As he delivered his welcome address to delegates at the Global Donors Forum in Kuala Lumpur recently, Malaysian Prime Minister Datuk Seri Najib Tun Razak sought to make a few crucial points about the necessity, and viability, of Islamic finance and microfinance in today’s world.
The occasion was the 5th annual meeting of the World Congress of Muslim Philanthropists (WCMP), the organizing force behind the forum that was held in the Malaysian capital in late April. The audience before the Malaysian premier was a veritable roster of decision-makers, people who are in a position to effectuate real change on a global level. More importantly, it consisted of philanthropists from across the Muslim world, and beyond, who understood the deeper context of event and the words of the Malaysian Prime Minister.
“At the heart of Islamic finance is, of course, the genuine philanthropic spirit,” he said, “a spirit that pervades both its giving and its business practices and that holds the potential to transform the lives of billions of the poorest people in the world.”
Yet, he added, in spite of significant progress across all fronts, Islamic financial institutions have yet to succeed in making financial services widely accessible to the poor: a move that could drive down poverty dramatically across the world. But, he said, “In recent years, some microfinance institutions have stepped in to service low-income customers and to meet their need for products consistent with Islamic financial principles, leading to the emergence of Islamic microfinance as a new market niche.”
The Prime Minister then proceeded to explain why it was important to build on that. “At its heart, Islamic microfinance is about financial inclusion, entrepreneurship and risk sharing through partnership finance an approach that conventional microfinance lacks,” he said. “And there can be no doubt that, going forward, it represents an opportunity for Islamic finance to develop ethical yet profitable products and services at the same time as supporting social entrepreneurial activities and investing long-term in social funds.”
All of these are valid points. Islamic finance is, without the shadow of any doubt, one of the fastest-growing finance sectors in the world. Yet, as Shari’a-compliant products are being developed, wealth made and assets built across the Muslim world, we would do well to ask ourselves if all this really does fall within the purview of an Islamic paradigm of development and welfare.
“In spite of significant progress across all fronts, Islamic financial institutions have yet to succeed in making financial services widely accessible to the poor: a move that could drive down poverty dramatically across the world. In recent years, some microfinance institutions have stepped in to service low-income customers and to meet their need for products consistent with Islamic financial principles, leading to the emergence of Islamic microfinance as a new market niche.”
This isn’t as tricky a question as it might appear to be. The answer is simple and it is an emphatic one – no. The reason, again, is simple: it is not enough for a financial conglomerate to sell Shari’a-compliant services or products, without explicitly subscribing to social responsibility and commitment to poverty alleviation. The market for Shari’a-compliant products remains small, despite phenomenal growth in it in the last 15-20 years. The market share in most of the low-income Muslim countries is expected to remain small unless radical changes are brought into the Islamic banking model to make it relevant to the social welfare and economic development of the underprivileged communities in the world in general and in the Muslim world in particular. This was, perhaps, what the Malaysian Prime Minister alluded to when he spoke about Islamic financial institutions not being able to make financial services widely accessible to the poor. It takes only a cursory glance at how these institutions function to be able to gauge that their primary purpose appears to be only to serve their own corporate objectives. While we, as ordinary citizens, may grant a business its right to attaining a certain level of profitability in its endeavours, we must also remember that a company dealing in finance should realize that a corporate objective entails more than merely seeking to increase the value of its shares. In the case of an Islamic financial institution this responsibility extends to ensuring that the objectives of Shari’a (the maqasid) are met.
However, some may argue that the problem may not rest entirely with financial institutions. For many, it is mystifying why individual governments are not willing to endorse holistic frameworks that would encourage the Islamic finance industry and help it to expand in a sustainable manner. Others question whether politicians, across the borders of Islamic countries, even understand the value that Islamic banking and finance offers. Still, others query if policymakers in these countries understand what Islamic finance even means.
One commonly asked question – which is really more of a concern – asks why Islamic banks cannot be different in their approach to innovation and provide a unique offering to their customer base by aiming for the core. After all, since Shari’a dictates pure Islamic values and provides direction to religious goals, perhaps if Islamic banks were to adhere to these basics, they could end up playing a much bigger role in the new frontier of banking and finance. The generic term here becomes “contextual” banking but, in reality, the bigger picture appears to provide for a healthy outlook for Islamic finance, if, of course, its basic principles are followed, in the key markets of the future: Africa, Asia and the Far East. A commonly held perception implies that whichever Islamic financial institution takes the lead in this field – most conventional banks appear to ignore it, by the way – it will be able to generate defendable profits, assume the market share and retain a unique sustainable value proposition. If the right kind of, and easily strategically replicable, business model were to be created, who knows what heights Islamic finance could achieve?
All this would depend, however, on such a business model is more than just Shari’a-compliant. Islamic banks could benefit, suggest Islamic finance experts, by offering a musharaka-based product which they argue is the essence of Shari’a. These experts hold the view that Islamic financial institutions need to look beyond their own balance sheets and, instead, ask themselves what value they have added in terms of solving social problems such as poverty, provision of affordable education, substandard health care and the degradation of the environment. If Islamic financial institutions were to support social businesses that have the dual effect of empowering the poor and reducing the need for charity, who knows what benefits might accrue for not just the Islamic world but the entire worldwide community.
Before that could happen, however, many other issues would need to be addressed. For example, within the world of Islamic finance, many inconsistencies in the legal, accounting, regulatory and fiscal frameworks have been pointed out by experts. There appears to be some sort of heavy industry reliance on exemptions that can only be considered ad-hoc. Most Islamic banks appear to operate in a tax-free environment; political agendas or the presence of dignitaries acting as directors can lead to regulators being influenced, or inconsistent. The industry itself appears to be fragmented and lacks real leadership. And too many small countries have been competing to be the industry hub.
Another common problem is that most regulators shy away from taking a Shari’a view on how the Islamic finance sector should work and customers show an increasing propensity to oscillate between Islamic and conventional products, especially in the West where competition in the financial sector is intense.
To add further complications in what is still a niche industry, any negativity reflects badly on all players. In a faith-based business, best practices are required: for example, the highest standard of business ethics and transparency. If these are not followed to the letter, not only would there be the distinct possibility of a detrimental effect being caused to the business in question, the faith according to which it operates could also run the risk of seeing its image tarnished.
So, in order to rectify all of this, one thing is clear: the objectives of Islamic finance need to be stated clearly. That would be the obvious first step. It would lead on to the next one: redefining the strategy, which is crucial. That could lead to a more forward-looking corporate approach for Islamic financial institutions, one that would be supported implicitly by a more transparent Shari’a-governance structure. Most importantly, it would work better if corporate targets for social responsibility are clearly defined and truly aligned to Islamic principles. Once set, working assiduously to safeguard the integrity of these principles is imperative. At the moment, as is clearly evident, most Islamic financial institutions appear to be bent on trying to justify their actions through functioning off what can only be termed as “patchy” Shari’a guidelines.
“Despite the criticism that the Islamic finance industry has received for not providing innovative risk-sharing products, the industry had succeeded in serving a good purpose by mobilizing the financial resources of many devout Muslims that would otherwise have been left hoarded outside the financial sector, thereby increasing financial inclusion.“
This has unfortunately – and perhaps because of the times we live in –resulted in far less than ideal commitment of Islamic banking and finance to social responsibility. By its very definition, Islamic finance should be seen to focus on the dual purposes of Personal Social Responsibility and Corporate Social Responsibility, because both were clearly laid out according to Islamic Shari’a more than 1400 years ago (although the terminology used here is obviously another by-product of the times we live in and not from an era long since past). For example, Shari’a prohibits the use of certain economic goods and forbids any indulgence in particular economic activities, even though, in practice, they might yield great dividends. But the reason for their being banned in the Islamic context is very obvious in the fact that, while they might benefit the business owner or the company, the detriment they would cause would create an ill-balanced society. Riba, or interest, has been deemed un-Islamic for that very reason. One should be mindful of the following verses in the Quran
“…it is possible that ye dislike a thing which is good for you, and that ye love a thing which is bad for you” (2:216)
The point here is that making a business ethical and accountable entails more than just adhering to Islamic principles related with trade and finance, which are sadly left by the wayside the moment the profitability angle makes its insidious presence felt. A truly socially responsible enterprise, whether mainstream or secular, would understand the importance of value creation for all stakeholders – shareholders, society, and the environment – but, sadly, Islamic financial institutions lag far behind in the important field of giving as compared to their worldwide counterparts. This represents a significant under-utilization of their resources.
So, in an ideal world – and according to the principles of Islamic Shari’a – an Islamic financial institution’s focus, as part of its social responsibility, should be to offer banking services to those who have no collateral (financial inclusion) and invest in small enterprises in the Islamic way by sharing their risks and developing their entrepreneurial skills. One key example could be on the agrarian. If farmers with little or no land holdings were to be offered a partnership in which both the financing party and the farmers were to reap the benefits, in every sense of the word, equally, a direct consequence of this would be genuine social change. This would mean an economically empowered populace which, in turn, would lead to financial institutions being strengthened immeasurably and a society’s triple bottom-line (people, profit, planet – a 1990s term signifying how we, our businesses and our environment are interdependent on each other) would improve.
Finally, and perhaps most crucially, if funds for social investment – such as providing capital to sustainable livelihood schemes – are established by Islamic financial institutions by way of out-of-the-box thinking, much-needed social change can be brought about – not just in our society, but others as well. All that would require would be strict adherence to the rules outlined in Shari’a. Yet all is not lost. There are still glad tidings to aspire towards. I, and others like me, still have faith in genuine Islamic finance institutions and we believe that social justice will be advanced as soon as they rise up to the challenge. At a recent forum on Islamic finance at Harvard University, Dr Savas Alpay, the director-general of the Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC), pointed the pertinent fact out that, despite the criticism that the Islamic finance industry has received for not providing innovative risk sharing products, the industry had succeeded in serving a good purpose by mobilizing the financial resources of many devout Muslims that would otherwise have been left hoarded outside the financial sector, thereby increasing financial inclusion. Dr Alpay invoked the Islamic teachings of fair competition, interest-free operation, elimination of contractual uncertainty, avoidance of excessive risk-taking and balance in wealth distribution and stressed that a financial system based on such principles would certainly be very conducive for development since it would not allow for disruptive financial innovation that would lead to an unstable economic environment. The stress here, though, would be on the fact that the faith of marginalized millions won’t be taken away by any lackadaisical showing but by proactive policies that are centred on actions that follow Islamic principles. Corporate greed has always caused more harm than good to the people and corporate giving proffers some relief but, ultimately, helps only in building a corporate image. True change can be brought about by genuine commitments made by the private and public sectors towards impact-oriented, strategic giving and investing. Such philanthropic interventions are designed to address the root cause of the problem, resulting in genuine social and economic empowerment of the people, which is indeed a beautiful way to follow and live Shari’a.
Dr. Tariq H. Cheema is the CEO of the World Congress of Muslim Philanthropists