6 June 2004DR. MABID ALI AL-JARHI1 THE ISLAMIC MONETARY AND FINANCIAL SYSTEM Dr. Mabid Ali Al-Jarhi.

6 June 20046 June 2004 DR. MABID ALI AL-JARHIDR. MABID ALI AL-JARHI 11

THE ISLAMIC THE ISLAMIC MONETARY AND MONETARY AND

FINANCIAL SYSTEMFINANCIAL SYSTEMDr. Mabid Ali Al-JarhiDr. Mabid Ali Al-Jarhi


MAJOR CHARACTERISTICS OF MAJOR CHARACTERISTICS OF CONVENTIONAL ECONOMIESCONVENTIONAL ECONOMIES

LENDING BASED VS LENDING BASED VS PRODUCTIVITY BASED PRODUCTIVITY BASED

PROCESSESPROCESSES


RESOURCE ALLOCATION TO

INVESTMENT

LENDING-BASED

PRODUCTIVITY-BASED

LENDERSINVESTORS

HOLDING MONETARY

ASSETS

HOLDING REAL ASSETS

DECISION MAKERS

TYPE OF DECISIONS

ASSETS HELD

BORROWERS’ BORROWERS’ SOLVENCYSOLVENCY

FUND USERS’ FUND USERS’ PRODUCTIVITYPRODUCTIVITY

MAJOR FACTOR


The conventional Financial The conventional Financial Structure: Basic Characteristics Structure: Basic Characteristics

Lending basedLending based A significant amount of resources is handed A significant amount of resources is handed

down from their owners to investors down from their owners to investors through lending institutionsthrough lending institutions

Lending institutions maintain the claims Lending institutions maintain the claims they hold against investors in the form of they hold against investors in the form of monetary asset, rather than titles to real monetary asset, rather than titles to real assets.assets.

The process of money creation is lending The process of money creation is lending based based


MONEY CREATION

COMMODITY MONEY

SUPPLY OF GOLD & SILVER

CONTROLLED MONEY SUPPLY

IMPORT OF GOLD

CURRENCY DEBASEMEN

T

COINAGE OF OTHER METALS


FIAT MONEY CREATION

NO LIMITATIONS ON MONEY SUPPLY

EXCESSIVE MONETARY EXPANSION

RUNNING INFLATION

HYPERINFLATION

GOV’T LENDING

EXPAN-SIONARY

OMO


BASES FOR MONETARY CONTROL

MONEY

GROWTH

HIGHER PRICES

EASIER TRANSACTIONS

LOWER TRANSACTIONS

COSTS

EXCESS DEMAND

HIGHER INFLATION

EFFICIENCY & EQUITY


WHY GOV’T BORROW FROM WHY GOV’T BORROW FROM CENTRAL BANK?CENTRAL BANK?

It is politically easier than raising taxes.It is politically easier than raising taxes. Less costly than borrowing from public.Less costly than borrowing from public. Financing politically unpopular actions.Financing politically unpopular actions. Easier to use for weak governments.Easier to use for weak governments. Used by gov’ts with inefficient taxing Used by gov’ts with inefficient taxing

structure.structure. The legislature does not have full control The legislature does not have full control

on government internal borrowing.on government internal borrowing.


THE ISLAMIC ECONOMIC THE ISLAMIC ECONOMIC SYSTEMSYSTEM

THE BANKING STRUCTURETHE BANKING STRUCTURE


THE CENTRAL BANKTHE CENTRAL BANK MANAGEMENT OF MONEY SUPPLYMANAGEMENT OF MONEY SUPPLY To provide for the transactions needs of the To provide for the transactions needs of the

community, especially in a growing economy.community, especially in a growing economy. Set the money supply at the level, which Set the money supply at the level, which

provides the “maximum” amount of provides the “maximum” amount of transactions services at a certain level of transactions services at a certain level of income.income.

Keep the level of prices stable.Keep the level of prices stable. It is the real and not the nominal unit of money It is the real and not the nominal unit of money

that produces transactions services.that produces transactions services.


MONEY, GROWTH AND PRICESMONEY, GROWTH AND PRICES Higher growth of money → excess demand Higher growth of money → excess demand

for goods (excess supply of money) at faster for goods (excess supply of money) at faster rates.rates.

If markets to be sable, equilibrium will be If markets to be sable, equilibrium will be regained.regained.

The new level of inflation depends on The new level of inflation depends on price, price, compared to quantity speeds of adjustmentscompared to quantity speeds of adjustments in in all markets, all markets, which can be related to:which can be related to: institutional framework of the economy, institutional framework of the economy, the degree of complementarities and the degree of complementarities and

substitution between gooks,substitution between gooks, The rate of growth of the economy. The rate of growth of the economy.


The rate of inflation (growth of The rate of inflation (growth of prices) can be written asprices) can be written as

;( 1,..., ) 1iP P p i n

Where (pWhere (pii) is the rate of growth of the price of ) is the rate of growth of the price of the ithe ithth good, which is equal: good, which is equal:

/ { . }/ 2i i ii i i

i

dp p dsp p p

dt s dt

where (swhere (si) is the excess demand for the ith ) is the excess demand for the ith good:good:


Equation (2) decomposes the rate of growth Equation (2) decomposes the rate of growth of the iof the ithth price into two factors price into two factors

1. responsiveness of the price to changes in 1. responsiveness of the price to changes in excess demand, (price speed of adjustment).excess demand, (price speed of adjustment).

2. the extent to which excess demand is 2. the extent to which excess demand is increasing or decreasing over time, (quantity increasing or decreasing over time, (quantity speed of adjustment).speed of adjustment).

Speeds of adjustment can be hindered by non Speeds of adjustment can be hindered by non competitive elements, e.g., monopolies.competitive elements, e.g., monopolies.

They also depend on the degrees of They also depend on the degrees of substitutability and complementarities.substitutability and complementarities.

the quantity speed of adjustment is faster with the quantity speed of adjustment is faster with higher rates of growth, as it becomes easier to higher rates of growth, as it becomes easier to satisfy excess demands.satisfy excess demands.


THE RELATIONSHIP BETWEEN THE RELATIONSHIP BETWEEN INFLATION RATE AND THE RATE OF INFLATION RATE AND THE RATE OF

MONETARY EXPANSIONMONETARY EXPANSION Ceteris paribus, the higher the rate of growth, Ceteris paribus, the higher the rate of growth,

the lower the rate of inflation resulting from a the lower the rate of inflation resulting from a certain increase in the rate of monetary certain increase in the rate of monetary expansion.expansion.

The optimal supply of money is the rate of The optimal supply of money is the rate of monetary growth, which maximizes the monetary growth, which maximizes the transactions services for the community.transactions services for the community.

the optimal monetary policy is that which the optimal monetary policy is that which brings monetary growth to the optimal level.brings monetary growth to the optimal level.


The Relationship between the rate of The Relationship between the rate of growth of the money supply and the rate of growth of the money supply and the rate of

growth of prices growth of prices The faster the growth of money, the stronger is The faster the growth of money, the stronger is

its effect on the real sector in terms of raising its effect on the real sector in terms of raising demand schedules and, consequently, the demand schedules and, consequently, the faster prices must rise.faster prices must rise.

We can therefore perceive of rates of monetary We can therefore perceive of rates of monetary expansion low enough not to produce any expansion low enough not to produce any inflation, given the real growth of the inflation, given the real growth of the economy and the state of expectationseconomy and the state of expectations


FIGURE (1): THE RELATIONSHIP FIGURE (1): THE RELATIONSHIP BETWEEN INFLATION RATE AND THE BETWEEN INFLATION RATE AND THE

RATE OF MONETARY EXPANSIONRATE OF MONETARY EXPANSION

P

M

EO A


P

M

L1(g1) L2(g2) L3(g3) L4(g4)

FIGURE (2): ECONOMIC GROWTH FIGURE (2): ECONOMIC GROWTH ATTENUATES THE EFFECTS OF MONETARY ATTENUATES THE EFFECTS OF MONETARY

EXPANSION ON PRICESEXPANSION ON PRICES

O E2 E3 E4


VARIATIONS IN MONEY SUPPLY VARIATIONS IN MONEY SUPPLY CENTRAL DEPOSITS, CD'SCENTRAL DEPOSITS, CD'S

The central bank opens investment The central bank opens investment accounts in its member banks.accounts in its member banks.

It deposits the money it creates and which It deposits the money it creates and which withdraws the money it retires.withdraws the money it retires.

Banks will invest central deposits in the Banks will invest central deposits in the real sector in accordance with the real sector in accordance with the investment policy of each.investment policy of each.

Profits earned would be used to cover the Profits earned would be used to cover the cost of central bank operations.cost of central bank operations.


The central bank issues “central deposit The central bank issues “central deposit certificates", certificates",

CDC's would be sold to the public and their CDC's would be sold to the public and their proceeds be invested in CD's throughout the proceeds be invested in CD's throughout the banking system,banking system,

CDC’s would provide the lowest degree of CDC’s would provide the lowest degree of financial risk in an interest-free economy, financial risk in an interest-free economy, since each carries with it a title to a more since each carries with it a title to a more diversified investment portfolio than any diversified investment portfolio than any member bank by itself can provide.member bank by itself can provide.

The rate of return on the CDC's will The rate of return on the CDC's will approach the average rate of profit on approach the average rate of profit on investment for the whole economy.investment for the whole economy.


THE PROCESS OF MONEY CREATION THE PROCESS OF MONEY CREATION IN AN ISLAMIC ECONOMYIN AN ISLAMIC ECONOMY

It is a non-lending based process of monetary It is a non-lending based process of monetary expansion has several advantages.expansion has several advantages.

An investment-based process.An investment-based process. CD’s rate of return gauges monetary policy CD’s rate of return gauges monetary policy

performance.performance. Totally independent of government budget:Totally independent of government budget: Monetary policy would be depoliticized. Monetary policy would be depoliticized. The monetary authority will depend solely on The monetary authority will depend solely on

monitoring the relationship between prices and monitoring the relationship between prices and output in deciding upon the (optimal) rate of output in deciding upon the (optimal) rate of monetary expansion.monetary expansion.


THE OPTIMAL PATH OF MONETARY THE OPTIMAL PATH OF MONETARY EXPANSION EXPANSION

Assume the central bank targets absolute price Assume the central bank targets absolute price stability.stability.

It will face a frontier of rates of growth, each It will face a frontier of rates of growth, each associated with a maximum rate of monetary associated with a maximum rate of monetary expansion that can be implemented without expansion that can be implemented without increasing prices.increasing prices.

We can term that rate the optimal rate of We can term that rate the optimal rate of monetary expansion or the optimal supply of monetary expansion or the optimal supply of money.money.


This frontier, the curve in figure (3), can be This frontier, the curve in figure (3), can be termed the optimal path of monetary termed the optimal path of monetary expansion or the optimal path of monetary expansion or the optimal path of monetary policy. policy.

As the rate of growth increases, the maximum As the rate of growth increases, the maximum rate of monetary expansion rises up to a limit, rate of monetary expansion rises up to a limit, after which no further increase in the rate of after which no further increase in the rate of monetary expansion without increasing the monetary expansion without increasing the rate of inflation.rate of inflation.


FIGURE (3) : THE OPTIMAL FIGURE (3) : THE OPTIMAL PATH OF MONETARY PATH OF MONETARY

EXPANSIONEXPANSION

gg1 g2 g3

e1

e2

e3


THE OPTIMAL PATHTHE OPTIMAL PATH

When the rate of growth is gWhen the rate of growth is g11, the optimal rate , the optimal rate of monetary expansion is eof monetary expansion is e11..

when growth rises to gwhen growth rises to g22, the optimal rate of , the optimal rate of monetary expansion rises to emonetary expansion rises to e22..

when the rate of growth is gwhen the rate of growth is g33, the optimal rate of , the optimal rate of monetary expansion is emonetary expansion is e33..

ee33 is the highest possible rate of optimal is the highest possible rate of optimal monetary expansion. monetary expansion.

. Any further rise in growth will not be . Any further rise in growth will not be associated with higher rates of monetary associated with higher rates of monetary expansion above eexpansion above e33..


EXTERNAL INFLUENCES AND EXTERNAL INFLUENCES AND THE MONEY SUPPLYTHE MONEY SUPPLY

Foreign exchange holders use part to cover Foreign exchange holders use part to cover purchases abroad, sell the rest to other residents, purchases abroad, sell the rest to other residents, and the banking system for domestic currency.and the banking system for domestic currency.

The change in net foreign assets held by the The change in net foreign assets held by the banking system will have a direct effect on banking system will have a direct effect on monetary expansion.monetary expansion.

This could distort the optimal supply of money This could distort the optimal supply of money rule. Options faced by central bank:rule. Options faced by central bank:

Neutralize all changes in net foreign assets by Neutralize all changes in net foreign assets by absorbing resulting increase in the money supply. absorbing resulting increase in the money supply.

Inject an amount equivalent to any decrease in Inject an amount equivalent to any decrease in money supply resulting from a decline in net money supply resulting from a decline in net foreign assets.foreign assets.


Net purchases of foreign exchange by the central Net purchases of foreign exchange by the central bank can be invested through member banks.bank can be invested through member banks.

Both absorption and injection would be carried Both absorption and injection would be carried out through the sale and purchase of CDC’s.out through the sale and purchase of CDC’s.

Neutralize only the changes in the money supply Neutralize only the changes in the money supply that would cause the path of monetary expansion that would cause the path of monetary expansion to deviate from its optimal path.to deviate from its optimal path.

Monetary authority can stand ready to sell and Monetary authority can stand ready to sell and purchase foreign exchange at daily declared purchase foreign exchange at daily declared prices.prices.

Exchange rates would be set at levels that would Exchange rates would be set at levels that would enable the monetary authority to keep the level enable the monetary authority to keep the level of net foreign assets consistent with the optimal of net foreign assets consistent with the optimal path of monetary expansion. path of monetary expansion.


EXTERNAL INFLUENCES AND EXTERNAL INFLUENCES AND THE MONEY SUPPLYTHE MONEY SUPPLY

The central bank can therefore keep The central bank can therefore keep CD's in foreign currencies with CD's in foreign currencies with member banks for this purpose.member banks for this purpose.

It can issue CDC's denominated in It can issue CDC's denominated in foreign currencies or domestic foreign currencies or domestic currency equivalents.currency equivalents.

The proceeds of selling those CDC's The proceeds of selling those CDC's can be used to finance foreign can be used to finance foreign currency purchases.currency purchases.


BANKS & FRACTIONAL RESERVESBANKS & FRACTIONAL RESERVES

Banks must undertake direct investment, take Banks must undertake direct investment, take equity in the firms they finance and provide the equity in the firms they finance and provide the rest of customary banking services as well.rest of customary banking services as well.

They take demand deposits.They take demand deposits. With fractional reserves, when traders switch With fractional reserves, when traders switch

from “currency" to "deposit money" and vice from “currency" to "deposit money" and vice versa, the total supply of money will change.versa, the total supply of money will change.

with one hundred percent reserves, such a switch with one hundred percent reserves, such a switch will change the composition of money, leaving its will change the composition of money, leaving its total supply constant:total supply constant:

Fractional reserves caused the monetary system Fractional reserves caused the monetary system to suffer from an "inherent instability", to suffer from an "inherent instability",


In a fractional reserve system, the process In a fractional reserve system, the process of creating derivative deposits is of creating derivative deposits is accompanied by changes in the money accompanied by changes in the money supply resulting from substituting deposits supply resulting from substituting deposits and cash for each other.and cash for each other.

Both processes change the cost of producing Both processes change the cost of producing real balances.real balances.

Such changes in the money supply make it Such changes in the money supply make it more costly to maintain the existing stock of more costly to maintain the existing stock of real balances or to add to it.real balances or to add to it.

The inherent instability and the cost of The inherent instability and the cost of producing real balances to warrant the producing real balances to warrant the adoption of 100 percent reserves:adoption of 100 percent reserves:


FRACTIONAL RESERVES & EQUITYFRACTIONAL RESERVES & EQUITY Money, as a medium of exchange is the Money, as a medium of exchange is the

creation of the whole society.creation of the whole society. Fractional reserves give banks’ Fractional reserves give banks’

shareholders a monopoly right to issue shareholders a monopoly right to issue money and profit at the expense of society.money and profit at the expense of society.

When fractional reserves are abolished, the When fractional reserves are abolished, the central bank gains the full value of central bank gains the full value of seigniorage and can use it for social benefit.seigniorage and can use it for social benefit.

In an Islamic economy, there is no In an Islamic economy, there is no justification to redistribute wealth for the justification to redistribute wealth for the benefit of banks’ shareholders.benefit of banks’ shareholders.. .


DIRECT INVESTMENT DIRECT INVESTMENT (MUSHARAKAH)(MUSHARAKAH)

Establish new firms, wholly or partially Establish new firms, wholly or partially owned by bank.owned by bank.

Hold shares in existing firms.Hold shares in existing firms. Banks participates in management & Banks participates in management &

influences corporate governance.influences corporate governance. Provide technical assistance to correct Provide technical assistance to correct

business decisions and to solve business decisions and to solve problems.problems.


Banks benefit from:Banks benefit from: Geographic proximity to firms.Geographic proximity to firms. , possession of first hand information , possession of first hand information

about their activities.about their activities. relative familiarity with people relative familiarity with people

operating .operating . Benefit from low cost of screening and Benefit from low cost of screening and

monitoring.monitoring.


PROFIT-AND-LOSS SHARING PROFIT-AND-LOSS SHARING FINANCEFINANCE

Banks hold equity in firms, monitor their Banks hold equity in firms, monitor their operations cheaply and assess their needs, which operations cheaply and assess their needs, which can be provided on a profit-and-loss-sharing can be provided on a profit-and-loss-sharing (PLS) basis.(PLS) basis.

Short-term funds to finance business needs for Short-term funds to finance business needs for working capital for the duration of the working capital for the duration of the production cycle.production cycle.

The earnings of firms financed by banks would The earnings of firms financed by banks would be netted out of costs, and the remainder is be netted out of costs, and the remainder is shared with banks according to an agreed upon shared with banks according to an agreed upon formula.formula.

The time length varies from six to twelve months The time length varies from six to twelve months for industrial and agricultural projects, and as for industrial and agricultural projects, and as short as 60 or 90 days for commercial ventures.short as 60 or 90 days for commercial ventures.


LEASING ACTIVITIESLEASING ACTIVITIES Banks purchase means of transport (ships, Banks purchase means of transport (ships,

planes, etc.), industrial equipment, planes, etc.), industrial equipment, buildings, and others to lease them to users buildings, and others to lease them to users in return for periodical installments.in return for periodical installments.

The lease agreement may terminate with a The lease agreement may terminate with a title transfer to the user.title transfer to the user.

A means to serve customers in a way that is A means to serve customers in a way that is flexible enough to cater for varying need.flexible enough to cater for varying need.

A way to invest in an equity, which A way to invest in an equity, which transfers itself into liquid cash gradually transfers itself into liquid cash gradually over a certain period of time.over a certain period of time.


CREDIT-PURCHASE OR CREDIT-PURCHASE OR COMMODITY FINANCECOMMODITY FINANCE

Several formulas can be used to provide Several formulas can be used to provide commodities for spot delivery and deferred commodities for spot delivery and deferred payment. That includes bai’ mu'ajjal, payment. That includes bai’ mu'ajjal, murabahah.murabahah.

Alternatively, producers can be provided Alternatively, producers can be provided spot cash in return for future delivery of spot cash in return for future delivery of goods, using forms of salam and istisna’. goods, using forms of salam and istisna’.

Some of these modes may require banks to Some of these modes may require banks to get involved in trade.get involved in trade.


ACTING AS HOLDING COMPANYACTING AS HOLDING COMPANY

Banks take interest in firms and finance Banks take interest in firms and finance their operations.their operations.

banks can establish specialized subsidiaries banks can establish specialized subsidiaries to handle their PLS, leasing and credit to handle their PLS, leasing and credit purchase finance. purchase finance.

Banks need only to hold part of the equity Banks need only to hold part of the equity of their own subsidiaries and attract the of their own subsidiaries and attract the rest from other shareholders.rest from other shareholders.

This keeps a reasonable amount of division This keeps a reasonable amount of division of labor in the banking industry, for the of labor in the banking industry, for the sake of economic efficiency.sake of economic efficiency.


NEED FOR LENDING ACTIVITIESNEED FOR LENDING ACTIVITIES

borrowing by business enterprises borrowing by business enterprises would become unnecessary.would become unnecessary.

some borrowing may still be needed. some borrowing may still be needed. when individuals face emergency when individuals face emergency

situations or special needs that would situations or special needs that would require short-term bridge financing.require short-term bridge financing.

A modest amount of interest-free A modest amount of interest-free lending must be provided as a lending must be provided as a philanthropic activity.philanthropic activity.


HOW TO PROVIDE LENDINGHOW TO PROVIDE LENDING bank would be instructed to devote a small bank would be instructed to devote a small

percentage of its resources for interest-free percentage of its resources for interest-free lending.lending.

The central bank can supplement such resources The central bank can supplement such resources from its CD earnings. from its CD earnings.

Some would make funds available for interest Some would make funds available for interest free lending for religious reasons, encouraged by free lending for religious reasons, encouraged by stable prices.stable prices.

Central bank can issue central lending Central bank can issue central lending certificates, CLC's, which carry no return, but certificates, CLC's, which carry no return, but are guaranteed to be paid on maturity.are guaranteed to be paid on maturity.

Proceeds of CLC's can be used by banks, to lend Proceeds of CLC's can be used by banks, to lend the needy after proper assessment using social the needy after proper assessment using social criteria, as rationing would be required.criteria, as rationing would be required.


CENTRAL BANK BALANCE SHEETCENTRAL BANK BALANCE SHEET

ASSETSASSETS LIABILITIESLIABILITIES

Cash in VaultCash in Vault Central Deposit CertificatesCentral Deposit Certificates

Central deposits with banks, Central deposits with banks, restricted and unrestrictedrestricted and unrestricted

Central Lending CertificatesCentral Lending Certificates

Lending Accounts with Member Lending Accounts with Member BanksBanks

Member Bank ReservesMember Bank Reserves

Investment Accounts for Investment Accounts for Government and Public Government and Public corporationscorporations

Net Foreign AssetsNet Foreign Assets Monetary Base = Money in Monetary Base = Money in CirculationCirculation


ASSETSASSETS LIABILITIESLIABILITIES

Cash in Vault Cash in Vault

Reserves with Central BankReserves with Central Bank

Demand DepositsDemand Deposits

Equity In SubsidiariesEquity In Subsidiaries Central Deposits, Restricted And Central Deposits, Restricted And UnrestrictedUnrestricted

Unrestricted investment depositsUnrestricted investment deposits

Accounts With Fund Users: Accounts With Fund Users:

PLS Accounts PLS Accounts

Leasing Accounts Leasing Accounts

Credit-Purchase AccountsCredit-Purchase Accounts

Restricted investment depositsRestricted investment deposits

Mode-restricted deposits Mode-restricted deposits

Project-specific deposits Project-specific deposits

Sector-specific depositsSector-specific deposits

Assets owned by special funds and Assets owned by special funds and portfoliosportfolios

Unrestricted Investment Deposit Unrestricted Investment Deposit CertificatesCertificates

Net Foreign AssetsNet Foreign Assets Restricted Investment Deposit Restricted Investment Deposit Certificates:Certificates:

Lending AccountsLending Accounts Fund SharesFund Shares

Central Lending FundsCentral Lending Funds


THE TREASURY: AN ISLAMIC THE TREASURY: AN ISLAMIC PERSPECTIVEPERSPECTIVE

THE DISTRIBUTIVE BRANCH: A distributive THE DISTRIBUTIVE BRANCH: A distributive tax, called Al-Zakah is levied on the following: tax, called Al-Zakah is levied on the following:

Monetary asset holdings for one year, including Monetary asset holdings for one year, including cash, demand deposits and debt, when held for a cash, demand deposits and debt, when held for a year. year.

Titles to real assets held for a year, e.g., shares, Titles to real assets held for a year, e.g., shares, profit sharing funds, etc, when held for a year..profit sharing funds, etc, when held for a year..

Gold, precious metals, and diamonds, on the Gold, precious metals, and diamonds, on the basis of their current market value, when held basis of their current market value, when held for a year.for a year.

Net earnings of assets not included in the above Net earnings of assets not included in the above categories.categories.


The tax rates, which differ from one category ofThe tax rates, which differ from one category ofassets to another, are applied on total assets to another, are applied on total

holdings over and above a certain level, called holdings over and above a certain level, called nissab that reflects the cost of living of the tax-nissab that reflects the cost of living of the tax-payer.payer.

The proceeds are earmarked for certain The proceeds are earmarked for certain purposes on the top of which poverty reduction. purposes on the top of which poverty reduction.

This is done through two kinds of redistributive This is done through two kinds of redistributive policies: wealth maintenance and income policies: wealth maintenance and income maintenance policies..maintenance policies..

Those whose income (and wealth) is below a Those whose income (and wealth) is below a certain "minimum" level, are classified into two certain "minimum" level, are classified into two categories, those capable and those incapable of categories, those capable and those incapable of work.work.


Those capable of work are given sufficient Those capable of work are given sufficient productive assets to use in order to earn productive assets to use in order to earn income that would place them outside the income that would place them outside the poor.poor.

the process of redistribution continues the process of redistribution continues every year and poverty is reduced gradually every year and poverty is reduced gradually and eventually eliminated in the long-run and eventually eliminated in the long-run for all capable of working. for all capable of working.

Banks would play a role, as wealth Banks would play a role, as wealth maintenance policies can be implemented maintenance policies can be implemented through the finance of micro enterprises, through the finance of micro enterprises, which the poor own and manage.which the poor own and manage.


THE ALLOCATIVE BRANCHTHE ALLOCATIVE BRANCHDIVISION OF MINERAL RESOURCES:DIVISION OF MINERAL RESOURCES: The mineral Resource Division assumes the The mineral Resource Division assumes the

responsibility of mineral production, directly or responsibility of mineral production, directly or indirectly, the proceeds of which are added to the indirectly, the proceeds of which are added to the Treasury to be used in financing government Treasury to be used in financing government operations.operations.

The state ownership of mineral resources does The state ownership of mineral resources does not necessarily imply state production. not necessarily imply state production.

The state can involve itself in the production of The state can involve itself in the production of minerals through state owned enterprises .minerals through state owned enterprises .

although it would be more efficient to although it would be more efficient to enfranchise private producers for this purpose.enfranchise private producers for this purpose.


DIVISION OF PUBLIC GOODS:DIVISION OF PUBLIC GOODS: Public goods: goods which are consumed Public goods: goods which are consumed

collectively, e.g., defense, basic education and collectively, e.g., defense, basic education and certain categories of health services.certain categories of health services.

Conditions of their provision are determined Conditions of their provision are determined through the political process, the state stands through the political process, the state stands responsible for providing them to its citizens. responsible for providing them to its citizens.

They may be produced directly by government They may be produced directly by government owned enterprises or, more efficiently, by private owned enterprises or, more efficiently, by private sector enterprises.sector enterprises.

They are financed by the net proceeds from the They are financed by the net proceeds from the mineral resource division and from other taxes.mineral resource division and from other taxes.

Some of the public goods, like defense, can be Some of the public goods, like defense, can be financed from Al Zakah proceeds given enough financed from Al Zakah proceeds given enough funds from that source after satisfying the poorfunds from that source after satisfying the poor


DIVISION OF MARKET ORDER:DIVISION OF MARKET ORDER: The working of free markets can always be The working of free markets can always be

disturbed by the rise of monopolies, the existence disturbed by the rise of monopolies, the existence of externalities, and other market "disorders".of externalities, and other market "disorders".

Dealing with such problems could involve a Dealing with such problems could involve a certain tax subsidy network or direct regulations certain tax subsidy network or direct regulations by the government. by the government.

In extreme cases, direct control may be called In extreme cases, direct control may be called for.for.

The finance of such operations could be The finance of such operations could be accomplished through balancing tax services accomplished through balancing tax services with subsidy payments.with subsidy payments.

It may also call for special taxes to finance the It may also call for special taxes to finance the maintenance of "orderly markets“.maintenance of "orderly markets“.


ISSUERSINSTRUMENTSENTERPRISES

INVESTMENT COMPANIES

CENTRAL BANK

TREASURYTREASURY

INVESTMENT CERT. INVESTMENT CERT. REST, UNRESTREST, UNREST

DEPOSIT CERTMUSHARAKAH CERTMUSHARAKAH CERT

LEASING CERT

FUND CERTFUND CERTPORTFOLIO CERT

LOAN CERTLOAN CERT

STOCKS

BANKSBANKS


INTEREST RATE & PRODUCTIVITY INTEREST RATE & PRODUCTIVITY EXPECTATIONS IN A EXPECTATIONS IN A

CONVENTIONAL ECONOMY CONVENTIONAL ECONOMY The opportunity cost is the rate of The opportunity cost is the rate of

"return" on the safest and most liquid "return" on the safest and most liquid financial asset, viz., government securities. financial asset, viz., government securities.

In a lending centered economy, economic In a lending centered economy, economic agents tend to associate changes in the price agents tend to associate changes in the price level with monetary growth.level with monetary growth.

monetary expansion or contraction is monetary expansion or contraction is influenced, in the first instance, by the influenced, in the first instance, by the desired level of government expenditures.desired level of government expenditures.

This has consequences on the prices This has consequences on the prices expectations.expectations.


When the government expands the money When the government expands the money supply by selling securities to the central supply by selling securities to the central bank, the latter can attempt to offset such a bank, the latter can attempt to offset such a move by selling securities back to the move by selling securities back to the public.public.

Even with a fairly wide market, such action Even with a fairly wide market, such action will raise the monetary rate of interest.will raise the monetary rate of interest.

The cost of money would rise, and The cost of money would rise, and economic activities would be restrained in economic activities would be restrained in the private sector while expanding in the the private sector while expanding in the public sector.public sector.

The rate of interest would therefore The rate of interest would therefore become a chariot of price expectations.become a chariot of price expectations.


When the central bank is capable of offsetting When the central bank is capable of offsetting the government monetary expansion, interest the government monetary expansion, interest rate could rise by a magnitude that is sufficient rate could rise by a magnitude that is sufficient to discourage any inflationary expectations. to discourage any inflationary expectations.

Although total offsetting is hardly conceivable, Although total offsetting is hardly conceivable, it could lead to the contraction of the private it could lead to the contraction of the private sector and an expansion of the government sector and an expansion of the government sector.sector.

People compare the rate of monetary expansion People compare the rate of monetary expansion with the rise in the rate of inflation. An excess with the rise in the rate of inflation. An excess of the former over the latter justifies of the former over the latter justifies expectations of further inflation, until both are expectations of further inflation, until both are equalized.equalized.

Therefore, in lending centered economies price Therefore, in lending centered economies price expectations compare the rate of monetary expectations compare the rate of monetary expansion with changes in the rate of inflation.expansion with changes in the rate of inflation.


The familiar equalization of opportunity The familiar equalization of opportunity cost of money and the rate of return on cost of money and the rate of return on investment, at the margin, is only investment, at the margin, is only illusionary. illusionary.

Savings are channeled through the banking Savings are channeled through the banking system on the basis of interest rate system on the basis of interest rate expectations.expectations.

Meanwhile, the production sector absorbs Meanwhile, the production sector absorbs those savings on the basis of productivity those savings on the basis of productivity expectations.expectations.

When the saving process is lending When the saving process is lending centered, interest rate expectations centered, interest rate expectations dominate productivity expectations;dominate productivity expectations;

This is a case of a tail wagging its dog!!This is a case of a tail wagging its dog!!


PRICE EXPECTATIONS IN AN PRICE EXPECTATIONS IN AN ISLAMIC ECONOMY ISLAMIC ECONOMY

Money is issued and allocated to uses on Money is issued and allocated to uses on bases related to growth and productivity bases related to growth and productivity and far removed from political pressures and far removed from political pressures connected with public sector requirements. connected with public sector requirements.

Lending plays an insignificant role.Lending plays an insignificant role. Cash and CLC’s, and other monetary assets Cash and CLC’s, and other monetary assets

have a negative yield, after payment of have a negative yield, after payment of zakah.zakah.

Holding CDC’s is next best alternative to Holding CDC’s is next best alternative to holding cash. They have the highest degree holding cash. They have the highest degree of safety, and the lowest degree of risk for of safety, and the lowest degree of risk for income-earning financial assets.income-earning financial assets.


CDC's with short term maturities should be CDC's with short term maturities should be encashable with a notice that is shorter than encashable with a notice that is shorter than other income-earning assets. other income-earning assets.

CDC’s are allocated to banks according to CDC’s are allocated to banks according to efficiency criteria. Their rate of return efficiency criteria. Their rate of return approximates the average rate of return on approximates the average rate of return on investment for opportunities lying on the investment for opportunities lying on the production frontier of the whole economy.production frontier of the whole economy.

CDC’s rate of return becomes in itself the CDC’s rate of return becomes in itself the opportunity cost of money and the benchmark opportunity cost of money and the benchmark for all uses of money.for all uses of money.

The proceeds of central deposit certificates are The proceeds of central deposit certificates are invested in productive uses, this makes the invested in productive uses, this makes the interest-free economy an investment centered interest-free economy an investment centered economy.economy.


Investors consider the safest possible Investors consider the safest possible investment opportunity They do not investment opportunity They do not consider the safest possible lending consider the safest possible lending opportunity at all.opportunity at all.

Money holdings are considered in Money holdings are considered in comparison with investment opportunities comparison with investment opportunities directly and not through a scheme of directly and not through a scheme of financial intermediation based on lending.financial intermediation based on lending.

In this way, money and investment markets In this way, money and investment markets are effectively interconnected.are effectively interconnected.

In contrast to the conventional economy, In contrast to the conventional economy, the real sector dominates the financial the real sector dominates the financial sector.sector.

The dog here can wag its own tail!!!The dog here can wag its own tail!!!


THE DEMAND FOR MONEY IN A THE DEMAND FOR MONEY IN A CONVENTIONAL ECONOMYCONVENTIONAL ECONOMY

The study of the demand for money in a The study of the demand for money in a conventional economy starts with distinguishing conventional economy starts with distinguishing between transactions, precautionary and between transactions, precautionary and speculative demand for money.speculative demand for money.

Ultimately, all three kinds of demand are added Ultimately, all three kinds of demand are added together in one aggregate called the demand for together in one aggregate called the demand for money .money .

Whether treating this demand was done through Whether treating this demand was done through the inventory approach (Baumol, 1952) or the the inventory approach (Baumol, 1952) or the portfolio approach (Tobin. 1958), all analysts portfolio approach (Tobin. 1958), all analysts agree that the quantity demanded for money is agree that the quantity demanded for money is inversely related to the rate of interest.inversely related to the rate of interest.


One of the pillars of monetary analysis under the One of the pillars of monetary analysis under the conventional monetary structure is what is called conventional monetary structure is what is called “inelastic expectations”.“inelastic expectations”.

Agents believe in the existence of a natural rate Agents believe in the existence of a natural rate of interest that reflects economic fundamentals.of interest that reflects economic fundamentals.

When the rate of interest rises above or declines When the rate of interest rises above or declines below the natural rate, agents believe that it will below the natural rate, agents believe that it will return back to its original level.return back to its original level.

When the rate of interest rises, bond prices When the rate of interest rises, bond prices decline..decline..

Since agents expect the rate of interest to decline Since agents expect the rate of interest to decline in the future and consequently bond prices to in the future and consequently bond prices to rise, they find an opportunity to make profit. rise, they find an opportunity to make profit. Speculators switch from cash balances to bonds.Speculators switch from cash balances to bonds.


When the rate of interest rises, they switch from When the rate of interest rises, they switch from bonds to cash balances.bonds to cash balances.

Therefore, the quantity of money demanded Therefore, the quantity of money demanded increases when the rate of interest declines and increases when the rate of interest declines and vise versa.vise versa.

This analysis represents the theoretical basis for This analysis represents the theoretical basis for the downward sloping liquidity preference curve.the downward sloping liquidity preference curve.

Therefore people in the conventional system hold Therefore people in the conventional system hold money for speculative purposes either when they money for speculative purposes either when they expect prices to decline or the rate of interest to expect prices to decline or the rate of interest to increase.increase.

Expectations of lower future prices or higher Expectations of lower future prices or higher interest rates will both lead to a shift from real interest rates will both lead to a shift from real and financial assets into money, thereby causing and financial assets into money, thereby causing a decrease in real asset and bond prices, which is a decrease in real asset and bond prices, which is equivalent to an increase in the rate of interest.equivalent to an increase in the rate of interest.


THE DEMAND FOR MONEY IN AN THE DEMAND FOR MONEY IN AN INTEREST-FREE ECONOMYINTEREST-FREE ECONOMY

The rate of return on CDC’s, or The rate of return on CDC’s, or RCDC, plays a central role in the RCDC, plays a central role in the demand for money; it works as:demand for money; it works as:

A benchmark for investment.A benchmark for investment. A rate of discount for future income A rate of discount for future income

streams expected to accrue on financial streams expected to accrue on financial and real assets.and real assets.

A tool and an indicator for feasibility A tool and an indicator for feasibility studies and business planning.studies and business planning.

A market price for resource allocation.A market price for resource allocation.


The demand for money must be directly The demand for money must be directly related to the RCDC.related to the RCDC.

When that rate rises, agents will find that When that rate rises, agents will find that they must economize on the use of they must economize on the use of monetary resources in transactions and monetary resources in transactions and switch some cash balances to investment.switch some cash balances to investment.

When it declines, agents will find that When it declines, agents will find that holding money has become less costly, holding money has become less costly, thereby encouraging them to increase their thereby encouraging them to increase their money holdings.money holdings.

A tool and an indicator for feasibility A tool and an indicator for feasibility studies and business planning.studies and business planning.

Therefore, the quantity demanded is Therefore, the quantity demanded is inversely related to the RCDC.inversely related to the RCDC.


SPECULATIVE DEMAND FOR SPECULATIVE DEMAND FOR MONEYMONEY

Expectations of higher RCDC's would Expectations of higher RCDC's would automatically be translated by the market automatically be translated by the market into higher prices of investment into higher prices of investment instruments.instruments.

When RCDC is expected to be higher, the When RCDC is expected to be higher, the expected returns of other instruments must expected returns of other instruments must be higher, since the latter is some kind of an be higher, since the latter is some kind of an average of the former.average of the former.

Moreover, and for the same reason, the rise Moreover, and for the same reason, the rise in the expected returns of investment in the expected returns of investment instruments will always be higher than the instruments will always be higher than the rise in the CDC rate.rise in the CDC rate.


The final conclusion is that expectations of The final conclusion is that expectations of higher RCDC will not lead to a decline but higher RCDC will not lead to a decline but a rise in the prices of investment a rise in the prices of investment instruments.instruments.

Therefore, the quantity demanded is Therefore, the quantity demanded is inversely related to the RCDC.inversely related to the RCDC.

Similarly, an expected decline in the RCDC Similarly, an expected decline in the RCDC must be associated with an expected decline must be associated with an expected decline in the prices of investment instruments.in the prices of investment instruments.

However, expectations of such decline in the However, expectations of such decline in the rates of return on financial instruments will rates of return on financial instruments will not lead to a rise in speculative demand for not lead to a rise in speculative demand for money unless the expected rates of return money unless the expected rates of return fall below -2.5 percent.fall below -2.5 percent.


In an interest free economy, prices should In an interest free economy, prices should be stable, since monetary growth is tied to be stable, since monetary growth is tied to the rate of change in prices.the rate of change in prices.

if prices were expected to decline, because if prices were expected to decline, because e.g., some policy error, people would revert e.g., some policy error, people would revert to money, if the decline exceeds 2.5 percent.to money, if the decline exceeds 2.5 percent.

the effects of a rise in speculative demand the effects of a rise in speculative demand for money can be easily reversed through for money can be easily reversed through monetary policy. This is more assured since monetary policy. This is more assured since all monetary growth is automatically all monetary growth is automatically translated in CD’s, which flow through translated in CD’s, which flow through member banks to investors.member banks to investors.


THE SAVING INVESTMENT THE SAVING INVESTMENT FUNCTIONFUNCTION

Savings (S) is a function of the average rate Savings (S) is a function of the average rate of return on investment (of return on investment () as well as on the ) as well as on the level of real national income (Y).level of real national income (Y).

Private investment (Private investment () is a function of the ) is a function of the average rate of return on investment as well average rate of return on investment as well as the level of real national income (Y).as the level of real national income (Y).

Public investment in the exploitation of Public investment in the exploitation of mineral resources, is included in private mineral resources, is included in private investment, as it is decided upon in light of investment, as it is decided upon in light of profitability and national income.profitability and national income.


THE SAVING INVESTMENT THE SAVING INVESTMENT FUNCTIONFUNCTION

The rest of public investment is made by The rest of public investment is made by monetary authority through the issue of new monetary authority through the issue of new money, i.e., through monetary expansion.money, i.e., through monetary expansion.

The rate of monetary expansion depends on the The rate of monetary expansion depends on the difference between the target and the expected difference between the target and the expected rate of inflation (rate of inflation (ππ*-*-ππe)..

Under absolute price stability when the target Under absolute price stability when the target inflation (inflation (ππ*) is equal to zero, rate of monetary *) is equal to zero, rate of monetary expansion will not increase unless the current expansion will not increase unless the current level would lead the economy to deflation.level would lead the economy to deflation.


THE SAVING-INVESTMENT THE SAVING-INVESTMENT MARKETMARKET

( , )S S Y

( , ) [ , ( )]h g egI I Y I Y


Conditions for public investment Conditions for public investment through monetary expansionthrough monetary expansion

0 ( )g egI if

0 ( )g egI if

0 ( )g egI if


SAVING-INVESTMENT SAVING-INVESTMENT EQUILIBRIUM FRONTIEREQUILIBRIUM FRONTIER

A rise in (A rise in () would increase both ) would increase both savings and investment, as investment. savings and investment, as investment. Consequently income would increase Consequently income would increase

The equilibrium frontier of the saving-The equilibrium frontier of the saving-investment market can be represented investment market can be represented by a positively sloped curve that rises by a positively sloped curve that rises between income and the rate of return between income and the rate of return on CDC’s, similar to the Keynesian IS.on CDC’s, similar to the Keynesian IS.


SAVING-INVESTMENT EQUILIBRIUM FRONTIER

( , ) ( , ) [ , ( )]h g ehS Y I Y I Y

Y ,I, S


DEMAND & SUPPLY OF MONEYDEMAND & SUPPLY OF MONEY

[ , ( )]s g egM I Y

( , , )d d ehM M Y


THE MONETARY EQUILIBRIUM THE MONETARY EQUILIBRIUM FRONTIERFRONTIER

Rising (Rising () means the real sector is performing ) means the real sector is performing better and aggregate supply is rising. The better and aggregate supply is rising. The expected rate of inflation goes down and the gap expected rate of inflation goes down and the gap between target and expected inflation widens.between target and expected inflation widens.

It becomes safe to increase monetary growth It becomes safe to increase monetary growth without violating inflation target. Central without violating inflation target. Central deposits and ultimately investment increase .deposits and ultimately investment increase .

The equilibrium frontier of the money sector can The equilibrium frontier of the money sector can be represented by a positive relationship between be represented by a positive relationship between real income and RCDC.real income and RCDC.

It would be parallel to the Keynesian LM curve, It would be parallel to the Keynesian LM curve, but with a positive slope, as all money issued is but with a positive slope, as all money issued is automatically is invested in the real sector.automatically is invested in the real sector.


MONETARY EQUILIBRIUMMONETARY EQUILIBRIUM

( , ( ) [ , ( )]g e g eI Y I Y

Y ,I, S


FIGURE (4): FULL EMPLOYMENT EQUILIBRIUM

Y, I, S

IS

LM

FE


the IS frontier is more elastic than the LM the IS frontier is more elastic than the LM frontier.frontier.

Along the IS frontier, increases in RCDC Along the IS frontier, increases in RCDC leads to higher savings and investment then leads to higher savings and investment then to higher income.to higher income.

income is more responsive to increases in income is more responsive to increases in investment below the level of full investment below the level of full employment aggregate supply.employment aggregate supply.

it becomes relatively inelastic beyond the it becomes relatively inelastic beyond the level of full employment.level of full employment.

The same applies to the LM curve but to a The same applies to the LM curve but to a lesser extent.lesser extent.


Higher RCDC’s (Higher RCDC’s () motivate the monetary ) motivate the monetary authority to issue more money and increase authority to issue more money and increase central deposits, the expected inflation rate gets central deposits, the expected inflation rate gets closer to the target inflation rate, inhibiting closer to the target inflation rate, inhibiting further increases in monetary expansion.further increases in monetary expansion.

Responsiveness of income along the LM curve is Responsiveness of income along the LM curve is therefore constrained by both the rate of therefore constrained by both the rate of inflation and the full employment level of inflation and the full employment level of aggregate supply.aggregate supply.

That is why the LM should be less elastic That is why the LM should be less elastic everywhere than the IS curve.everywhere than the IS curve.

the elasticity of the IS relative to the LM frontier the elasticity of the IS relative to the LM frontier appears from Figure (3) to be an equilibrium appears from Figure (3) to be an equilibrium condition.condition.


MONETARY POLICYMONETARY POLICY The monetary authority can change money The monetary authority can change money

supply through two means:supply through two means: The addition or withdrawal of cash to The addition or withdrawal of cash to

central deposits.central deposits. The sale and purchase of central deposit The sale and purchase of central deposit

certificates through open market certificates through open market operations.operations.

Expansion must always be justified by a Expansion must always be justified by a possible contribution to real balances.possible contribution to real balances.

central bank monitors real growth through central bank monitors real growth through the investment performance of banks.the investment performance of banks.


Growth and past price performance will provide Growth and past price performance will provide the central bank with information on whether a the central bank with information on whether a faster expansion of the money supply can faster expansion of the money supply can contribute to real balances.contribute to real balances.

Monetary policy could be viewed as closely Monetary policy could be viewed as closely intertwined with development policy.intertwined with development policy.

the government may wish to encourage the government may wish to encourage investment in certain regions or sectors.investment in certain regions or sectors.

This would conflict with the central bank This would conflict with the central bank efficiency criteria used to allocate new money efficiency criteria used to allocate new money among banks.among banks.

It would introduce serious inefficiencies. It is It would introduce serious inefficiencies. It is best that the monetary authorities’ concentrate best that the monetary authorities’ concentrate on stabilization rather than development.on stabilization rather than development.


TRANSFORMATION TO ISLAMIC TRANSFORMATION TO ISLAMIC FINANCEFINANCE

Moving from conventional to Islamic Moving from conventional to Islamic finance cannot be done instantly or finance cannot be done instantly or overnight.overnight.

It must be done gradually with It must be done gradually with conscious planning and preparation .conscious planning and preparation .


THE CENTRAL BANK.THE CENTRAL BANK. Restructuring domestic and foreign assets Restructuring domestic and foreign assets

and liabilities on a non-interest basis.and liabilities on a non-interest basis. Liquidation of government and public Liquidation of government and public

sector debt. The new resources, especially sector debt. The new resources, especially from higher central bank profits, which from higher central bank profits, which would include larger seigniorage, could be would include larger seigniorage, could be used to repay the public debt. Some of the used to repay the public debt. Some of the debt can be swapped against equity in debt can be swapped against equity in public enterprises. public enterprises.

Changing government and public sector Changing government and public sector deposits to profit-and-loss-sharing deposits.deposits to profit-and-loss-sharing deposits.


RESERVE REQUIREMENTS.RESERVE REQUIREMENTS. Gradual transformation into 100 Gradual transformation into 100

percent reserve requirements would be percent reserve requirements would be advisable, since sudden switch would advisable, since sudden switch would create real hardships for banks.create real hardships for banks.

Increases in the required reserve ratio Increases in the required reserve ratio should be accompanied by injection of should be accompanied by injection of additional resources to banks through additional resources to banks through central deposits.central deposits.


TAX REFORMTAX REFORM Al-Zakah plays a central role in the Al-Zakah plays a central role in the

interest-free financial system. In addition, interest-free financial system. In addition, direct taxes are more consistent with equity direct taxes are more consistent with equity than indirect taxes.than indirect taxes.

A new system would be needed in which A new system would be needed in which wealth and income taxes are main features.wealth and income taxes are main features.

overly high rates of taxation must be overly high rates of taxation must be avoided and those with wealth below the avoided and those with wealth below the minimum necessary to cover for basic needs minimum necessary to cover for basic needs must be exempted.must be exempted.

Such approach would minimize tax evasion.Such approach would minimize tax evasion.


UNIVERSAL BANKINGUNIVERSAL BANKING The banking system needs to switch from The banking system needs to switch from

commercial to universal banking.commercial to universal banking. This requires retraining bankers into this This requires retraining bankers into this

new type of business.new type of business. Banking regulations must be changed to Banking regulations must be changed to

allow for universal banking activities.allow for universal banking activities. Particularly, feasibility studies, investment Particularly, feasibility studies, investment

evaluation and follow-up, management of evaluation and follow-up, management of holding companies and monitoring of holding companies and monitoring of subsidiaries would all be some of the new subsidiaries would all be some of the new skills required by bankers.skills required by bankers.

6 June 2004DR. MABID ALI AL-JARHI1 THE ISLAMIC MONETARY AND FINANCIAL SYSTEM Dr. Mabid Ali Al-Jarhi.

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Transcript of 6 June 2004DR. MABID ALI AL-JARHI1 THE ISLAMIC MONETARY AND FINANCIAL SYSTEM Dr. Mabid Ali Al-Jarhi.