DINAR AND DIRHAM EFFECT ON THE BANKING BUSINESS AND ITS SOLUTION

One of the issues that might arise when implementing the use of Dinar and Dirham is how it will affect the banking business. The introduction of Dinar and Dirham will retard the growth of the existing banking business. Banks that exist today are based entirely on the concept of interest-bearing instruments (Bexley, et.al, 2000). At present, a major portion of bank's income is derived from interest income. Interest income is derived from the loan that was given out to a bank's customer, from depositor's funds after deducting the required reserve set by the law (Rose, 2000). Banks will loan out a portion of depositor's money and charge the borrower with interest. The borrower will then deposits this loan into his account in the same bank or other bank, in which a portion of this money will be loan out to some other customer. This is known as money multiplier or money creation (Fabozzi, et.al, 1998). With the implementation of Dinar and Dirham, such money multiplier activities will be difficult if not impossible to occur. This is because each Dinar and Dirham must be represented with actual money that contains a certain weight of gold and silver. In this case Dinar will have 4.3 grams of gold and Dirham will contain 3.0 grams of pure silver (www.e-dinar.com). Dinar and Dirham can be considered as 'real money' or 'live money' and it is difficult to simply create or print or controlling its supply and demand. This is due to the fact that gold and silver is limited in supply by natural factors and requires scarce resources to produce (Rose, 2000). Therefore, it is different from fiat money, in which its existence promotes money multiplier and interest charges. Dinar and Dirham will promote real economy instead of financial economy. Under the Dinar and Dirham system, for every transaction, trades and investments, real physical money do change hands. Thus, we can say Dinar and Dirham can become a threat to the banking business due to the fact that it cannot be simply multiplied. As a result, the interest income derived from the money multiplier activity shall also be diminished. If this is the case, how banks will survive in the Dinar and Dirham system? The current economic and banking system is a system made by non-Muslim. It is time that Muslims of the world design its own economic and financial system (Ahmed, 2000). Banks have to be totally reformed. The present banking system is irrelevant in Dinar and Dirham system. Therefore this paper is to discuss the type of bank that should exist in the Dinar and Dirham system. The information presented is only conceptual, thus further research in different areas of this proposed type of bank is still needed to make it complete.