December 23, 2019

In today’s world of debased currencies, there is space for a new currency that would not be created out of nothing. In response to Tun Dr Mahathir Mohamad’s call for an Islamic crypto-currency, Dr Serge Pierre Besanger, who is the Head of Investments at IBC Assets Berhad, yesterday said that such a currency could be implemented in spite of likely sanctions by superpowers.

The strength of a currency, says Dr Besanger, rests on its Central Bank’s balance sheet strength and governance. With the new blockchain technology, the Central Banks of several Muslim countries, such as Malaysia and Turkey, would qualify. There would have to be clear rules pertaining to the “minting” of new currency units. These virtual coins, which Dr Besanger calls IDRs for Islamic Drawing Rights, would have to be issued in accordance with pre-defined quotas, such as each Central Bank’s share in the group’s gold reserves.

The gold backing of the IDR, Dr Besanger says, needs not be 100 percent. Indeed, the US dollar only has a 2 percent gold backing, while the world’s strongest major currency in terms of gold backing, the Euro, only has 4 percent. Dr Besanger proposed a gold backing of 10 percent, akin to the Swiss Franc’s current gold backing.

This would be mildly inflationary, Dr Besanger said, as it would result in an expansion of the Muslim world’s monetary base by around 2 percent.

Islamic finance, he said, should be expanded in order to mop up some of the excess liquidity created by the minting of the IDR, and to provide more demand and liquidity for the new currency. Today, Islamic financial assets only amount to about $2 tn globally, whereas the world’s total financial assets represent well over $260tn.

Dr Besanger noted that there had been a significant growth in the value of Malaysian Islamic assets.

 

Could the IDR be a solution to the chronic underdevelopment in Islamic countries?

Dr Besanger, who is also behind the idea of a new currency for combating climate change called the e-SDR, says IDRs could also be used as a solution to underdevelopment in certain Islamic countries like Erithrea, which is currently the world’s poorest country.

A pre-defined quota of newly minted IDRs could be allocated for that purpose, just like the IMF “mints” new XDRs whenever there is a crisis. The IDR would represent a significant improvement in terms of liquidity over the current proposals of Muslim countries to trade among themselves using a mix of barter trade and pure gold which, Dr Besanger said, would be highly complex to manage, and would result in significant inefficiencies, which the crypo-IDR would dispense with.

Technically, the IDR would be a claim to gold held by member countries. The IDR would not be a retail currency—one would not be able to withdraw them from ATMs.

IDRs would be backed by a portion of the Muslim world’s foreign reserves, which are currently in excess of $1tn.

ABOUT THE AUTHOR

Dr-Serge

Dr Serge Besanger, IBC Assets Berhad.

Dr. Serge Pierre Besanger is the Chief Investment Officer of IBC Assets Berhad. He was previously Acting Director of the International Monetary Fund’s (IMF) IMF-STI and a Professor of Finance at HEC Business School, Paris. He was also former MD & CEO of Leroy-Somer SEA (subsidiary of Emerson, a Fortune-100 company). He has authored IMF papers and advised government regulators on banking and finance regulations as well as risk scoring for banks. As the CIO, Dr. Besanger directs and implements the growth and investment strategy of the company.

Dr Serge Besanger can be email at [email protected]