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The Chinese calendar defines the lunar month containing the winter solstice as the eleventh month, meaning that Chinese New Year usually falls on the second new moon after the winter solstice rarely the third if an intercalary month intervenes. In the Gregorian calendar , the Chinese New Year begins at the new moon that falls between 21 January and 20 February. According to tales and legends, Chinese New Year started with a mythical beast called the Nian a beast that lives under the sea or in the mountains during the annual Spring Festival.

The Nian would eat villagers, especially children in the middle of the night. An older man appeared before the villagers went into hiding and said that he would stay the night and would get revenge on the Nian. The old man put red papers up and set off firecrackers. The day after, the villagers came back to their town and saw that nothing had been destroyed.

They assumed that the old man was a deity who came to save them. The villagers then understood that Yanhuang had discovered that the Nian was afraid of the color red and loud noises. From then on, Nian never came to the village again. The Nian was eventually captured by Hongjun Laozu , an ancient Taoist monk. After that, Nian retreated to a nearby mountain. The name of the mountain has long been lost over the years.

There is also a saying that the beast is "Xi", rather than Nian. Xi is a kind of faint monster, and Nian is not related to the animal beasts in terms of meaning, it is more like a mature harvest. The word "Nian" is composed of the words "he" and "Qian". It means that the grain is rich and the harvest is good. The farmers review the harvest at the end of the year and are also full of expectations for the coming year.

Before the new year celebration was established, ancient Chinese gathered and celebrated the end of harvest in autumn. However, this was not the Mid-Autumn Festival , during which Chinese gathered with family to worship the Moon. In the Classic of Poetry , a poem written during Western Zhou BC - BC by an anonymous farmer, described the traditions of celebrating the 10th month of the ancient solar calendar , which was in autumn.

The 10th-month celebration is believed to be one of the prototypes of Chinese New Year. It evolved into the practice of cleaning one's house thoroughly in the days preceding Chinese New Year. The first mention of celebrating at the start of a new year was recorded during the Han dynasty BC — AD. I bring my wife and children, to worship ancestors and commemorate my father. It's a thriving view. Han Chinese also started the custom of visiting acquaintances' homes and wishing each other a happy new year.

In Book of the Later Han , volume 27, a county officer was recorded as going to his prefect's house with a government secretary, toasting the prefect, and praising the prefect's merit. The Northern and Southern dynasties book Jingchu Suishiji described the practice of firing bamboo in the early morning of New Year's Day, [33] which became a New Year tradition of the ancient Chinese.

It is said that the custom was started by Emperor Taizong of Tang. Word of the emperor's gesture spread, and later it became the custom of people in general, who used Xuan paper instead of gold leaves. As imperial examinations became essential and reached their heyday under the Tang dynasty, candidates curried favour to become pupils of respected teachers, in order to get recommendation letters.

As described by Song dynasty official Zhang Tangying in his book Shu Tao Wu , volume 2: on the day of New Year's Eve, the emperor ordered the scholar Xin Yinxun to write the couplets on peach wood and hang them on the emperor's bedroom door. Amid the sound of firecrackers a year has come to an end, The spring wind has wafted warm breath to the Tusu wine. While the rising sun shines over each and every household, People get rid of the old couplets and put up the new ones.

After gunpowder was invented in the Tang dynasty and widely used under the Song dynasty , people modified the tradition of firing bamboo by filling the bamboo pole with gunpowder, which made for louder explosions. Later under the Song, people discarded the bamboo and started to use paper to wrap the gunpowder in cylinders, in imitation of the bamboo. It was also during the Song dynasty that people started to give money to children in celebration of a new year.

Sometimes put one or two silver currency inside dumplings, and whoever gets the money will attain a year of fortune. The lucky money was presented in one of two forms: one was coins strung on red string; the other was a colorful purse filled with coins.

In , the ruling Kuomintang party decreed that the Chinese New Year would fall on 1 Jan of the Gregorian Calendar, but this was abandoned due to overwhelming popular opposition. The State Council of the People's Republic of China announced that the public should "change customs"; have a "revolutionized and fighting Spring Festival"; and since people needed to work on Chinese New Year Eve, they did not need holidays during Spring Festival day.

The old celebrations were reinstated in On the other hand, the overseas Chinese diaspora mostly prefer the term "Lunar New Year", while "Chinese New Year" remains a popular and convenient translation for people of non-Chinese cultural backgrounds.

Korea, Vietnam, Singapore, Malaysia, Indonesia and the Philippines celebrate it as an official festival. Chinese New Year is observed as a public holiday in some countries and territories where there is a sizable Chinese population. Since Chinese New Year falls on different dates on the Gregorian calendar every year on different days of the week, some of these governments opt to shift working days in order to accommodate a longer public holiday.

In some countries, a statutory holiday is added on the following work day if the New Year as a public holiday falls on a weekend, as in the case of , where the New Year's Eve 9 February falls on Saturday and the New Year's Day 10 February on Sunday. For other countries and regions where Chinese New Year is celebrated but not an official holiday, see the table below.

Red couplets and red lanterns are displayed on the door frames and light up the atmosphere. The air is filled with strong Chinese emotions. In stores in Beijing, Shanghai, Wuhan, and other cities, products of traditional Chinese style have started to lead fashion trend[s]. Buy yourself a Chinese-style coat, get your kids tiger-head hats and shoes, and decorate your home with some beautiful red Chinese knots, then you will have an authentic Chinese-style Spring Festival.

During the festival, people around China will prepare different gourmet dishes for their families and guests. Influenced by the flourished cultures, foods from different places look and taste totally different. Among them, the most well-known ones are dumplings from northern China and Tangyuan from southern China.

For those that practice Buddhism, the Laba holiday is also considered Bodhi Day. The porridge was prepared by the women of the household at first light, with the first bowl offered to the family's ancestors and the household deities. Every member of the family was then served a bowl, with leftovers distributed to relatives and friends.

The concept of the "La month" is similar to Advent in Christianity. Many families eat vegetarian on Chinese New Year eve, the garlic and preserved meat are eaten on Chinese New Year day. On the days immediately before the New Year celebration, Chinese families give their homes a thorough cleaning.

It is believed the cleaning sweeps away the bad luck of the preceding year and makes their homes ready for good luck. Brooms and dust pans are put away on the first day so that the newly arrived good luck cannot be swept away. Some people give their homes, doors and window-frames a new coat of red paint; decorators and paper-hangers do a year-end rush of business prior to Chinese New Year. Purchasing new clothing and shoes also symbolize a new start.

Any hair cuts need to be completed before the New Year, as cutting hair on New Year is considered bad luck due to the homonymic nature of the word "hair" fa and the word for "prosperity". Businesses are expected to pay off all the debts outstanding for the year before the new year eve, extending to debts of gratitude. Thus it is a common practice to send gifts and rice to close business associates, and extended family members.

In many households where Buddhism or Taoism is observed, home altars and statues are cleaned thoroughly, and decorations used to adorn altars over the past year are taken down and burned a week before the new year starts on Little New Year , to be replaced with new decorations. This is done so that the Kitchen God can report to the Jade Emperor of the family household's transgressions and good deeds. Families often offer sweet foods such as candy in order to "bribe" the deities into reporting good things about the family.

Prior to the Reunion Dinner, a prayer of thanksgiving is held to mark the safe passage of the previous year. Confucianists take the opportunity to remember their ancestors, and those who had lived before them are revered. Some people do not give a Buddhist prayer due to the influence of Christianity, with a Christian prayer offered instead. This meal is comparable to Thanksgiving dinner in the U.

In northern China, it is customary to make jiaozi , or dumplings, after dinner to eat around midnight. Dumplings symbolize wealth because their shape resembles a Chinese sycee. In contrast, in the South, it is customary to make a glutinous new year cake niangao and send pieces of it as gifts to relatives and friends in the coming days. After dinner, some families may visit local temples hours before midnight to pray for success by lighting the first incense of the year; however in modern practice, many households held parties to celebrate.

It is a traditional practice to light fireworks, burn bamboo sticks and firecrackers, and lion dance troupes, were done commonly as a tradition to ward off evil spirits. Typical actions such as lighting fires and using knives are considered taboo, thus all consumable food has to be cooked prior. Using the broom, including swearing and breaking any dinnerware without appeasing the deities, are also considered taboo. Normal traditions occurring on the first day involve house gatherings to the families, specifically the elders and families to the oldest and most senior members of their extended families, usually their parents, grandparents and great-grandparents, and trading Mandarin oranges as a courtesy to symbolize wealth and good luck.

Business managers may also give bonuses in the form of red packets to employees to symbolize a smooth-sailing career. While fireworks and firecrackers are traditionally very popular, some regions have banned them due to concerns over fire hazards. For this reason, various city governments e. As a substitute, large-scale fireworks display have been launched by governments in Hong Kong and Singapore.

However, in some cases such as Hong Kong being an exception to do so for the indigenous peoples of the walled villages of New Territories in a limited scale. Traditionally, married daughters didn't have the opportunity to visit their birth families frequently. During the days of imperial China, "beggars and other unemployed people circulate[d] from family to family, carrying a picture [of the God of Wealth] shouting, " Cai Shen dao! Business people of the Cantonese dialect group will hold a 'Hoi Nin' prayer to start their business on the second day of Chinese New Year, blessing business to strive in the coming year.

A representative from the government asks Che Kung about the city's fortune through kau cim. Rural villagers continue the tradition of burning paper offerings over trash fires. It is considered an unlucky day to have guests or go visiting. In those communities that celebrate Chinese New Year for 15 days, the fourth day is when corporate "spring dinners" kick off and business returns to normal.

Other areas that have a longer Chinese New Year holiday will celebrate and welcome the gods that were previously sent on this day. This day is the god of Wealth's birthday. In Taiwan, businesses traditionally re-open on the next day the sixth day , accompanied by firecrackers. It is also common in China that on the 5th day people will shoot off firecrackers to get Guan Yu 's attention, thus ensuring his favor and good fortune for the new year.

The sixth day is Horse's Day, on which people drive away the Ghost of Poverty by throwing out the garbage stored up during the festival. The ways vary but basically have the same meaning—to drive away the Ghost of Poverty, which reflects the general desire of the Chinese people to ring out the old and ring in the new, to send away the previous poverty and hardship and to usher in the good life of the New Year.

The seventh day, traditionally known as Renri the common person's birthday , is the day when everyone grows one year older. In some overseas Chinese communities in Southeast Asia, such as Malaysia and Singapore, it is also the day when tossed raw fish salad, yusheng , is eaten for continued wealth and prosperity.

For many Chinese Buddhists, this is another day to avoid meat, the seventh day commemorating the birth of Sakra , lord of the devas in Buddhist cosmology who is analogous to the Jade Emperor. Another family dinner is held to celebrate the eve of the birth of the Jade Emperor, the ruler of heaven.

A prominent requisite offering is sugarcane. Incense, tea, fruit, vegetarian food or roast pig, and gold paper, are served as a customary protocol for paying respect to an honored person. Candles are lit outside houses as a way to guide wayward spirits home. Families may walk the streets carrying lanterns. In China and Malaysia, this day is celebrated by individuals seeking a romantic partner, akin to Valentine's Day.

The taste is an indication of their possible love: sweet represents a good fate while sour represents a bad fate. The venue will usually be in or near the home of the most senior member of the family. The New Year's Eve dinner is very large and sumptuous and traditionally includes dishes of meat namely, pork and chicken and fish.

Most reunion dinners also feature a communal hot pot as it is believed to signify the coming together of the family members for the meal. Most reunion dinners particularly in the Southern regions also prominently feature specialty meats e. If in the previous year a death was experienced in the family, seven dishes are served. Other traditional foods consists of noodles, fruits, dumplings, spring rolls, and Tangyuan which are also known as sweet rice balls.

Each dish served during Chinese New Year represents something special. The noodles used to make longevity noodles are usually very thin, long wheat noodles. These noodles are longer than normal noodles that are usually fried and served on a plate, or boiled and served in a bowl with its broth.

Expectedly, the noodles symbolize the wish for a long life. The fruits that are typically selected would be oranges, tangerines, and pomelos as they are round and "golden" color symbolizing fullness and wealth. Their lucky sound when spoken also brings good luck and fortune. Pomelos is believed to bring constant prosperity. Dumplings and spring rolls symbolize wealth, whereas sweet rice balls symbolize family togetherness.

Red packets for the immediate family are sometimes distributed during the reunion dinner. These packets contain money in an amount that reflects good luck and honorability. Several foods are consumed to usher in wealth, happiness, and good fortune. Several of the Chinese food names are homophones for words that also mean good things.

Many places in China still follow the tradition of eating only vegetarian food on the first day of the New Year, as it is believed that doing so will bring joy and peace into their lives for the whole year. Like many other New Year dishes, certain ingredients also take special precedence over others as these ingredients also have similar-sounding names with prosperity, good luck, or even counting money.

The parents wrapped coins in red paper and placed them next to their children's pillows. When Sui came, the flash of the coin scared him away. From then on, every New Year's Eve, parents will wrap the coin in red paper to protect their children. Red packets almost always contain money, usually varying from a couple of dollars to several hundred. A married person would not turn down such a request as it would mean that he or she would be "out of luck" in the new year. Red packets are generally given by established married couples to the younger non-married children of the family.

It is custom and polite for children to wish elders a happy new year and a year of happiness, health and good fortune before accepting the red envelope. Red envelopes are then kept under the pillow and slept on for seven nights after Chinese New Year before opening because that symbolizes good luck and fortune. In Taiwan in the s, some employers also gave red packets as a bonus to maids , nurses or domestic workers from Southeast Asian countries, although whether this is appropriate is controversial.

In the mids, Chinese messaging apps such as WeChat popularized the distribution of red envelopes in a virtual format via mobile payments , usually within group chats. The child will be frightened by the touch and wake up and have a fever. The fever eventually will cause the child to be mentally retarded. A folklore tale of sui is about an elderly couple with a precious son. On the night of New Year's Eve, since they were afraid that sui would come, they took out eight pieces of copper coins to play with their son in order to keep him awake.

Their son was very sleepy, however, so they let him go to sleep after placing a red paper bag containing the copper coins under the child's pillow. The two older children also stayed with him for the whole night. Suddenly, the doors and windows were blown open by a strange wind, and even the candlelight was extinguished. It turned out to be a sui. When the sui was going to reach out and touch the child's head, the pillow suddenly brightened with the golden light, and the sui was scared away, so the exorcism effect of "red paper wrapped copper money" spread in the past China [96] see also Chinese numismatic charms.

Another tale is that a huge demon was terrorising a village and there was nobody in the village who was able to defeat the demon; many warriors and statesmen had tried with no luck. A young orphan stepped in, armed with a magical sword that was inherited from his ancestors, and battled the demon, eventually killing it. Peace was finally restored to the village, and the elders all presented the brave young man with a red envelope filled with money to repay the young orphan for his courage and for ridding the village of the demon.

In addition to red envelopes, which are usually given from older people to younger people, small gifts usually food or sweets are also exchanged between friends or relatives of different households during Chinese New Year.

Gifts are usually brought when visiting friends or relatives at their homes. Common gifts include fruits typically oranges, but never trade pears , cakes, biscuits, chocolates, and candies. Gifts are preferred to be wraped with red or golden paper, which symbolises good luck.

Certain items should not be given, as they are considered taboo. Taboo gifts include: [98] [99] []. Markets or village fairs are set up as the New Year is approaching. These usually open-air markets feature new year related products such as flowers, toys, clothing, and even fireworks and firecrackers. It is convenient for people to buy gifts for their new year visits as well as their home decorations. In some places, the practice of shopping for the perfect plum tree is not dissimilar to the Western tradition of buying a Christmas tree.

Bamboo stems filled with gunpowder that was burnt to create small explosions were once used in ancient China to drive away evil spirits. In modern times, this method has eventually evolved into the use of firecrackers during the festive season.

Firecrackers are usually strung on a long fused string so it can be hung down. Each firecracker is rolled up in red papers, as red is auspicious, with gunpowder in its core. Once ignited, the firecracker lets out a loud popping noise and, as they are usually strung together by the hundreds, the firecrackers are known for their deafening explosions that are thought to scare away evil spirits.

The burning of firecrackers also signifies a joyful time of year and has become an integral aspect of Chinese New Year celebrations. Watching Chinese New Year films is an expression of Chinese cultural identity. During the New Year holidays, the stage boss gathers the most popular actors whom from various troupes let them perform repertories from Qing dynasty. Nowadays people prefer celebrating the new year with their family by watching these movies together.

The color red is commonly worn throughout Chinese New Year; traditional beliefs held that red could scare away evil spirits and bad fortune. The wearing of new clothes is another clothing custom during the festival, the new clothes symbolize a new beginning in the year, and enough things to use and wear in this time.

In some places, the taking of a family portrait is an important ceremony after the relatives are gathered. The photo is taken at the hall of the house or taken in front of the house. The most senior male head of the family sits in the center. As with all cultures, Chinese New Year traditions incorporate elements that are symbolic of deeper meaning. Therefore, it symbolizes the arrival of luck, happiness, and prosperity. For the Cantonese -speaking people, if the fu sign is hung upside down, the implied dao upside down sounds like the Cantonese word for "pour", producing "pour the luck [away]", which would usually symbolize bad luck; this is why the fu character is not usually hung upside-down in Cantonese communities.

Red is the predominant color used in New Year celebrations. Red is the emblem of joy, and this color also symbolizes virtue, truth and sincerity. On the Chinese opera stage, a painted red face usually denotes a sacred or loyal personage and sometimes a great emperor. Candies, cakes, decorations and many things associated with the New Year and its ceremonies are colored red. According to Chinese tradition, the year of the pig is a generally unlucky year for the public, which is why you need to reevaluate most of your decisions before you reach a conclusion.

However, this only helps you get even more control over your life as you learn to stay ahead of everything by being cautious. Nianhua can be a form of Chinese colored woodblock printing, for decoration during Chinese New Year. The following are popular floral decorations for the New Year and are available at new year markets. Traditionally, families gather together during the Chinese New Year.

In modern China, migrant workers in China travel home to have reunion dinners with their families on Chinese New Year's Eve. Owing to a large number of interprovincial travelers, special arrangements were made by railways , buses and airlines starting from 15 days before the New Year's Day. This day period is called chunyun , and is known as the world's largest annual migration. In Taiwan, spring travel is also a major event. The majority of transportation in western Taiwan is in a north—south direction: long-distance travel between urbanized north and hometowns in the rural south.

Transportation in eastern Taiwan and that between Taiwan and its islands is less convenient. Cross-strait flights between Taiwan and mainland China began in as part of Three Links , mostly for "Taiwanese businessmen" to return to Taiwan for the new year. Chinese New Year is also celebrated annually in many countries which houses significant Chinese populations. These include countries throughout Asia, Oceania, and North America. Chinese New Year is a national public holiday in many Southeast Asian countries and considered to be one of the most important holidays of the year.

In Singapore, Chinese New Year is officially a two-day public holiday. Chinese New Year is accompanied by various festive activities. One of the main highlights is the Chinatown celebrations. In , this included a Festive Street Bazaar, nightly staged shows at Kreta Ayer Square and a lion dance competition. It is an annual street parade in Singapore, well known for its colorful floats and wide variety of cultural performances.

In the Philippines, Chinese New Year is considered to be the most important festival for Filipino-Chinese , and its celebration has also extended to the non-Chinese majority Filipinos. In Thailand, one of the most populous Chinese descent populated countries. Also celebrated the great Chinese New Year festivities throughout the country, especially in provinces where many Chinese descent live such as Nakhon Sawan , Suphan Buri , Phuket etc. Which is considered to promote tourism in the same agenda as well.

In the capital, Bangkok in Chinatown , Yaowarat Road , there is a great celebration. Which usually closes the road making it a pedestrian street and often have a member of royal family came to be the president of the ceremony, always open every year, such as Princess Maha Chakri Sirindhorn. This restriction is ended when the regime has changed and the President Suharto was overthrown. The celebration is conducted unofficially by Chinese community from to In Indonesia, the first day of the Chinese New Year is recognized as a part of the celebration of the Chinese religion and tradition of Chinese community.

The remaining 14 days are celebrated only by ethnic Chinese families. Every year, the Ministry of Religious Affairs Kementerian Agama Republik Indonesia set the specific date of religious holiday based on input from religious leaders. A lot shopping malls decorated its building with lantern, Chinese words and lion or dragon with red and gold as main color. Lion dance is a common sight around Chinese houses, temples and its shop houses. Usually, the Buddhist , Confucian and Taoist Chinese will burn a big incense made by aloeswood with dragon-decorated at front of their house.

The Chinese temple is open 24 hours at the first day, their also distributes a red envelopes and sometimes rice, fruits or sugar to the poor around. And often wear red clothes because it is believed to bring auspiciousness to life.

Observed by Thai Chinese and parts of the private sector. Usually celebrated for three days, starting on the day before the Chinese New Year's Eve. For the year one year only the government declared Chinese New Year a government holiday. It applies mostly to civil servants, financial institutions and private businesses can decide whether or not to observe it. With one of the largest Chinese populations outside of Asia , Sydney also claims to have the largest Chinese New Year Celebrations outside of Asia with over , people attending the celebrations in Chinatown annually.

The events there span over three weeks including the launch celebration, outdoor markets, evening street food stalls, Chinese top opera performances, dragon boat races, a film festival and multiple parades that incorporate Chinese, Japanese, Korean and Vietnamese people. More than , people attend notably the main parade with over 3, performers. Apart from Sydney, other state capital cities in Australia also celebrate Chinese New Year due to large number of Chinese residents.

The common activities are lion dance, dragon dance, New Year market, and food festival. The city of Wellington hosts a two-day weekend festival for Chinese New Year, [] and a one-day festival is held in Dunedin , centred on the city's Chinese gardens. The festivities include cultural festival, [] music concert, [] fireworks on the Hudson River near the Chinese Consulate, [] and special exhibits.

The festival incorporates Grant and Kearny Streets into its street festival and parade route, respectively. The use of these streets traces its lineage back to early parades beginning the custom in San Francisco. In , with the discovery of gold and the ensuing California Gold Rush , over 50, people had come to San Francisco to seek their fortune or just a better way of life.

Among those were many Chinese, who had come to work in the gold mines and on the railroad. By the s, the residents of San Francisco's Chinatown were eager to share their culture with their fellow San Francisco residents who may have been unfamiliar with or hostile towards it. The organizers chose to showcase their culture by using a favorite American tradition — the parade. They invited a variety of other groups from the city to participate, and they marched down what today are Grant Avenue and Kearny Street carrying colorful flags, banners, lanterns, drums, and firecrackers to drive away evil spirits.

Festivities include a parade, cultural feast, fireworks, concerts and performances. In Paris, celebrations have been held since the s in several districts during one month with many performances [] and the main of the three parades with 40 groups and 4, performers is attended alone by more than , people in the 13th arrondissement. Celebrations have been held officially in The Hague since Many celebrate the festival in Chinatown , Kolkata , India, where a significant community of people of Chinese origin exists.

In Kolkata, Chinese New Year is celebrated with lion and dragon dance. In Pakistan, the Chinese New Year is also celebrated among the sizable Chinese expatriate community that lives in the country. During the festival, the Chinese embassy in Islamabad arranges various cultural events in which Pakistani arts and cultural organizations and members of the civil society also participate.

Chinese culture in Mauritius is an important component of the multiculturalism in Mauritius. Sino-Mauritians are very attached to Chinese traditions. The festival starts on the Chinese New Year's Eve by lighting on fire crackers to ward off evil spirits. Some families would also visit pagoda on New Year to honour their ancestors. Chinese items e. Chinese lanterns are also used as decorations. They probably predate the Ming dynasty — , but did not become widespread until then.

Numerous other greetings exist, some of which may be exclaimed out loud to no one in particular in specific situations. But the concept of how the rate of interest emerges in the economy, and how it can be phased out from this system, has not matured either in the mainstream literature and practice or within the theory and practice of Islamic economics and finance.

The latter area thus remains inextricably submerged in mainstream academic thinking relating to money, interest rate and the real economy relations. The net result of these developments in the history of economic thought in respect of the theory of interest and capital accumulation, and which Islamic economics and finance have emulated, is this: Capital accumulation embodies savings arising from abstemiousness in present consumption for attaining maximum intertemporal consumer utility.

This idea is embodied in the classical theory of intertemporal savings and consumption contributed by Ramsay The capitalized value of all future yields from present abstemiousness in consumption is obtained by a discounting method that invariably imputes the discount rate as the shadow rate of interest for capitalizing future uncertain yields. The Position of Islamic Economics and Finance in Respect of Capitalization of Assets with Interest-free Instruments Islamic economic and finance gurus have adopted a time-value of money discounting approach in asset valuation.

They thus failed to understand the interest-rate implications of the discounting approach. The result in asset valuation is that a future market, which remains undetermined, would be capitalized at a rate either less or greater than the expected rate of return on the stream of future income flows.

Microenterprises bear the burden of the excessive cost of capital. The problem arises when large shareholders aim at discounting their risk by taking a larger share of the profits in joint venture. This leaves smaller residual shares and dividends for the small borrowers and participants in Islamic funds.

Microenterprises thus find it costly to refinance their assets by means of the lower share of total profits of joint ventures. The same result can swing in favour of micro-enterprises at the expense of shareholders when an under-valuation of the intergenerational flow of projected returns takes place. In such a case, the question is this: Can the investor be risk-avert and divert potential investments into risk-free alternatives, such as short-term trade using the murabaha mark-up financing instrument?

Consequently, although interest-free financing has been promoted by Islamic banks, yet the method towards realizing this goal has not been well-defined in terms of investment, liquidity problem, asset valuation and socioeconomic development of the ummah. Besides, it was pointed out above that secondary financing instruments have been used in place of the principal Islamic financing instruments to argue in favour of operations in interest-free financing.

Yet there are looming sharia problems relating to interest rates in these secondary financing instruments. Two of these problems are first, the absence of the idea of pooled funds made by combining individual types of financing modes. The sharia gurus have not looked into this possibility.

Both of these approaches in asset valuation and financing run into the same kinds of methodological problems mentioned above. This situation is found to be empirically true of Islamic financing everywhere Choudhury, a. The Money, Finance and Real Economy Relationships in an Interest-Free Regime of Socioeconomic Change Islamic economists argue on behalf of establishing an interest-free regime of socioeconomic change by retaining the existing fractional monetary reserve system, despite introducing the compelling need for delivering social justice Chapra, The arguments, prescriptions and implementation of such an approach through interest-free targeting are untenable.

We explain this problem below in terms of a general system of comprehensive socioeconomic transformation. The idea expressed in this reference and similar references is that interactive, and thus unifying relations between an expanding economic and financial system, cause systemic learning, that is evolutionary-type equilibriums with complementarities. The result is heightened participation causing empowerment for the participants.

If interest-based financing is inverted by the rise of trade-based instruments in the Islamic case, then there is a decreasing need and incentive for holding savings in banks and capital markets. This process, which is continuous, generates participatory dynamics between spending possibilities relations and between their entities representative variables denoting socioeconomic variables and financing instrumental variables.

These variables define the relations and represent the agencies agents, institutions, markets, etc. The result then is to interactively integrate the three domains — money, finance and the real economy in participatory ways, so that they learn by circular causation between them. Such causation is the same as generating endogenous relations between the representative pairing variables.

The circular-causation phenomenon is termed equivalently as learning behaviour in the midst of complementary relations. The pervasive principle of extensive complementarities is the clearest sign of unity of knowledge, which denotes the epistemological premise of money, finance and the real economy system of circular causation relations. The epistemology of unity of knowledge, forming the complete phenomenology of the socio-scientific system will be formalized below.

This epistemology is understood in this paper equivalently as the unity of the divine law that causes unity in the world-system. The argument here is that phasing out the rate of interest in Islamic financing can neither be sustainable in the absence of a simultaneous overhaul of the monetary system in relation to the real economy, nor will the ruptured goal of unity between money, finance and the real economy lead to the realization of anything that is truly Islamic in the ummah sense.

The latter argument here was explained earlier by examples in the contemporary history of Islamic economic thought and action in reference to its imitation of the Occidental worldview. The Occidental economic thought did vouch for the development- financing regimes devoid of the interest-rate Sauer, , but with a failed conception.

Likewise, at the present time of global financial and banking crisis, central banks in most countries are lowering their prime rates to zero to bring about lower bank-lending rates and stimulate spending. Yet we cannot say that these economies and the banking system have been transformed into the Islamic banking and finance kinds.

The fact is that interest-rate reduction to zero can be attained independently of structural change. Such is the case with Islamic banks today. Consequently, no structural change has come about in a substantively foundational way for the ummah. Only a small segment of the financial sector less than 2 per cent of the global capital market remains relatively free of interest-based transactions.

See M. Parker in Arab News, 3 Jan. How can an Islamic capital market arise? A better possibility for realizing the impact of interest-free financing in the real economy is to establish the wide range of linkages that money-finance-real economy interrelations generate and are sustained. Therefore, to base all transactions on interest-free instruments in the Islamic economic and financial system is only a necessary condition of Islamizing the financing and banking system.

It is therefore necessary to combine the interest-free transformation as a process linked with a simultaneous change in monetary policies and money-finance-real economy relations. Such relations are generated between the central bank, the commercial bank and the real economy by circular causation.

The resulting new economic arrangement based on complementary circular causation between variables and their representative agents would cause the emergence of unified, synergetic interrelationships between the monetary system, the financial instrumentation and the real economy.

We now turn to a formalism of the underlying dynamics in such a case. The circular connections and the two-way arrows explain the circular-causation relations between the various entities as noted. Most importantly, in this kind of circular-causation relationships there occurs the simultaneously complementary and participatory linkages between the central bank, the commercial banks Islamic banks and other banks , and the resulting complementarities in the real economy between the good things of life as ordained by the sharia.

Such unifying relationships bring out the nature of monetary policy and the complementary money, finance and market transformation in the Islamic economy. The Islamic economy is essentially based on free-market orientation. But at the same time, it is guided by knowledge induction and appropriate sharia instruments and policies to realize resource mobilization into the good things of life.

In this respect, the central bank generates a supply of money as is conventionally known. That is, the supply of money to banks in excess reserve pursues multiple credit creation backed by promissory notes. Also, the intent of the underlying monetary policy is to attain a stable and productive macroeconomic state of the general circular flows of goods and services in physical and monetary terms. In other words, such projects are financed by the full quantum circulation of micro-money in specific projects, as needed.

Central bank, commercial bank and real economy interrelations, and money, finance and real economy relations in resource mobilization and market transformation of the Islamic economy. Currency is thereby equivalent to money serving as a medium of satisfying the additional demand of commercial banks to finance real economy project-specific development in a situation where market demand for funds exceeds the available financial resources to fund the projects.

The point here is that resource mobilization through the commercial banks Islamic banks will run its own course through the real economy. Through such a currency flow, a quantity of micro-money is linked up with market exchange by the use of financial instruments. Now there would be an automatic equilibrium circulation of currency through the commercial banks entering the real economy.

This kind of an equilibrium process of money-finance-real resource linkage must however be governed by appropriate central bank regulations on sustaining a stable and growing economy. We note in such a case, there is no excess creation of money by the central bank when an automatic equilibrium process is maintained between the monetary flows generated by linkages between the commercial banks and the real economy. The commercial banks under the authority of central bank guidance can generate the real bills for the increased resource mobilization as needed.

Alternatively, it is possible that central banks create the extra quantity of money needed to finance a growing real economy. The cost underlying this additional flow of a quantity of money will be recovered from bank seigniorage. Seigniorage is revenue gained by the central bank to cover the cost of producing a quantity of money by gold-backing.

The cost will be collected from the borrowing commercial banks that themselves earn participatory returns from the yields of the real economy funding of projects, also from market exchange in approved goods and services. The central bank and commercial bank interrelationship abides.

The quantity of money required to finance additional projects in the real economy arises from the increased demand for goods and services that result in project development. The direction of the arrow indicates the mobilization of monetary and real resources between banks and the real economy.

On the one side, there is the quantity of goods and services in demand. On the other side, this real economy demand is satisfied by the monetary injection. This injection of money equals a quantity of currency in circulation. The carrier of this circularly regenerated monetary stock through the real economy in response to the demand for regenerated resources, comprise the bundle of trade-related instruments.

Trade and commerce thereby replace interest-based businesses of all kinds. The result thus is contra-bank savings. We mean by bank savings that part of the earned and national income that is withheld by banks to serve interest-bearing and speculative portfolio over time.

The quantity of micro-money increases in pursuit of such a real demand for goods and services connected with projects. The diversion of income into bank savings to earn interest rate is diminished. The consequence of this kind of circular flow dynamics is a continuous liquidation of savings at every moment of time in the life of the economy by its mobilization into approved spending outlets.

There is yet another type of monetary flow between the commercial banks and the central bank. The resulting amount of unmobilized financial resources cannot remain in the commercial banks. The commercial banks are not allowed to hold this saving as excess reserve, for fear of causing multiple credit creation. Such central bank reserve transfer form simply stock of unmobilized monetary stock now held with the central bank. They will form Islamic instruments once they are mobilized through the commercial banks upon demand.

The fund remains with the central bank until it is called back by the commercial banks to finance subsequent rounds of enhanced demand in the real economy. A simple Version of Financial Flows between the Central Bank, Commercial Banks and Real Economy A simple form of the financial flows schema through the monetary and real economy linkage can be seen in Figure 2.

All the generated resources remain with the commercial bank across specific projects. This though is the ideal case of per cent utilization of commercial bank real bills in the real economy in pursuit of approved possibilities. We next examine the possibility of resource leakage from the banking system. The important issue here is to note that the quantity of money exists in circularity between the demand of the real sector, the availability of loanable funds with the banks, and the additional requirements from the Central bank.

In the last case, certain amounts of funds could fail to meet the optimal requirements of the real economy, thus causing leakages from the desired money, finance and the real economy interrelationship. Indeed, the usual case of resource mobilization must accept leakages through the commercial banks in the real economy linkages with financial instruments carrying money.

Thereby, the inter-bank flows of such savings in speculative assets will trigger multiple credit creation and an accumulating amount of interest cost on debt capital. This becomes the per cent potential reserve of the commercial bank with the central bank. At the time of such a future release of funds from the central bank, the per cent reserve converts to money in circulation in the form of a quantity of currency.

This value protection cannot be done by paper and promissory notes or any such numeraire whose long-term stability is in question. The choice is gold as the required stable monetary numeraire. Thus a stock of gold denoted by G is stored by the central bank to stabilize the value of the central bank reserve, which subsequently becomes currency in circulation. Circular flow of resource augmentation and contraction between central bank, commercial bank and real economy.

Let the change of gold stock be denoted by DG which in the special case equals the initial new stock G. Let DM denote the per cent reserve with the central bank. Let pG denote the price of gold. For maintaining stability of the monetary stock, that is per cent reserve with the central bank, the condition is pG. Thus, pG. A small amount of gold is needed to protect the entire stock of currency in circulation.

The regulatory condition though is this: The central bank must regulate the stable price of gold over the long-run. The Islamic state has the duty of moral suasion to attain such a goal of moderation on holding gold as precious metal. The same kind of regulation is extended to the mixed precious bi-metals, gold and silver. This situation would involve supervising the management of a stable and growing economy in concert with the participation of commercial banks as the principal medium for mobilizing money and finance between banks, the financial sector and the real economy.

This function too is inversely related with the velocity and volume of the circularly mobilized money and finance through the real economy Figures 1 and 2. Governance is replaced by the participatory decision- making analytical forums. The conventional functions on the other hand are money supply and monetary regulation, interest rate and exchange-rate setting by regulating the monetary reserve of the countries, balance of payments.

The Laissez Faire Concept of Money and Medium of Exchange in the Literature Our delineation of a predominantly commercial-banking role in resource mobilization in the real economy with the central bank being a lender of last resort and an overseer of the currency value in market exchange in terms of a quantity of gold-backing, has strong precedence in the literature Saving, ; Klein, ; Tullock, ; Tobin, Hayek thought about such a kind of private monetary system in which private banks will play the role of money circulation Hayek, In this case, private money would all be valued on the basis of a given standard, such as gold, but they would compete with each other.

In other words, competing quantities of money would be held by private institutions, especially banks, and this would be like holding money in terms of financial and other assets. Commercial banks would supply such funds. This is his prescription of monetary reform, which Yeager expands upon the work of Black, Fama and Hall -- BFH Yeager, : Government would be banished from any role in the monetary system other than that of defining a unit of account or numeraire.

We envisage a unit defined by a bundle of goods and services comprehensive enough for the general level of prices quoted in it to be practically steady. Merely by conducting its own accounting and transactions in the Unit — we tentatively so name it, with a capital U — the government would give private parties a strong incentive to adopt the same Unit.

Yeager continues op cit, p. The Unit would be defined by goods and services having supplies and demands of an almost entirely non-monetary character. The Praxis of the Islamic Approach to Trade and Interest Relationship Our arguments establish the fact that interest-rate eradication in the Islamic economy cannot be enforced by exogenous forces, policies and measures.

If it is so, as is presently practiced by Islamic venues everywhere in the world, the replacement of the interest rate will not be sustained without simultaneously charting the constructive change that the trade and financing instruments must generate between money, finance and the real economy.

Presently, there is no such attempt by Islamic banks and Muslim countries in their Islamization experiment. Consequently, the programme of Islamization of the financial sector has not proceeded to the extent of contributing to the rise of the ummah endowed by its own capital markets, inter- communal international trade dynamics, and socioeconomic development programmes.

This is the continued import of idea from our earlier mention. That is, merely a construal of interest-free financing modes does not form an adequate benchmark of the sharia. Islamization is not an adequate approach in such a partial view of Islamic change. We have argued and explained that the Islamic programme to phase out interest rate, and replace them with trade instruments6 must be carried out within a general equilibrium system of circular causal relations between money, finance and the real economy.

This simultaneously involves pervasively complementary interrelations between the central bank, the commercial banks and the per cent reserve requirements monetary system with the gold numeraire. Such pervasively complementary relations generate organic relations in reference to the epistemology of systemic unity of knowledge.

We note here the empirical and policy-directional role played by the principle of pervasive complementarities in explaining the epistemology of unity of knowledge by using the constructed functional ontology of that unity in diverse problems of the world-system.

The answer to our above question is in the negative. The dividing line between Islam and all other systems is the penultimate quintessence of epistemological reference to the oneness of God, or equivalently, the oneness of the divine law, which projects the unity of knowledge in relation to the world-system. In all other systems the origin of knowledge is premised on the epistemology of rationalism.

Rationalism and its entire constructed system operate on the basis of methodological individualism, conflict, competition and notions of scarcity of resources, and thereby, of substitution between contested entities. The rationalist mind is inextricably rooted in such behaviour at the level of the individual, institution, society and human relations.

Such a character remains globally at large in this rationalist world- system. The first one is when a regional group together adopts a common currency. Such an arrangement is gaining momentum. In our case, the example is of an incomplete regional arrangement for the per cent reserve requirements with the gold standard. In the latter case, the fractional reserve monetary system is treated as dual with the Islamic banking system.

Segmented markets would be necessary to establish the desired money, finance and the real economy interrelations. This kind of an incomplete monetary transformation is presently practised by some Islamic financial outlets, notably the Islamic Bank Bangladesh and the Islamic Society of North America Housing Co-operative.

In general, the phasing out of interest rates in Islamic financial operations is embedded in a general system of simulated interrelations that must be realized with the simultaneous development of the emergent trade versus interest paradigm.

Following such a recent development, a return to the per cent reserve requirement monetary system with the gold standard would be extended within the segmented region that would adopt this arrangement. The principle of resource mobilization is promoted in this regional grouping to establish a complementary and participatory trade and development regime. A regulatory and learning medium is enhanced by means of active networking between partners and Islamic banks.

A given stock of gold is parcelled through the medium of an Islamic bank for settlement of payments. This is a significant global project that can be considered by the Islamic Development Bank. Since the stock of gold required for stabilizing currencies would not be great, and would be inversely proportional to the extent and speed of resource mobilization, a large stock of gold and its minting cost would be avoided.

Besides, the cost of gold minting would be covered by the seigniorage that the central bank would collect from the commercial banks in terms of the cost of production of gold required to protect the currency value and a legitimate mark-up Black, of the reserve held. Seigniorage would also be collected by participatory arrangements that would exist in a cooperative agreement to share risk and returns between the central bank and commercial banks, and between the commercial banks and the clientele in the real economy.

The latter case is well-known in the profit-loss mudaraba and equity participation musharaka arrangements of Islamic banks. Now the commercial banks share the services that the central bank renders by paying for these services in terms of the cost of procuring gold stock by the central bank plus a service charge on the commercial banks. The commercial banks can roll over this cost to their clientele in the real economy by way of service charges. This shows that both service charges and interest rates are inversely related to productivity and product and risk diversifications.

These positive changes are causally related to resource mobilization through commercial banks. The principal cost that would exist is caused by leakages. This is where the full productivity of the use of money and finance in the real economy fails -- always, partially, but increasingly so in the interest- bearing system.

In order to reduce such leakages and share in the full realization of profitability and cost-reduction, Islamic banks benefit from the joint consequences of risk and product diversifications. The paradigm of the participatory, thus endogenous relations between the central bank, commercial banks Islamic banks and the real economy remains unchanged for the open economy, as is the case with the closed domestic economy.

In the open economy case, the national central bank, commercial and real economy relations are further extended by the bank of international settlements of payments in the Islamic networked monetary arrangement. Figures 1 and 2 are now extended to incorporate the additional monetary institution of international monetary settlement. M denotes volume of imports; pM denotes price of imports.

It is shown to have a stable relationship with the terms-of-trade variable. The function of money, finance and Islamic banks is precisely to attain this well-being objective. So what are the functions of monetary aggregate in such a system? Is money a store of value? The value of money arises from the real economy in terms of approved exchange of goods, services and project financing. Is money a unit of exchange? Currency is equivalent to money in circulation in this system. This amount of money in circulation is supported by the gold standard in order to be stable and sound money as currency von Mises, Indeed, the Prophet informally denominated various values to monetary units called danaq and mithqal, in terms of physical units of basic needs Allouche, This property of money is true only in the static case.

Also, consumer preferences, systemic risk, and costs of future flows of goods and services, and financial demand in projects are based on subjective factors, and are thus undeterminable. Consequently, it is impossible to ascertain the value of goods and services in exchange, and thereby, the value of money that would back up such a real economic value. Therefore, money does not have any market of its own, which otherwise results in the theory of interest rate as the price of money and financial instruments.

Islamic money being micro-money and specific to projects that need to be financed, the quantity of money currency in circulation in the economy is determined by full quantum flows into projects. Thus an alternative definition of money is the value of GDP, which in turn represents the value of all spending expenditures. But all these implications are specified by projects, rather than by the economy as a whole.

We therefore, interpret that a quantity of money, M, is driven fully into financing a project s. This is the meaning of full quantum financing of projects by micro-money. Otherwise, the micro-money as currency is totally mobilized as resource to fit into projects in the real economy. This kind of currency valuation against the real goods and services in market exchange can be used both in the regional and international sense.

For example, units of currency can be the Islamic Dinar. Yet the currencies in circulation may not be strictly in these precious metals. This paper has also rejected the unquestioned acceptance of the notions of the mainstream functions of money. Of these, only the function of unit of exchange as it is actually realized or intertemporally established with market transactions is acceptable. The function of store of value is untenable, for value is jointly claimed by money and market exchange of real goods and services as they are temporally realized and as payments are settled.

The function of money as the medium of exchange is rejected in the absence of a well determines of the exchange values of goods and services over time. Ludwig Von-Mises , p. From the legal point of view, money is not the common medium of exchange, but the common medium of payment of debt settlement. In this paper, we have gone a step further by arguing that money is a convention to settle payment contracts at every determined moment of clearly realized market exchange in the real economy.

Conclusion: Inferences on the Islamic Alternative on Global Financial Crisis Islamic banks are claimed to have remained safe from the financial crisis that is sweeping the world today. Central banks of most countries have cut down their prime lending rates to near zero to stimulate consumer and investment lending.

Yet the deepening crisis continues. Islamic banks although insulated from the global financial crisis due to their operations that do not involve the stock market and speculative financing, have not gained advantage of the situation to contribute to the ummah future, and thereby, to show the path out of the crisis for the rest of the world, except by pointing out the zero- interest agenda and the alternative trade financing instruments.

Spending and innovation require venture capital to be freely mobilized by development-financing instruments through commercial banks. This paper points out that simultaneously with the phasing out of interest rate to zero, it is necessary to reconstruct the general-system design of the relations between the central bank, the commercial bank, and the real economy. Within such general-system reconstruction must be taken up all such circular causation synergies that establish pervasive complementarities between the productive and good things of life that are not simply sharia-compliant but also meet the demands of the greater purpose of well-being that is embedded in the purpose of the sharia maqasid as-sharia.

This is a panacea for the Muslim and non-Muslim alike - because unethical, unsocial, and thereby, immoral things equally abhor all peoples and cultures. Most fundamentally, underlying this common heritage of mankind upon which to build, renew, or reconstruct old and fallen systems is the epistemological shift away from rationalism.

Rationalism breeds methodological individualism. Contrarily, the epistemology of systemic unity of knowledge as the core of unity of the divine laws in relation to the world-systems, establishes the world-systems on the foothold of cooperation.

Discourse with convergence towards consensus is the goal and the result universally. Discourse leads to new patterns of monetary futures. The global financial crisis requires a change in the monetary arrangements along with fiscal stimulus through reduced interest rates to restore stability. Our above-mentioned recommendations can be extended for global institutional reform.

In that case, the central banks of member states would be superseded by a regional bank of reconstruction and development. In the case of the Islamic ummah such a global monetary reform can be guided by Islamic Development. On this issue the International Monetary Fund has a standing idea. The IMF. Treasury Secretary muses on such a direction of monetary reform in the following words: This is an important moment for the IMF and its future. The IMF has a critical role to play in the global resolution of the financial crisis.

It is strongly in the U. The above quote signifies the urgency of the time to launch the blueprint of a future reform of the monetary system in conjunction with the outlook of the real economy to gain global economic and financial stability. This paper has pointed out what structure of reasoning and institutional change will be required inside such an alternative form of money, finance and the real economy interlinked system in the Islamic economic and financial framework.

This is a complex and extensive field of inquiry. Details of the phenomenological have been examined by Choudhury Underlying all phenomena in Islamic intellection is this epistemological invoking of a systemic way of understanding oneness of the divine law at work. The phenomenological model of unity of knowledge is universal in the sense of its extensive explanatory and applicative capability.

In the case of money, finance and real economy, the problem of unified interrelations has been explained in this paper. They denote learning parameters that induce all variables endogenously. These are generated in reference to the epistemology of the unity of knowledge Choudhury, Several kinds of organic unity of the phenomenological system can be noted in Figure 3.

These delineate the intra-process and inter-process dynamics and can be generalized to multiple systems by extension. First, we note the unity of derived knowledge from the epistemological core within a discursive process to come up with the limiting value of knowledge-flow.

This learning experience along with everything to follow represents endogenous relations caused by their induction by the knowledge-flow parameters, the q-values. This latter case is true both at the beginning and the end of the processes shown in Figure 3. Hence the Beginning is equivalent to the End, and the continuity over the Space, Time, and Knowledge domains is a closed one. This pairing phenomenon is explained by the principle of pervasive complementarities together with the use of the functional ontological model of simulating the money, finance and the real economy interrelations.

Thirdly, we note that within any process the phasing out of interest rates by trade instruments causes heightened resource mobilization. Fourth, learning by simulated complementarities between the elements of the tuple within any Process involves discourse over diverse possibilities Interaction. Interactions lead to limiting the value of the learning parameter within a Process.

At the end of any learning Process there comes about subsequent Evolution into the new learning processes. Evolutions arising from Interactions leasing into Integrations carry on the recursive learning processes in continuity over the knowledge-space-time domains. Fifth, the entire IIE-character of the learning process is universal and continuous by its extensions until the Hereafter. The all-inclusive IIE-model comprises the universal model of the unity of knowledge.

The phenomenological model of learning in unity of knowledge. This phenomenon is well-known. The idea is that each commodity is intertemporally valued according to its own interest rates. But in the static equilibrium model, these divergent interest rates converge to a given rate. Hence, savings is that part of unspent income that is sensitively influenced by interest rate. For ten rounds of resource mobilization and regeneration through the commercial banks, the amount of money that will be created as a result equals x 1.

These are the participatory development-financing instruments of mudaraba profit-sharing mushraka equity-participation , murabaha mark-up pricing , and questionably the secondary financing instruments and Islamic bonds called sukuk.

Functional ontology is the logical explanation of the being of a certain reality e. In Islamic belief we cannot work at the level of critical discourse of the latter. But functional ontology is accepted Islamic medium to unravel the unity of the divine laws at work in the world-systems. Functional ontology can be subjected to scientific discourse. Nay, they will come to know! Nay, again, they will come to know! Bank Syariah Mandiri.

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Yeager, L. Spring, Stable money and free-market currencies. CATO Journal, — The fluttering veil. Indianapolis, IN: Liberty Fund. TAN M. For the Singaporean market, the monthly data of market returns on the Straits Times Index STI and 3-months deposit yields in Singapore during the same period are used.

Results suggest that interest rate volatility in each country has a strong positive relationship with its respective stock market volatility. The results also show that the volatility of interest rates has a negative relationship with the stock market return but the relationship is insignificant.

Interest rate reflects the price of money and has influence on other variables in the capital and money market. For example, the increase of interest rates might direct investors to change the structure of their investments from capital markets to fixed income securities markets. A stock market is the subset of the financial market which plays an important role in the growth and development of economy.

Stock return volatility refers to the variation in the change of stock price during a period of time. The higher the variation, the higher the risk of a particular stock is. The volatility of the stock market has been proven to have a number of negative impacts in economic performance. Prior researches have investigated the determinants of stock market return for the last several years. There are a number of factors that influence the general movement of stock prices in the market.

Studies on the relationship between the behaviours of the stock market and macroeconomic factors are numerous in the literature. These studies, however, have concentrated on the developed markets of the United States, Europe and Japan. Among others, Fama , , documented the relationship between stock market returns and fundamental economic activities in the United States.

Chen and Fama model the relationship between asset prices and real economic activities in terms of production rates, interest rates, inflation and so on and so forth. A reduction in interest rates would reduce the cost of capital for calculating the price of financial assets. Increased competition among lenders could lead to customers gearing up their operations and taking greater risks, and hence lead to more defaults Kaufman, ; Davis, Even though many studies have documented the strong relationship amongst the equity market and macroeconomic variables especially in western countries, there is still a need to pursue the issue in relation to the Malaysian and Singapore markets.

Respective central banks will adjust the interest rate accordingly based on the condition of the economy. When the inflation is high and economy is overheating, the central bank will actually tighten the monetary policy by withdrawing funds from the banking system and increasing the interest rates. While previous studies by Ramin et al. The objective of this research is to contribute to the existing literature on the relationship between interest rates and stock returns and volatility in Malaysia emerging market and Singapore developed market stock markets.

By examining the predictive power of the interest rate volatility on stock market performance, investors will be able to make better security investment decision by monitoring the changes of interest rates. This research is important in consolidating the predictive power of future stock market returns in Malaysia by looking into interest rate volatility.

The result from this research would be useful in the process of decision-making especially for investors, corporations, and regulators. It would also help to widen the horizon of investors when they come to equity portfolio management decisions. Hence, investors will not be able to earn abnormal profit through the prediction of the future stock market movements. There is a considerable member of studies that have been conducted on the impact of financial variables on stock prices. Besides, Aisyah et al.

For example, restrictive policies via higher interest rates would make cash flows worthless after discounts. Thus, it would lower the attractiveness of the investment and shrink the value of the stock return. Research has been conducted by Fama in which he finds that stock prices are the reflectors of various macroeconomic variables such as interest rate, inflation rate, exchange rate and industrial production.

Islam extended the above research to investigate the long-run equilibrium and the short-run dynamic adjustment relationship between macroeconomic variables interest rate, inflation rate, exchange rate and industrial productivity and the Kuala Lumpur Stock Exchange KLSE Composite Index. The research findings from Islam and Watanapalachaikul show a significant long-run relationship between interest rates and stock prices during the period to in Thailand.

The volatility of the stock market refers to the price variation of the stock market over time Zvi et al. The volatility and risk issues have become gradually important to market participants, financial practitioners, researchers and regulators. He explains that when wealth increases, it will drive consumer-spending up.

Nevertheless, consumer confidence falls when the stock market falls and drives consumer-spending down. The volatility of the stock market can be inferred as an increase of risk in equity investment and results in a shift of funds to a less risky asset. According to Zuliu , stock market volatility also distresses business investment. His research investigates whether the volatility of the stock market influences the real fixed investment.

His analysis indicates that the volatility of the stock market is negatively related to the growth of investment. In addition, the stock market volatility weakens fixed capital formation; hence, the outcomes recommend the desirability of reducing the volatility of the stock market.

Furthermore, Koh and Maysami investigate the impacts of interest rate on the stock returns and the result shows that the interest rate is one of the determinants in predicting the stock prices. By using wavelet analysis with the Granger causality test, Cifter and Ozun investigate the impact of interest rate volatility on stock returns in Turkey. Bren et al. They find that the one-mouth interest rate is useful in predicting the sign and the variance of the excess returns on stocks.

This implies that bad news has higher predictive power for upcoming volatility and finally the existence of heavy-tailed property in selected volatility models. The results of this research found that the market returns of KOSPI have a negative and significant relationship with interest rates.

At the same time, the variance of returns has a positive but not significant relationship with interest rates. The findings indicate that the interest rates have a strong positive power for stock returns, however, a weak predictive power for volatility of KOSPI Interest rates refer to the cost of obtaining capital.

In this research, it is proxied by the average of the interbank deposit rates in the Interbank Money Market. Generally, the central banks in the countries conduct the monetary policy by influencing the level of interest rate. The decision of injecting or withdrawing funds which is made by the central bank would influence the level of interest rate in the financial system.

For Singapore, the monthly STI and the 3-months deposit yield in Singapore for the same period are used in order to do the comparison. All the data were obtained from the Data Stream System. The continuously compounded monthly index returns are calculated using the formula below, where Yt represents the return on the market index. The lags of squared error which are needed to capture all of the dependence in conditional variance might have large varying. Furthermore, the more parameters there are in the conditional variance equation, the more that one or more of them will have negative estimated values.

This model was further extended by Bollerslev into the Generalized Autoregressive Conditional Heteroscedasticity GARCH in which is commonly applied the class of time series models in recent financial literature in studying volatility. Researches on the relationship between the stock market and the return volatility method by using the multivariate GARCH model have been growing like mushrooms.

For instance, the GARCH model is being widely applied in examining the volatility of the stock market in developed and emerging countries. The studies include Huang for nine Asian countries; Lee et al.

The estimation of the GARCH model involves the joint estimation of a mean and a conditional variance equation. In order to appreciate the impacts of interest rate volatility on the monthly conditional index returns and variances, two models are employed. Model 1 is without the changes of interest rate, while model 2 is with the changes of interest rates in the mean and variance.

Findings The estimates of the conditional market variance equation parameters will be first discussed. Then, it will followed by the discussion of the estimates of the conditional mean equation. Model 1 indicates the estimates without interest rates while Model 2 includes interest rate volatility in both conditional mean and variance. The result from Table 1 indicates that the point estimates of conditional variance parameters for Model 1 and Model 2 are almost the same.

The result shows that the conditional volatility of returns is fairly persistent for Model 1 and Model 2. This indicates that volatility of return is mean; reverting no matter how much time it takes, the process of volatility does return to its mean. Model 2 contains the interest rates in the conditional variance and mean equation. The result is consistent with the results indicated by Campbell , Shanken and Whitelaw The result above shows that interest rates do help in predicting stock market volatility in Malaysia.

The negative relationship between interest rates and conditional market return is consistent with the results reported by Giovannini et al. This points to less significant predictive power of interest rates on the market returns in Malaysia. It is similar to Table 5 in which Model 1 indicates the estimates without interest rates while Model 2 includes interest rate volatility in both the conditional mean and variance. As mentioned, Model 2 includes the interest rates in the conditional variance and mean equation.

The result above shows that interest rates do help in predicting volatility in Singapore. This result shows that the predictive power of interest rates on stock market return in Singapore is not significant. The result is consistent with the result reported by Ramin et al. The diagnostic check of standard residuals is carried out to check Model 1 and Model 2 for both markets. The results are shown in Table 3 and Table 4 below.

P-values are in parentheses. Table 3 and Table 4 also show negative skewness which indicate that the standardized residuals are not normally distributed. This indicates that the variance equations are well specified in the two models in both markets and the test confirms all the models are fairly specified. Model 1 in the analysis is without interest rates, while Model 2 incorporates interest rates in the conditional mean and variance.

The study period for this research started in September and ended in December Similar results are found for the both markets. Furthermore, the results for both markets suggest that historical interest rate volatility has a positive relationship with stock market volatility. In other words, the results show that interest rates in both Malaysia and Singapore do help in predicting the volatility in their own stock markets.

However, the results are not statistically significant. The results of this research have a substantial influence in policy implication for investors. Investors should keep their eyes on the monetary policy as a means for adjusting their investments in Malaysia and Singapore. The other macroeconomic factors are referring to inflation, exchange rates, industrial production and money supply in Malaysia and Singapore. Future research can further investigate the predictive power of the other macroeconomic factors on the stock market returns for both markets.

References Aisyah, A. Macroeconomic determinants of Malaysian stock market. African Journal of Business Management, 3 3 , 95— Alper, O. International transmission of volatility in the US interest rates into the stock returns: Some comparative evidence from world equity markets.

International Research Journal of Finance and Economics, 10, — Bollerslev, T. Generalized autoregressive conditional heteroskedasticity. Journal of Econometrics, 31 1 , — Campell, J. Stock return and the term structure. Journal of Financial Economics, 18, — Consumption and the stock market: Interpreting international experience.

Chen, M. Review of Economy and Finance, 43, — Chen, N. Financial investment opportunities and the macroeconomy. Journal of Finance, 46, — Cheong, C. Volatility in Malaysian stock market: An empirical study using fractionally integrated approach. American Journal of Applied Sciences, 5 6 , — Chong, C. Intertemporal linkages of economic activity, stock price and monetary policy in Malaysia.

Asia Pacific Journal of Economics and Business, 9 1 , 48— Cheung, K-C. Applied Economic Letters, 8, — Davis, E. An industrial approach to financial instability. Bank of England Discussion Papers no. Engle, R. Autoregressive conditional heteroscadasticity with estimates of the variance of the U.

K inflation. Econometrica, 50 3 , — Fama, E. Journal of Finance, 25 2 , — Stock returns, real activity, inflation and money.

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