Aittreya Sriram Ramanujam, the architect of an Islamic gold bank, is now setting his sights wider – an asset-backed Islamic financing and investment model that can be applicable to all commodities, with crude oil as its flagship.
Aittreya’s concept, termed ‘commodity banking,’ aims to bring Shariah compliant principles of risk sharing and asset-derived income to volatile markets that disproportionately affect ordinary citizens, particularly those in the developing world.
“The same concept can be expanded and extended to all commodities,” Aittreya shared with IFN Investor, emphasizing the universal applicability of his ethical financial framework.
Gold was chosen as the starting point for his Islamic banking revolution because of its ‘perfect ecosystem’ among commodities, universal understanding and stable physical form. As the founder and chief strategist of the Bharat Gold Hedge Fund based in India, he has since developed that structure, applying it to oil, natural gas, copper and other natural resources.
The gold bank structure, built on physical asset backing and integration of risk protection against price volatility and Halal lease-based income, provides the replicable template. For oil, this would mean accounts directly backed by physical crude oil, with generated returns or productive use rather than speculative interest.
Recent price shocks in the oil market point to a critical failure in the current financial system. “When oil prices go up 20% to 30%, nobody but the common man and poor countries are affected.”
An opportunity to transform commodity backing
In an era of increasing scrutiny of financial markets and calls for more sustainable and equitable economic models, a truly asset-backed commodity banking system could offer a compelling long-term vision.
By directly linking finance with physical assets and focusing on lease fees rather than speculative interest, the model could reduce market manipulation and excessive financialization, potentially leading to more stable prices and a more equitable distribution of value.
The Shariah compliant nature that is advocated – with its emphasis on real economic activity, shared risk and ethical returns – could theoretically attract a significant pool of ethically conscious investors and sovereign wealth funds looking for alternatives to conventional finance.
By eliminating speculative profits for intermediaries, the system could reallocate value to producers and consumers, potentially fostering stronger and more transparent supply chains.
If successfully implemented, the model’s focus on insulating consumers from price spikes by managing physical inventory and deriving returns from utilization fees could be a powerful selling point, especially in commodity-dependent economies.
There are as many challenges as opportunities
This Shariah commodity banking plan, however, has its challenges. For one, the global oil market is colossal, with daily trading volumes in hundreds of millions of barrels and trillions of dollars. Financing this scale physically – where capital is directly converted into physical crude – would require an immense logistical infrastructure for storage, transportation and delivery, far beyond what’s typically needed for gold.
While the aim is to shield consumers from volatility, oil prices are inherently volatile due to geopolitical events, supply disruptions and demand fluctuations. Holding large physical inventories of oil exposes the financing entity to significant storage costs, insurance and the risk of physical degradation or loss, which needs to be factored into the ‘lease fees’.
Commodity markets are also heavily regulated, and introducing a fundamentally different financing model would require navigating diverse regulatory frameworks across multiple jurisdictions.
Last, but not least, are existing market infrastructure and entrenched interests. The current oil financing ecosystem is dominated by conventional banks, large trading houses and the derivatives market.
These established players have deeply entrenched interests and risk management systems, including conventional derivatives, which are often not Shariah compliant. Convincing them to dismantle or significantly alter their operations for a new model would be a monumental task.
Commodity model workable with Islamic commitment
Aittreya is unaffected by the challenges to his vision of commodity banking. However, having spent years studying the functions of Islamic finance, the gold bank architect is disillusioned with the current ‘fragmented system’ that can be ‘driven by profit over principle’.
The lucrative Islamic finance industry, valued at over US$4 trillion, needs to see more economic contribution aligned with its spiritual mission. “Everybody is functioning, everybody sees money but nobody sees value.”
This gold model rigorously adheres to AAOIFI Shariah Standard 57 that incorporates comprehensive risk management to safeguard against gold price fluctuations, offering both stability and ethical returns. This includes protecting depositors from volatility, a key differentiator from typical gold investments.
“Anyone who’s able to confidently say that I can protect the capital, will be able to call my model a bank.”
