finance instrument. Diminishing Musharaka is used to finance acquisition of property assets by the corporate, SME and consumer sectors. The total cost of t he asset is divided into two parts depending on customer s liquidity position. After pooling the two sources of fund, the property is purchased in the name of the I slamic bank. The fund portion contributed by the bank is divided into a number o f smaller amounts called units. The customer can take possession of the property by exercising the buy-back option. The ownership of the property is transferre d to the customer after he or she buys back all the units of the fund contribute d by the bank. During the intervening period, the customer keeps on paying the bank an agreed amount of rent. The paucity of time did not allow any intellectua l interaction with Dr. Mujeeb during which I would have loved to ask him to thro w some more light on the mechanism of Diminishing Musharaka, particularly the qu estion whether the rent is linked to the existing property rent market or the in terest-based money rent market. If linked to the Kibor- based money rent market, then how Diminishing Musharaka can be called Islamic? Shamsul Ghani