Gold investment and syariah-compliant claims

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EARLY in October, Bank Negara Malaysia, together with the Ministry of Domestic Trade and Consumer Affairs and the Companies Commission of Malaysia (SSM), raided several gold trading companies with the help of the police.

Among them were Genneva Malaysia Sdn Bhd, Pageantry Gold Bhd, Caesar Gold Sdn Bhd, Worldwide Far East Bhd and Bestino Group Bhd.

Genneva — probably the largest and the most high-profile of these companies — attracted much attention from the public and the media. Basically, these companies were raided as they were suspected of carrying out gold-trading schemes that the authorities claim were not sustainable.

One of the companies, as part of its marketing strategy, even highlighted that its gold trading model had been approved by Bank Negara and was syariah-compliant, with its own syariah advisory council. The company had even portrayed a former prime minister as endorsing its business.

The freezing of these companies' accounts by Bank Negara while investigations go on has, however, sparked widespread dissatisfaction among their customers. This is only to be expected as millions of ringgit of investors' money is at stake.

Deputy Finance Minister Datuk Awang Adek Hussein, referring to one company, said about 35,000 investors had invested about RM10 billion. He also said there was a huge gap between the deposits paid and assets, indicating the company's inability to pay returns to its customers. The company had initially delivered actual gold bars to its customers but later resorted to just deposit-taking.

A large number of investors had paid up but had yet to receive their gold, in some cases for longer than five months. This caused the regulators to move in and investigate the activities of these companies, particularly to ascertain the movement of assets.

Are these truly gold-trading companies or get-rich-quick schemes that we have seen time and time again that target the gullible public?

Gold, undoubtedly, is a good investment to be included in one's investment portfolio given the current global economic and political uncertainties. Within the last decade, the price of gold has increased five-fold. Gold is also a proven hedge against inflation. However, investors should know some basic investment rules before putting their money into any investment. Always check and double check if what is being offered is too good to be true.

Consider the following business model offered by one of the affected companies. For an investment in a one-kilogram gold bar worth, say, RM200,000, the customer is required to pay the amount upfront and is then given a 999 one-kilogram gold bar to hold. The customer is also given a monthly return of 2% for six months — that's RM4,000 per month, or a total of RM24,000 for the six months.

At the end of the sixth month, the customer may choose to sell the gold back to the company at the purchase price of RM200,000 or continue the scheme by putting in more cash if the price of gold rises, or getting a cash rebate if the price drops.

A simple glance would tell us that this is not an investment. At best, it is a loan by the customer to the company at an annual percentage rate (APR) of 24%, because the principal amount is guaranteed at the end when the customer "sells" back the gold.

The huge difference between this rate and normal fixed deposit rates could lure people to borrow money from banks to invest in this scheme, which may lead to shrinking deposits in the banking system.

However, the company has another rule which states that in the event a customer decides to sell back the gold, he must do so within seven days or be imposed a penalty of 20% to 25%! Note that the customer is given a return of 12% in the six-month period but could end up losing 25% by not selling back within the stipulated seven-day period.

Customers should also understand that once they take possession of the gold, there is no reason why they should be given a monthly return of 2% unless there are strings attached. In this case, they can only sell back their gold at the original purchase price and not at the prevailing market price.

The company is clearly betting on the rising trend of gold price, and is simply borrowing money from its customers at an APR of 24% per annum. If it can invest in the gold market or other investments that can give more than 24% per annum, then it would make sense to do this. In the past two years, however, returns from gold have not been able to match this.

A possible suspicion, therefore, is that earlier investors were paid using money from investors who came in later. Such activities would cause the company's cash holdings to balloon. However, when its liabilities were found to far exceed its assets, it became a matter of concern to the regulators.

The whereabouts of the cash deposits need to be investigated, particularly when new investors are also not getting their gold.

Unfortunately, the gold investment scheme has also brought a bad name to Islamic finance even though the mechanism is clearly against Islamic principles. The business model has been presented to the public as syariah-compliant. However, when seen in totality, the whole transaction is tantamount to loan transactions with fixed returns.

Also, gold is a monetary item in Islamic law and must be exchanged on the spot. Hence, the long delay in the delivery of gold after payment violates the syariah principles of Sarf, or rules for monetary items.

Accordingly, the National Fatwa Council of Malaysia has ruled that the operations of the company do not fully comply with syariah.

Investors must thus take precautions not to fall into such lucrative, too-good-to-be-true "investment" traps. Seek advice from investment experts. The cleanest investment strategy is to buy, take possession and sell in the future. There is always risk involved in investments and the investor must learn diversification techniques to minimise risk. In layman's terms, don't put all your eggs in one basket.

As for Islamic banking and finance, this and other issues like abandoned housing projects indicate that an independent syariah body is needed to oversee the development of the Islamic finance industry. If syariah advisers are paid by the banks and financial institutions, there is bound to be a conflict of interest that can later bring about more serious problems, which will hinder healthy growth and competitiveness of the industry.

One NGO that plays that independent role is the Dewan Ulama Nasional in Indonesia.

Malaysia needs to immediately address this issue if it wants to maintain its global competitiveness and leadership in Islamic banking and finance.

Dr Ahamed Kameel Mydin Meera is dean of International Islamic University Malaysia's Institute of Islamic Banking and Finance. He has presented many papers on the seigniorage of fiat money and the gold dinar. This story first appeared in

The Edge weekly edition of Nov 26-Dec 2, 2012.

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