The Art of Islamic Banking and Finance: Tools and Techniques for Community-Based Banking

(Tina Meador) #1
That is a return of 300 percent on the value of the house, in terms of
wheat. As to the return on invested capital of $3,500, or the equivalent
of 757 bushels of wheat, we realized a profit of $19,000, equivalent to
8,796 bushels of wheat—a return on equity in wheat terms of 11,620
percent.
&In terms of gold, the picture is different. The value of the house was
equivalent to 421 ounces of gold (the gold price in 1974 was $103
per ounce). We sold it in 1977 for 428.6 ounces of gold (the gold
price was $149.33 per ounce). This translates to an appreciation in
the price of the house of 1.8 percent in terms of gold. The return on
invested capital of $19,000, or 127.23 ounces of gold, on an original
investment of $3,500, or 33.97 ounces of gold, yielded a return of
374.7 percent.

Naturally, life 1,400 plus years ago was far simpler than it is today. The
matrix of an average citizen’s production and demands in a country is more
diversified now and is by far more complex and different between one coun-
try and another. For example, those who want to think in terms of wheat
(in this case, wheat farmers) cannot live on wheat alone, because they will
need to buy farm equipment, as well as fuel for heating and for operating
the farm equipment. He or she will obtain credit to finance these agricul-
tural activities. On the other hand, we cannot live on gold, because we can-
not eat or drink it. It should be made clear here that in discussing the
commodity indexation concept we do not imply a return to the gold stan-
dard. What is strongly recommended here is a pioneering new system that
uses a reference commodity like gold or a basket of commodities peculiar to
each country, depending on its production and demand matrix, similar to
the concept for the basket used for measuring inflation and the concept pro-
posed by James Baker III in 1987 to detect economic ‘‘bubbles’’ in a local
economy. Fiat (paper) money can be used, and the U.S. dollar may continue
to be the reserve currency of the world, but to complement it and to be fair,
a basket of commodities based on the concept pioneered by Prophet Mu-
hammad (pp), as described above, must be implemented to be fair to all
people and all nations and to price things fairly in the market while detect-
ing any ‘‘bubble’’ overpricing as is usually experienced in energy prices and
as was experienced in the United States housing bubble that led to the 2008
economic meltdown. It also will help central bankers with their most im-
portant job of keeping inflation under control. It is interesting to note that
this basket of commodities concept can change, not only from country to
country, but also from time to time, with changes in the production mix in
a certain country. This concept will prompt nations to produce and become
efficient producers to improve the value of their currencies. It is hoped that


52 THE ART OF ISLAMIC BANKING AND FINANCE

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