Development of an RF Monetary System to Develop a Fair RF Pricing Discipline
A valuable research on money in Islam was documented in an Arabic language book published by Albaraka and authored by Dr. Omar Kamel.[1]
A Historic Review of the Definition of Money and Monetary Discipline According to the Judeo-Christian-lslamic Shari'aa Law by Many RF Scholars
Ibn Khaldun (732-808 A.H., 1332-1406 c.e.), in his book The Muqaddima,[2] introduced his recommendations for a sound monetary policy. He stated that he is “against the policies of government authorities to manipulate and play with the value of currency.” He also expressed his deep concerns about the economic devastation that occurs “if the authorities are tempted to debase the value of money in order to build palaces for the rulers, the rich and affluent and to finance mercenary armies.” He concluded that “these policies will cause inflation and population will lose confidence in the currency.” He recommended to government leaders that they should make justice as their prime goal. He stated that “protection of the purchasing power of money has to be implemented as a matter of justice.” To reach that goal he recommended that governments devise an independent monetary agency and policy under the authority of the chief justice. He qualified that person to be a “God fearing person who can stand firm to prevent the rulers from carelessly toying with an independent monetary policy leading to reducing the value of currency by debasing it.” He concluded that “a stable monetary policy aiming at the protection of purchasing power of money is a must as a matter of establishing justice.” He then concluded that what is ultimately needed is less government expenditure on palaces and bureaucracy, less expenditure on mercenary armies, and less taxation. All these policies of establishing and enforcing justice will help in achieving the ultimate goal of a stable currency that will enhance and produce prosperous trading and production in the society.
Ibn Taimiya (661-728 A.H., 1263-1328 C.E.), in his book The Edicts (Al Fatawa) stated that money is a calibrating device and is not the thing in itself and it should not be considered for what it is but for what calibrating role it plays in defining prices in the market. In conclusion, Ibn Taimiya states that the purpose of money, gold and silver (at that time), is to be used as a calibrating reference tool for valuing assets through which the value of these assets is defined. Money, gold and silver, is not intended to be used for its commercial use primarily and if exchanged for each other (gold for silver or silver for gold) in transactions that settle later on in the future will make the intention of using it to be in trading and not as a calibrating reference. This in itself contradicts the rule of using it as a standard reference to calibrate value in the open market.
Ibn Qayim Al-Jawziya (691-751 A.H., 1292-1350 C.E.), in his book Ilam Al Mowaq'ueen Ann Rab'il Alameen (Informing Those Who Need to Know about the Rule of the Law of the Lord of the Universe), stated that money — or silver dirham and gold dinar — is not intended for what it is (in its matter as precious metals), but its use is intended as a reference to value and as a transacting medium in order to transact the exchange of other commodities and products in the marketplace. If these pricing commodities (gold and silver) are used as trading commodities for what they are, then the benefits to the people would be spoiled.
On the matter of the two pricing reference commodities, gold and silver, Ibn Khaldun stated that the Lord, the most supreme, has created the two metals; gold and silver, as a reference tool to calibrate against in order to establish a standardized value for every seeker of assets. These two metals are considered the ammunition (al-zakheera), implying a store of value, and the exchange medium in the market place (al-qunya.) If an individual owns other metals or products, then it is meant that the value of these two pricing metals change in terms of these other products and nonpricing metals in the marketplace. These two metals (gold and silver) are the origin and the reference in calibrating earnings, the medium of exchange valuation, and the store of value.
Ibn Rushd (Averroes) (520-595 A.H., 1126-1198 c.e.), in his book The Beginning for the Researcher and the End for the User (Bedayat Al Mujtahid tva Nihayat Al Muqtasid), states that prices are stated in terms of gold and silver and the purpose for the use of these pricing commodities should primarily be for calibrating prices and not in using them in different applications that render them to be traded in the marketplace.
Imam Al Ghazaly (450-505 A.H., 1058-1111 c.e.), in his book Revival [of life) in the Sciences of the Faith (lhia UloomAl Deen) states that the two pricing reference metals, gold and silver, were created by God the Supreme in order for exchanging hands as a calibrating reference medium for users in order to define the value of assets in a just and precise fashion. He added that another wisdom and purpose for the creation of gold and silver is to use them as a valuing reference in the market and as a medium of exchange because these two metals are precious and their use is not primarily essential (at that time), and their calibrating valuation of other things in the market are the same. These calibrating metals are in fact a means to store value.
Scholars also made a first attempt to define an RF monetary policy that would help in the preservation of the pricing value of currency:
Al Mawardy (364 — 450 A.H., 972-1058 c.e .), in his book Facilitating (and Explaining) the View (Tas'heel Al Nazar), explains the need of the state to fight the tendency of governments to debase currencies (gold and silver) by mixing it with other metals. He states: “The head of state must know that money; gold Dinar and silver Dirham, if handled properly will benefit the state and its citizens. This main purpose outweighs by far the personal benefit to the head of the state. If the head of state allows debasing it, by for example mixing silver with other metals, then the benefit of doing so is overwhelmed by the harm it causes. In addition, this act of fraud produces a currency that tarnishes with time and with transactions from hand to hand resulting in that citizens will refuse to use it for settling transactions. The ultimate result will be that the citizens use bartering instead of these defrauded currencies in their transactions. In addition, if the head of state is known for defrauding currencies by debasing it, then people will use another currency issued by a more credible currency issuer. If the currency is pure and is free from fraud (if it is debased), people will feel that it is a safe currency for storing value and will use it as a currency of choice for their savings and will render it as the preferred currency for transacting trade and business.”
Al-Raghib al-Asfahani (d. 508 A.H., 1108 c.e.), in his book The Excuses that Lead to the Best Application of Shari'aa {Al Zaree'aa ela Makarim Al Shari'aa), says: To know that money, gold and silver, is one of foundations of this worldly life, and if we believe that it does not exist, people will find it difficult to conduct their living needs and will not be able to coexist and work together to benefit mutually from their specific products and services.
That is why it is said that the (silver) dirham is a silent source of governance and of justice, and it is called in Persian the dinar. The word dinar means in Persian the debt issued by governments and its rulers. Because of its critical governing role, God has warned those who amass it and do not circulate it in the economy of a grievous punishment on the Day of Judgment as revealed in the Holy Qur'aan, Chapter 9 (Sura Tauba), verse 34:
9:34 .. . And there are those who amass gold and silver and spend it not in the way of Allah, announce unto them a most grievous penalty
9:35 On the Day when heat will be produced out of that (wealth) in the fire of Hell, and with it will be branded their foreheads, their flanks, and their backs. “This is the (treasure) which ye buried for yourselves: taste ye, then, the (treasures) ye amassed!”
He elaborates that these grievous punishments have been promised by God because not circulating money in the economy will result in the lack of liquidity, making life difficult for the citizens.
Al Maqreezy (776-845 A.H., 1364-1442 c.e.), in his book about the economy of Egypt titled The Rescue of the Nation by Uncovering the Setback (Eghathatul Ummah be Kashf Al Ghummah), details the reasons for the crippling inflation Egypt suffered at his time, which destroyed the economy, the decline of Egypt's prosperity, the rise of poverty, and the prevalence of needy people among the Egyptian citizens. One of the main reasons was the minting by the Egyptian government at that time of debased currency. He concluded that there were three causes for the plight of hunger among the Egyptians until 1405 (808 A.H.). The most important reason has been the increase of money supply in a debased form by mixing the silver with another metal to reduce its purity.
The RF Institute[3] started a research program to make modern monetary sense of a well-known Hadeeth by the Prophet Muhammad (pp). This is the Hadeeth of “Gold for Gold”[4] detailed earlier while developing the RF Commodity Indexation Discipline (please see references and quotes in the notes at the end of this chapter). This research was initiated as a result of our original in-depth research about the prohibition of riba/ribit in the Torah, the Bible, and the Qur'aan. The conclusion of this research was that Islam came to reinforce the prohibition, in the Torah and the Bible, of abusing the rights and taking advantage of the poor and the needy through the use of loans given (money rented to them) by the rich. In fact, Islam prohibited all kinds of loans (qard, meaning a bite) except one loan: the qard hassan (benevolent loan). This RF law prohibited lending (renting) money and using it to take advantage of the poor and the needy that would eventually lead to their enslavement in an effort on their part as forced by the lenders to pay off the loan in terms of work or by confiscating their land and properties.
Further research indicated that the real historic and revolutionary contribution of Islam was the development, for the first time in history, of a fair and well-rooted system for financing commerce and business in an RF format. As it is known historically, Moses (pp) and Jesus (pp) were commissioned in the ages of slavery and agrarian societies. When the Prophet Muhammad (pp) was commissioned, international commerce with trade caravans was flourishing. The challenge was how to fairly calculate the profit and loss of a trade transaction using different local currencies in varying foreign lands like Ethiopia, China, India, Persia, and other communities and countries in the Roman and Byzantine empires. Our research concluded that this may have been the real motivation of what we call the commodities' Hadeeth in order to set fast and firm standards and calibrating reference pricing disciplines in order to normalize the value of the trades using these commodity-based standardized currencies.
The RF Institute developed what is introduced as the beginning of a basic RF monetary discipline, which is called the RF Commodity Indexation Discipline in which we normalize prices away from fiat (paper) currencies like the dollar and the euro. To bring this discipline closer to mind, we reiterate in this chapter what was discussed in Chapter 5. Let us assume that a qard hassan (a benevolent loan with no increase) of $100,000 was given in March 1971. The agreement to repay this qard hassan can be expressed in one of the many following options:
■ Pay back in U.S. dollars the amount of $100,000, say, in 2012.
■ In case the country is a rice producer only and relies on rice as a reference currency, pay it back in the same amount of rice. If we do it in rice, then $100,000 would buy, in 1971, a total of 18,868 hundredweights (cwt) of rice (rice in 1971 was selling for $5.30/cwt). That is, based on this agreement, the qard hassan, when paid back in 2012, will be paid back in the exact amount in rice or 18,868 cwt of rice (which reached approximately $15/cwt in 2012). This is equivalent to $283,000!
■ In case the country is a wheat producer only and relies on wheat as a reference currency, pay it back in the same amount wheat. If we do it in wheat, then $100,000 would buy, in 1971, a total of 70,922 bushels of wheat (which in 1971 was selling for $1.41 a bushel). Based on this agreement, the qard hassan, when paid back in 2012, will be paid back in the exact amount in wheat or 70,922 bushels of wheat (which reached approximately $7.90 a bushel in 2012). This is equivalent to $564,000!
■ In case the country is a corn producer only and relies on corn as a reference currency, pay it back in the same amount of corn. If we do it in corn, then $100,000 would buy in 1971 a total of 70,423 bushels of corn (which in 1971 was selling for $1.42 for a bushel). Based on this agreement, the qard hassan, when paid back in 2012, will be paid back in the exact amount in corn or 70,423 bushels of corn (which reached approximately $7.63 a bushel in 2012). This is equivalent to $537,324! Please notice the approximate similarity in value if one uses wheat and corn — two substitutable staple grains.
■ In case the country is a silver producer only and relies on silver as a reference currency, pay it back in the same amount of silver. If we do it in silver, then $100,000 would buy, in 1971, a total of 61,350 ounces of silver (which in 1971 was selling for $1.63/ounce). Based on this agreement, the qard hassan, when paid back in 2012, will be paid back in the exact amount in silver or 61,350 ounces (which reached approximately $34.14/ounce in 2012). This is equivalent to $2.1 million!
■ In case the country is using gold as a reference standard for currency, pay it back in the same amount of gold. If we do it in gold, then $100,000 would buy in 1971 a total of 2,857 ounces of gold (which was then priced at $35/ ounce.) Based on this agreement, the qard hassan, when paid back in 2012, will be paid back in the exact amount in gold or 2,857 ounces of gold (which reached $l,700/ounce in 2012). This is equivalent to $4.85 million!
In today's economy countries produce a basket of basic commodities that are varied from country to country. That is why we started a research program at the RF Institute to come up with an algorithm that defines the real value of local currencies based on local production of staples and natural resources instead of tying (pegging) these currencies to a major currency like the dollar, which value is defined by a completely different matrix of commodities that relate to the local U.S. economy.
We proceeded to apply this Commodity Indexation Discipline to study prices in the United States of homes, crude oil, food commodities, natural gas, and even the stock market in terms of the reference commodities based on the Hadeeth of the Prophet (pp), and here is a summary of the results:
1. When fiat (paper) money is normalized, in terms of pricing commodities, economic bubbles can be readily identified ahead of time and remedial actions can be taken to avoid participating in or help in taking advantage of the lack of these bubbles. We could identify, ahead of time, the housing bubble in America, starting from the fourth quarter of 2005 to 2006 when the overpricing started to give way, before it burst. We, at LARIBA, using this rule, helped many of our customers not to purchase homes at the peak prices in the U.S. housing market in the states of Arizona, Nevada, Massachusetts, and northern California, as well as Washington, D.C. In fact, based on this RF Commodity
Indexation Discipline, back in 2008, we projected that the depressed prices of homes and undervalued housing market would last for five to seven years and issued our recommendation to buy homes then. It is interesting to note that the housing market in the United States has recovered in mid-2013 as the RF discipline has projected. In fact, because of the housing bubble, the level of housing finance in the bubble period declined, by design, at LARIBA and started to rise sharply, as was recommended to many of our customers, in response to our call to start buying, as shown in Exhibit 6.3 (LARIBA financed a total of $1.25 billion in RF home mortgages from 2000 to 2012).
Let us look at the chart that depicts the history of home prices in the United States in U.S. dollars. We can see that average house prices in the United States kept rising until they peaked around 2006/2007 as shown in Exhibit 6.4.
Exhibit 6.5 shows the home prices in gold after taking away the effect of fiat (paper) currency and using the pricing currency of gold based on the Hadeeth detailed earlier.
In general, we can see that after taking the influence of the fiat (paper) currency away from pricing and using instead a standard reference pricing currency like gold in Exhibit 6.5 or rice in Exhibit 6.6,
Mortgages Originated by the LARIBA Group ($ Million)
EXHIBIT 6.3 History of Mortgages Originated by LARIBA 2001-2012
Price of Average U.S. Home in Dollars
EXHIBIT 6.4 Average Price of a Home in the United States
Price of Average U.S. Home in Ounces of Gold
EXHIBIT 6.5 Price of U.S. Homes in Gold
Price of Average U.S. Home in Hundredweights of Rice
EXHIBIT 6.6 Price of U.S. Homes in Rice
home prices do not show an ever-rising price behavior as experienced in Exhibit 6.4 with the use of fiat money (the U.S. dollar). However, we find that when we use a reference commodity standard calibrating currency, prices fluctuate up and down depending on the market forces of supply-and-demand factors, and prices may drop drastically or skyrocket due to any market manipulations and/or speculation.
To decipher that relationship, we drew a channel — an upper price level and a lower price level — that reflects the range of normal price fluctuations based on the “stochastic technical analysis and charting” techniques of the market forces of supply and demand, which is used in stock market technical analysis. Any time the price is lower than the lower level of the channel, that gives us an indication of an undervalued housing market and it gives a buy signal. Any time the opposite is observed, that is, the price penetrates the upper level of the channel, that gives us a red flag about the overpricing and the beginning of an economic pricing bubble in the housing market created by speculation, and it is taken as an early warning signal of selling and getting out of the market. As can be seen, we noticed this trend to start from the beginning of 2000, and the house price bubble continued to grow until it peaked in 2004/2005 and started its stagnation and decline afterwards. Because of the use the Commodity Indexation Discipline at LARIBA as an early warning flag, this has alerted our management and underwriters to pay very close attention to the process of investing with (financing of) homes for our customers.
In order to respond to some monetarists in the money marketplace and in academia who may say that this is “another” call to return to the “gold standard,” we have studied the pricing of housing and each commodity in terms of other commodities, including gold, silver, rice, wheat, corn, and crude oil. And the results were very educational. Exhibit 6.6 shows the pricing of homes in rice (a staple food) as a standard pricing tool in case the only commodity used in America was rice. The same trend experienced with gold (Exhibit 6.5) is revealed in Exhibit 6.6 when another food staple (rice) commodity is used.
2. Using the same approach described earlier, we can also identify the fair value of crude oil in the market and identify if current prices of gold or crude oil are fair prices based on the market forces of supply and demand or they are hyped through speculation in the commodities' futures and options markets. We at LARIBA, for example, think (as of 2011) that the next bubble to burst will be gold. Based on Exhibits 6.7 and 6.8, we project that the fair market value of gold is between $850 and $1,000 per
Price of Each Barrel of Oil in Dollars
EXHIBIT 6.7 Price of a Barrel of Oil in U.S. Dollars
Price of Each Barrel of Oil in Ounces of Gold
EXHIBIT 6.8 Oil Price in Gold
ounce and that the oil price may range between $65 and $80 a barrel in the next two to three years (2014-2015).
3. We also discovered that after taking the effect of fiat currencies away from pricing food commodities like what we see in Exhibit 6.9, the agricultural food commodities prices declined precipitously after the closing of the gold window in August 1971 (by President Nixon) as shown in Exhibit 6.10. Despite higher agricultural food commodities prices in U.S. dollars, as shown in the chart in Exhibit 6.9, their value in terms of other commodities like gold, silver wheat, and rice have declined precipitously, and as shown in Exhibit 6.10 stayed low and fluctuated between a High and low in a market channel that defines the forces of supply and demand. That explains the reason why farmers worldwide — outside some major economies in North America and Eurozone — have deserted their farms to live in the cities. These farmers also helped train and educate their children to enable them to leave the farm and become city dwellers. It is also interesting to note that the price of one food commodity (say rice in terms of wheat, as shown in Exhibit 6.11) were steady, and that reflected the real exchange value of two food staples as prices fluctuated around a mean market channel that defined the free-market forces of supply and demand.
Price of Each Hundredweight of Rice in Dollars
EXHIBIT 6.9 Price of Rice in U.S. Dollars
Price of Each Hundredweight of Rice in Ounces of Gold
EXHMT 6.10 Price of Rice in Gold
Price of Each Hundredweight of Rice in Bushels of Wheat
EXHIBIT 6.11 Price of Rice in Wheat
It is believed that the most pressing challenge to RF Shari'aa scholars and RF bankers in the twenty-first century is to develop a comprehensive RF monetary system that will be the foundation of fair pricing in the marketplace and an instrumental tool that can be used to guide central bankers in the stabilization of local currencies and their exchange rates on the international foreign exchange markets. This can be done by using a basket of reference calibrating pricing commodities, metals, and products to normalize prices instead of just using one commodity (food staples), precious metal (gold or silver), or energy sources (oil and gas.) We need to use this beginning as a foundation to start a comprehensive research program in the areas of the RF law and the RF monetary system.
- [1] Omar Kamel, Money and the International Monetary System, Economic Studies Series (Jeddah, Kingdom of Saudi Arabia: Dallah A1 Baraka Group).
- [2] Ibn Khaldun, The Muqaddima: An Introduction to History, translated from Arabic by Franz Rosenthal, 3 vols. Bollingen Series, No. 43 (New York: Pantheon, 1958). Cited in a research authored by Hon. Dr. Selim Karatas, Foundation for Science Technology and Civilization under the title “The Economic Theory of Ibn Khaldun and the Rise and Fall of Nations.”
- [3] The RF Research Institute for RF Lifestyle, Economics and Monetary Discipline is part of the LARIBA System. It was established in 1998 by the author in Pasadena, California.
- [4] Miscellaneous references on the Hadeeth of RF Monetary Discipline: ■ The Prophet(s), said, “Sell gold in exchange of equivalent gold, sell silver in exchange of equivalent silver, sell dates in exchange of equivalent dates, sell wheat in exchange of equivalent wheat, sell salt in exchange of equivalent salt, sell barley in exchange of equivalent barley, but if a person transacts in excess, it will be usury (Riba). However, sell gold for silver anyway you please on the condition it is hand-to-hand (spot) and sell barley for date anyway you please on the condition it is hand- to-hand (spot).” ■ From Abu Sa'id al-Khudri: The Prophet (s) said: “Do not sell gold for gold except when it is like for like, and do not increase one over the other; do not sell silver for silver except when it is like for like, and do not increase one over the other; and do not sell what is away [from among these] for what is ready.” (Bukhari, Kitab al-Buyu', Bab bay'i al-fiddati bi al-fiddah; also Muslim, Tirmidhi, Nasa'i and Musnad Ahmad) From 'Ubada ibn al-Samit: The Prophet said: “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt — like for like, equal for equal, and hand-to-hand; if the commodities differ, then you may sell as you wish, provided that the exchange is hand-to-hand.” (Muslim, Kitab al-Musaqat, Bab al-sarfi wa bay'i al- dhahabi bi al-waraqi naqdan; also in Tirmidhi) From Abu Sa'id al-Khudri: The Prophet said: “Gold for gold, silver for silver, wheat for wheat, barley for barley, dates for dates, and salt for salt — like for like, and hand-to-hand. Whoever pays more or takes more has indulged in riba. The taker and the giver are alike [in guilt].” (Muslim, ibid.; and Musnad Ahmad) From Fadalah ibn 'Ubayd al-Ansari: On the day of Khaybar he bought a necklace of gold and pearls for twelve dinars. On separating the two, he found that the gold itself was equal to more than twelve dinars. So he mentioned this to the Prophet, who replied, “It [jewelry] must not be sold until the contents have been valued separately.” (Muslim, Kitab al-Musaqat, Bab bay'i al-qiladah fiha khara-zun wa dhahab; also in Tirmidhi and Nasa'i)
