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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. What are the aims of Islamic finance?. Strive to make society a fair, equitable and better place to live for everyone

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What role for Islamic finance in promoting development?

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  1. What role for Islamic finance in promoting development? Ajaz Ahmed Khan Institute of Social Studies, The Hague, Netherlands, 9th February 2011

  2. 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

  3. 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

  4. What does Islamic finance look like? • Mudaraba - Silent partnership • Musharaka - Joint venturepartnership • Murabaha - Cost plus mark-up • Qard hasan - Benevolent loan • Ijarah - Leasing • Sukuk - Bonds • Bay Salam - Forward sale • Istisna - Forward sale • Takaful - Insurance (mutual guarantee)

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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’?

  12. 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?

  13. 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

  14. 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?

  15. 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

  16. 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’?

  17. Thank you! Feel free to ask questions and more information! Khan@careinternational.org

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