The gold Dinar and silver dirham

26.12.2011 Just for your Info.....

"Valuation of WIM Silver Dirhams versus Other Silver Products"

The valuation of silver dirhams authorized by the World Islamic Mint (WIM) in common currencies such as the USD ($), Euro (€), Malaysian Ringgits (RM)—i.e. the ‘price’ of the WIM silver dirhams as reflected in official rates available on its web sites—is often compared to prices of other silver products sold in the market. A very rudimentary comparison of, for example, the WIM 10 dirham coin (29.75 grams) and other silver products with similar weights such as a 1 oz silver medallion (1 troy oz = 31.1 grams) may very well apparently show a significant difference in pricing, with the WIM 10 dirham priced much more higher than the 1 oz silver medallion. How is this difference explained?

The fundamental issue is, of course, the ‘arbitrary’ link between the value of precious metals (such as silver) and the common fiat currency valuations – which has been discussed extensively in topics dealing with fiat money, bimetallic currencies and related matters. However, this does not address the comparative pricing issue, where specific valuations of two similar products are compared. In other words, here we look into the difference in the prices of two similar products using a common valuation medium, in this case, a given monetary value (in any common currency).

The primary issue defining the price of the WIM silver dirhams is the purpose or function of the WIM coins, vis-à-vis the other silver products. WIM coins are purpose-designated to function as a medium of exchange which is halal in compliance with the sharia. In other words: halal money or sharia currency (other terms such as “sunna” or “fitra” money/currency may refer to the same). In contrast, almost all other silver products are not.

At this juncture, it may be worth defining the context of several terms that relate to the subject matter to ensure a proper understanding of the topic. The idea of the implementing the gold Dinar and silver dirham (Dinar dirham) as a medium of exchange which is halal in compliance with the sharia may not necessarily be associated with the law of the legal tender. In most countries or for some regional economic zones, money in use is an official currency typically declared as the national/regional legal tender in accordance with constitutional acts or laws. Hence, a formally recognized monetary system typically consisting of notes and coins is commonly used by the citizens within a country or region, at the exclusion of other monies unless authorized for exchange with the local or regional currency. The introduction of other forms of money or potential currencies such as the Dinar dirham may thus be subject to existing laws governing such, and therefore it should be properly defined to ensure legal compliance.

At the very elemental level, the gold Dinar and silver dirham are medallions with underlying intrinsic values in their precious metal contents. Each could nominally be deemed as a good (product) in its own right, eligible to be exchanged for other goods in bona fide barter exchanges. By this definition, no identifiable law has thus far objected to such transactions. With the introduction of standards, the medallions can further function as a commonly accepted medium of exchange, especially if the denominated coinages gain popular acceptance. Here the transition from a mere bartered good to a functional monetary tool in the form of a recognisable but non-official currency may require conformance with applicable laws. However, informal acceptance without any compulsion on its use will typically render such practice in the domain of private transactions done in discretion without flouting any laws. For some countries with the influence of Islam in public life, it may even be acceptable by the authorities to have halal money/sharia currencies/etc. existing in tandem with the legal tender currency, moreover being identifiable with such overt terminologies. Ostensibly with prescribed purposes such as in the practice of religious activities, it could nevertheless also be used in private transactions in so long as these monies do not contain claims of being legal tender – making it an optional medium of exchange freely chosen by the people in mutually consenting environments of trade and otherwise. Interestingly, there are also efforts to get national recognition of Dinar dirham to be deemed as legal tender, either in exclusivity or in parallel with present currencies in law, but such exercises are currently in very early exploratory stages in light of the accompanying complexities for countries with the intent to implement. The rationale for Dinar dirham as legal tender may also invite compliance issues with the sharia principles of trade, therefore any application for such must be in consideration of the necessity concerns (e.g. addressing taxation issues on non-legal tender medallions) outweighing the regulatory concerns (e.g. compelled use).

Therefore, in the context of this discussion of the subject matter, it must be pointed out that any reference to WIM coins as money or currency must be treated in the manner defined above to ensure an appropriate application at the reader’s specific locale of jurisdiction. It could also be worth pointing out here that it may be due to any of the explanations provided above that most other silver products are not produced with the intent of becoming a currency. A detailed discussion of Dinar dirham as halal money/sharia currency is available separately.

Now, coming back to the issue of monetary function & purpose – in order for WIM coins to be a commonly accepted medium of exchange, it has to be made available and usable to the masses with all monetary features expected of a currency. Among these features include: for the coins to be available in multiple denominations (e.g. 1, 2, 5, 10 dirhams); a linear ratio of valuation (e.g. 1 dirham : $8 , therefore 2 dirhams : $16, and so on); comes with a re-call (for faulty or fakes) or re-issue (for new versions) responsibility by the issuers; ease of exchange between the coin types (Dinars to dirhams and vice-versa) as well as reverse conversions (Dinar dirham back to fiat currencies); and others such as security features and more.

In addition to the above, a standardized valuation mechanism is applicable to all WIM-authorized coins for a uniform universal valuation. This is reflected in the official published rates (which allows for minor local variations). It means that any WIM coins all over the world is exchangeable one-to-one (at the same inherent valuations – i.e. Dinars for Dinars; dirhams for dirhams).

In formulating the standardized valuation, taking into account all of the above, WIM applies a certain premium above and beyond the typical market-based ‘spot price’ of the base precious metal (silver for dirham). Although the premium covers both minting & non-minting costs, the contributions of the above-mentioned factors for features in a functioning currency are critical considerations towards this premium. For example, achieving a linear ratio of valuation for the various denominations requires a balancing act between the higher cost of minting for small denomination coins, and, the economies of scale inherent in minting coins of larger denominations. A separate discussion is available on the other detailed aspects of this premium. The application of this premium, in deriving at the pricing structure and resulting in the final price of WIM coins—which, specifically for the dirham, is typically higher than for other silver products—is a condition for the WIM-authorized coins to be recognized & usable as money (e.g. in trade, zakat, etc.).

It follows that, making possible the usage of WIM coins necessitates a viable ‘muamalat system’ – which calls for a sustainable trading environment, or markets, where the coins can be used. This goes back to the core concept of a halal medium of exchange – as money/ currency, with which to trade for goods and services with mutual consent. In consideration for this role of the coins as a halal medium of exchange, WIM also takes into account the welfare of the users, particularly in the aspect of valuation, to achieve this consensual condition.

This is where the concept of the ‘Purchasing Power’ is applied for WIM coins. Thus, WIM coins come with official rates that represent the purchasing power of the coins. For example, a 1 dirham obtained at $8 can be used to buy something valued at $8. In markets where shops accept payment using WIM Dinar dirham, valuations of the coins (i.e. its purchasing power) are reflective of the official rates. Failure to recognize such valuations goes against the principles of the muamalat system and breaks the intention of providing functionality for the coins; therefore WIM also plays a role in regulating such markets (through recognition of regulation-respecting trade establishments accepting WIM Dinar and dirham through registration, use of identifiable insignias such as “We Accept Dinar and Dirham” stickers, etc.).

The purchasing power valuation example shown above should also be seen in the relative context of time. Due to market-based ‘spot price’ movements of the inherent base precious metal, valuations used must reflect current rates as determined by WIM for the coins (i.e. in the example above, it may no longer be $8 at a future date). In addition to that, apart from the standardized valuation mechanism, a rate stabilization mechanism may also apply for certain local implementations of the WIM coins. The rate stabilization mechanism essentially fixes the price of the coin at a determined rate, as long as the internally calculated rate of the standardized valuation mechanism remains within a certain band of value. Stabilization facilitates use of the coins in trade by providing a non-volatile value of the purchasing power and is typically applied for the more commonly used lower valued dirhams as opposed to the higher valued Dinars.

The purchasing power concept is an often overlooked aspect of valuation when comparing prices of the dirham versus other silver products. In practice, the dirham is not valued at comparatively weighted silver products. Only rarely, and probably the only possible situation where such comparative weight valuation applies, may be in the case where the owner of the dirham decides to sell the silver content of the coin at market-based rates of the underlying precious metal, i.e. the silver, at the going value of its weight, at, for example, metal recyclers.

Therefore, as a medium of exchange used in muamalat, the combination factors of regulated markets and the purchasing power of WIM coins provide for a fair and undiminished monetary valuation to all users, an important factor for acceptance and recognition of the coins’ purpose as functional money. More importantly, the responsibility that comes with the introduction of these coins also means that WIM has a duty to continuously improve and implement any necessary adjustments to all aspects of the system as and when appropriate in the interest of the users. For instance, if production factors contributing to the minting cost are enhanced or becomes more efficient, the effective reduction in overall costs should result in more closely-matched-to-market valuations.

How about other different priced coins claimed as Dinars and dirhams? If they are not WIM-related, WIM cannot answer for them. It remains for parties who produced such to provide their proof of practicality and compliance towards sharia principles. Rejecting the valuation of the WIM coins implies a refusal to accept the monetary application and the accompanying muamalat system as how it is being promoted & made practical by WIM. WIM is not in a position to force anyone to accept our methods but remains steadfast in its propagation of a comprehensive solution for the times. To the parties who insist on disagreeing with WIM concepts, they always have other options for cheaper silver products, but without the purpose or functionality that comes with WIM coins.

In summary, WIM believes that it has a justified pricing structure which has effectively made possible the realisation of a medium of exchange which is halal in compliance with the sharia, practically implemented within a viable muamalat system – an effort in which WIM has pioneered & currently leads in practice with the sole intention of obtaining the pleasure of Allah and to be in His service for the Deen. In conclusion, the difference in price between WIM silver dirhams and other silver products is an unavoidable reality acknowledged by WIM with sufficient explanation provided for such.
Footnote: Although this article mainly addresses silver valuation, it also generally applies to similar comparative valuations between WIM gold Dinars and other gold products. However, due to the high valuation of gold relative to silver, the associated differential in the premium associated with the Dinar has minimal correlation to the rates of the coins.
Irwan ibn Izhar is a representative of World Islamic Mint based in Kuala Lumpur, Malaysia.

http://www.islamicmint.com/news_articles/articles/valuation.html

Good peice of information!