Application of the Grondona system in selected OIC countries : justification, simulation, feasibility and evaluation from syariah perspective

Abstract

In view of the continuing episodes of financial crisis involving fiat money systems around the globe, this thesis aims to describe the author`s analysis of the Grondona system of conditional currency convertibility from theoretical, Shariah and economic perspectives. The first part evaluates the theoretical soundness of the Grondona system in comparison to fiat money systems by using library research. The second part examines the Grondona system’s structure and operations from the Shariah point of view by using library research. It also applies the principle of siyasah shariyyah to evaluate the Grondona system as a possible policy initiative for the OIC countries. Simulations of the Grondona system in four selected OIC countries, namely Malaysia, Turkey, Pakistan and Indonesia are also provided in order to analyse the potential impact of each country’s CRD (Commodity Reserve Department) on macro-economic indicators. The simulations are performed by using a program developed in C++ and the results of the simulation are analyzed by using Eviews. The theoretical evaluation of the Grondona system shows that it contains essential attributes of a system for preserving sound and stable money. From the Shariah analysis of the Grondona system, it has been found that the fundamental principle of economic planning of Prophet Yusuf (A.S) was found in the Grondona system. The system accumulates reserves of primary commodities during times of abundance and releases those reserves during periods of scarcity, thereby helping to stabilise the "business cycle" through its counter-cyclical influence. Thus, in the light of such benefits, it may be inferred that implementation of the Grondona system is in accord with siyasah shariyyah since it helps to secure the maslahah (collective benefit) and prevent mafsadah (harm). The simulation results for the Grondona system shows an inverse relation between the prices of primary commodities and the quantity of reserves stockpiled by each country`s CRD. Further, the simulation has shown how the national money supply of each country changes with the change in the levels of reserves of the different primary commodities stockpiled by the CRDs. Finally, correlation analysis of the simulation results shows the CRD’s possible effects on several economic indicators, namely exchange rate, inflation, money supply and interest rate. The results show that the exchange rate was significantly correlated with the changes in money supply caused by the CRD operations in all four OIC countries. Besides that, the correlation with inflation was found to be significant only for Malaysia. In addition, correlations with changes in the national money supply (M0) were found to be statistically significant for Pakistan and Indonesia, while money supply correlation using M1 was significant only for Turkey. However, the CRD operations did not affect the interest rate in all four OIC countries. Due to limitations of data, these simulations and correlation analyses could be performed only for the past five years: it will be valuable to repeat them as longer data series become available.