e-Dinar: An Operational Mechanism

By:
Prof. Dr. Mohd. Ma’sum Billah
masum@applied-islamicfinance.com
masum2001@yahoo.com
+6019-3699542

INTRODUCTION

Completing this research paper is truly an eye opener because we thought the concept of electronic payment backed by gold is very new. However when we surfed the internet, there are many stores located at other parts of the world participate in this system. What ponders us is that why participation from the Muslim countries is very limited if the system exists?

Source: http://www.e-gold.com/ - Participating outlets

The concept of e-dinar is simple but the implementation requires special attention due to the underlying challenges. Since a very similar payment and exchange system, which is the e-gold, has already in the operations for a number of years, the development of e-dinar is not starting fro m zero base. Later, you would notice that e-dinar is very much similar to e-gold, in terms of its operation model.

What is e-dinar? e-dinar is an electronic based payment system which is backed by physical gold. Each e-dinar carries a fixed weight of 4.25 grams of pure 24k gold and the unit is infinitely divisible. Later we will show how it is being done. Unlike fiat money which is not backed by any commodity, e-dinar is backed by real gold which is stored securely in internationally renowned bullion repository. The physical gold bullion backing e-dinar units is always equivalent or larger than all electronic dinars in circulation.

To check the gold in circulation, you can go to the Examiner’s page. The Examiner will display tables that illustrating the gold in storage and circulation. The rule here is that the gold circulation must never exceed the gold in repository. This is how gold payment system differentiates itself from the fiat money system, backing itself with valuable commodity.

Source: www.e-gold.com / e-metal Balance Sheet

Account holders always have the option to exchange their dinars into any major currency or take physical possession of an equivalent amount of gold dinar anytime.

How does e-dinar operates?

The operator

An operator’s role in mobilizing the system is very essential. We notice that credibility and reliability of the operator will ensure the participation level among depositors and dealers. You can say that the operator is essentially the middle party who facilitate the transaction. So far, Malaysia has one e-dinar operator, who names itself as e-dinar Limited and the company is located in Labuan Sabah, Malaysia.

Among others, the roles of operator are summarized below:

Despite the existence of e-dinar operator in Malaysia, which is seen as positive sign, there are still underlying concerns such as:

For the past few months, we don’t see any development on e-dinar’s web pages. The content is static and no progress of new information on the portal. Our question is, has the company closed down? We have tried to communicate using e-mails as there are no contact person and phone numbers, but failed to get any responses.

Account creation

The account opening is very simple. If you can read and write and have access to the internet, irregardless of age, you can have your account created free of charge, in couples of minutes. Certainly we have no issue on its simplicity but our concerns are money launderer and person without legal capacity are too eligible to open the account too. Basically the account opening is free for all, like opening an email account with Yahoo or Hotmail. No filtering or confirmation of identification against reliable source is required.

Purchasing the gold

As a seller you don’t have to do anything else but wait for the funds to be transferred to your e-dinar account. But as a buyer you have to buy gold before you can transact. At the moment e-dinar uses US currency only to buy gold. But other e-gold operators, which have been operating for a longer time, offer other major traded currencies. How much does it cost to buy 1 e-dinar? Buyer has to refer to the exchange rate board for the rate. The exchange rate board is up-dated as and when there are any changes.

Source: www.e-dinar.com/ exchange_rate

Performing the transaction

The fees structure during the normal course of transaction is summarized below

During the in-exchange account holder will have to add up 4% on top of the spot price which is illustrated in second table below. For example: In-exchange: 56.73 x 1.04 = 58.99 .

All you have to do is to insert the trader’s account number. Since e-dinar is riding on e-gold’s capability you will find that you can logon on e-dinar or e-gold account. In e-gold, is has a calculator to convert the cash amount into gold weigh. For example, if you purchase a PC amounting USD5,000, the calculator will convert into gold weigh i.e how much grams or ounce is required for the transaction. You will use this to check whether you have enough gold repositories in your account or not.

Source: www-e-gold.com \unsecured\fees.html (the converter calculator)

After you have done with the balance checking, you then fill up the form, entering all the necessary details and click for confirmation. The administrator will notify the transaction through your corresponding e-mail. According to e-dinar Ltd and e-gold Ltd, they are using a digital certificates encrypt data that uses Secure Sockets Layer (SSL) technology, the industry-standard method for protecting web communications developed by Netscape Communications Corporation. The SSL security protocol provides data encryption, server authentication, message integrity, and optional client authentication for a TCP/IP connection. Because SSL is built into all major browsers and web servers, simply installing a digital certificate turns on their SSL capabilities.

Total process

The total process of e-dinar transaction can be simplified in below diagram:

Practical issues in e-dinar

We feel that there are still valid issues worth discussing or note taking:

The participating outlets especially in Southeast Asia or Muslim nations are very limited, you can’t find any. The range of outlets available in the e-gold directory is not interesting or less relevant. To make the system works better strategic alliances must be formed with major traders and stores such as Amazon.com, Compaq, Dell, music and video stores etc. Increase in the popular participating outlets, definitely will increase the acceptance level of e-dinar. Otherwise there is no use of trading using e-dinar, where the number of outlets that accept e-dinar is very few. Classic example, the e-dinar Ltd itself, the link to e-dinar operating outlets is absent. So what is the add value to the e-dinar account holder? Practically none, so when this happens, e-dinar will not work.

In the agreement, the company is not bound by any regulations and no guarantee on the liability inherited by the account holders. This is a major risk to the depositor. Who will ensure that the safe is still in the account? If the figure suddenly gone due to hackers and things alike, who will be held responsible? We not quite sure whether e-dinar is subject to Malaysian law or international law since it has connection with e-gold which operates in States. Trust in e-dinar operator as part of the total system is very important otherwise the implementation of the process will collapse.

There is no local bank’s participation in e-dinar. Is the framework is yet to be in placed? Or the possibility of money laundering has actually forbidden banks to participate in the system due to lack of transparency and control? As in the case of e-dinar, it doesn’t clearly indicate a list of banks in Malaysia that we can contact or liaise with when it comes to purchasing and redemption of gold dinar.

Although they claim that the transaction cost is lower than paying via credit cards, users appreciate credit limit more than the transaction fees. Based on observation, irregardless of the interest rate charged to credit card holder, when it comes to state of emergency such running out of cash, credit limit is a life saver. So marketing for low transaction cost will no longer become a competitive edge sort of advantage. Here e-dinar must at least match with the available mode of payment’s total package in order to compete. Everybody is very open to conceptual but we must always bear in mind that conceptual must reflect the practicality and application within the context of the ummah. Especially for e-dinar, it is not just meant for the Muslims but the non-Muslims too. We must understand that the non-Muslims in terms of the advancement in the technology is far superior but it doesn’t mean that we can not tap on it and make it as our competitive advantage.

You can not use RM to buy gold to deposit in your e-dinar account. First you need to buy USD using local currency to buy gold, so there’s still exchange risk due to fluctuations. So one could say, it is not cheaper to transact using e-dinar. If it is so, the costs saving is negligible considering the other risks come to fore.

We found that the penetration level of the world population on e-dinar system is still limited due to the level of literacy and IT infrastructure within the locality. We foresee that the assimilation process will take for quite some time before it becomes the fundamental or requirement in the total business process.

CONCLUSION

No doubt that e-dinar, conceptually is interesting and worth participating. But new users like us, will draw some reservations due to security concerns. Not until the government of Malaysia endorses such system by appointing a governing body to manage the e-dinar or e-gold operators, we will still maintain such reservation. Here the argument is more on implementation rather conceptual acceptance. The other point is participation among traders. What’s point of having e-dinar account if majority outlets do not recognize such payment system just yet. Perhaps the least that we as Muslim can do is to open an e-dinar account to show our support for the system.