beyondbrics

Paper money is so old hat. While De La Rue – which makes banknotes for 150 currencies – struggles with production problems and management turmoil, in one part of Malaysia, they are looking at an ancient alternative – gold.

In a move applauded by some local Muslims, the state government of Kelantan said it was introducing a new monetary system featuring standardised gold and silver coins based on the traditional dinar and dirham coins once used by the Ottoman Empire.

Nik Abdul Aziz, the state’s chief minister, spoke in visionary terms of an economy in which state civil servants would be paid in the new sharia currency, and the poor would be protected against inflation by the intrinsic value of the precious metals used to produce it.

About 1,000 shops and restaurants in the state have said they will accept the new currency, which follows an earlier issue of gold dinars in 2006. The coins comply with traditional Islamic teaching on the use of coins with intrinsic value as a medium of exchange, rather than paper money.

The coins, minted to a specified weight and purity, are available in a range of denominations from half a dinar to eight dinars, and from one dirham to 20. At the current price of gold, one dinar is worth M$581($183) and one dirham is valued at M$13 ($5).

The launch was lauded by the Muamalah Council, a campaigning organisation that seeks the peaceful introduction of an Islamist social and economic system. The council said it was “the main Islamic event of the last 100 years”.

The details of the scheme suggest, however, that the people of Kelantan are unlikely to abandon the ringgit, the national currency, in a hurry. The state government said the value of the new coins was M$2m at the current price of gold. It is not known how many of each denomination have been minted, but if they were all worth one dinar there would be just under 3,500. That works out at about one coin for each 400 people in the state.

The chief minister also admitted that there were “many technicalities” to be overcome before the scheme could be significantly extended. He did not explain why a switch to gold and silver coins would protect against fluctuations in the value of money, given that the US dollar price of gold has risen more than five fold in a decade.

In spite of its small scale, the scheme may pay political dividends for the state government, which is run by PAS, an Islamist party that is in opposition in the national parliament. PAS is locked in a ceaseless struggle for control of Kelantan with the United Malays National Organisation, the main party in the federal government coalition, which also claims to represent Malay Muslims, the largest population group in Malaysia.

Burnishing its Islamic credentials is unlikely to do PAS any harm. The only certain winner, though, is the gold market. Although small, the scheme will help to increase demand, pushing up prices even further.

Related reading:
Gold – In depth, FT