Download What role for Islamic finance in promoting development

What role for Islamic
finance in promoting
development?
Ajaz Ahmed Khan
Institute of Social Studies, The Hague,
Netherlands, 9th February 2011
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What are the aims of Islamic
finance?
• Strive to make society a fair, equitable
and better place to live for everyone
• Transactions in business and trade
should be characterised by fairness,
equity, transparency and justice
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What is Islamic finance?
• Provision of financial services that conform to
Islamic financing principles
What does this mean exactly? Number of principles:
• Only socially productive activities
• No speculation or excessive uncertainty (gharar)
• Prohibition of Riba or ‘unjust gains’ and this includes,
but is not limited to interest
• No exploitation by the stronger party against weaker
party
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What does Islamic finance
look like?
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Mudaraba
Musharaka
Murabaha
Qard hasan
Ijarah
Sukuk
Bay Salam
Istisna
Takaful
- Silent partnership
- Joint venture partnership
- Cost plus mark-up
- Benevolent loan
- Leasing
- Bonds
- Forward sale
- Forward sale
- Insurance (mutual guarantee)
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The growth of Islamic finance
• US$1.1 trillion in assets globally among more
than 500 IFIs in 2011
• Annual growth rate of 20% over past 3 years,
growth in 2011 of 33% on 2010
• Greatest volume of assets held in Iran, Saudi
Arabia and Malaysia
• Islamic ‘windows’ in conventional banks such
as HSBC, Standard Chartered, Citigroup
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How can Islamic finance
impact upon development?
• Islamic financial services for the poor
(Islamic microfinance)
• Funding from Islamic financial
institutions and donors for development
initiatives
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Is there a demand for Islamic
microfinance?
• Evidence that between 25-40% of Muslims
refrain from utilising interest based
microfinance for fear of breaching their
religious beliefs
• 72% of people living in Muslim majority
countries do not use formal financial services
• Islamic microfinance represents less than 1%
of global microfinance programmes
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What are the implications?
• Muslim owned small businesses are
constrained by the lack of accessible
financial services
• Tremendous potential of Islamic
microfinance to contribute to alleviating
poverty and promoting development
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Advantages of Islamic microfinance
• Compatible with religious beliefs of clients
• Whole of the loan is invested directly into the
business venture
• Promotes ethical investment and business
practices
• Develop greater levels of trust and
understanding between lender and borrower
• Allows for a diversity of microfinance
approaches depending upon the
entrepreneurial ability and needs of borrowers
– more appropriate financing
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Even the Vatican supports it!
• The Vatican has argued that western banks
should consider Islamic financing principles as
the solution to the worldwide banking crisis
• “The ethical principles on which Islamic finance
is based may bring banks closer to their clients
and to the true spirit which should mark every
financial service”
L’Osservatore Romano, 3 March 2009
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Challenges of Islamic
microfinance
• Low institutional technical capacity,
established policies and procedures and
guidance
• Requires high level of transparency - the
difficulty associated with calculating profits
and losses
• High transactions costs
• What is really ‘Shari’ah Compliant’?
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Will the real Islamic
microfinance please stand up?
• What direction will the growth in Islamic
microfinance take?
• Will the development of Islamic
microfinance mimic the growth of
Islamic finance?
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Islamic funding for
development
Likely to increase significantly in the
future because:
• Growth of worldwide Islamic finance
industry
• Growth of ‘Muslim’ institutional donors
• Muslims wanting to fulfil their charitable
obligations
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Is there an ‘Islamic’ approach
to development?
• Does Islam advocate how the poor and
needy should be helped?
• Can faith be incorporated into programmes
and is it possible to speak of an ‘Islamic
approach to development’?
• Should we be looking to explore the
relationship between faith and development
more?
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The Qur’an, hadith and
development
• Probably yes to all three questions!
• Qur’an is explicit on social justice with
numerous relevant verses
• Extensive authentic hadith reported in
Bukhari, Abu Dawud and Muslim
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What does an ‘Islamic
approach’ look like?
• Two key components of an Islamic approach to
development: promoting self-reliance among the poor
and advocating for social justice
• Islam considers it an obligation to earn a livelihood
through one’s own labour and strongly encourages
helping people to become financially independent
and self-sufficient (microfinance is particularly
relevant)
• Islam discourages a culture of dependency as this is
viewed as undermining one’s dignity
• Will increased ‘Muslim’ funding translate into ‘Islamic
approaches to development’?
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Thank you!
Feel free to ask questions and more
information!
[email protected]
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