“Islamic finance is not the business for profit, but this (business) is for a purpose; to uplift the teeming millions out of the vicious cycle of poverty by providing access to finances and services tailored for the poor.”
The exponential growth in the business of Islamic Finance Institutions (IFIs) has cumulatively led to wealth creation, but in the same vein, it has starkly failed in value creation for the social-economic development of the marginalised segments of society, which is one of the prime objectives of the Islamic Shari’a compliance.
Islamic finance is based on the laws of Islamic jurisprudence, where IFIs are involved in Halal (permissible according to the Islamic Shari’a) and interest-free transactions. An economic transaction may be considered Riba (interest) free if it avoids multiplier mode of money-making, profit-taking and capital creation. But the potential of IFIs to address poverty has been conspicuously undermined due to misplaced priorities.
With Islamic finance sector being termed as the fastest-growing segment of the global financial industry, religious and financial experts are making persistent queries about authenticity, according to religious scriptures, of the financial services on display. They claim that Islamic finance is not the business for profit. But this (business) must be for a purpose; to uplift the teeming millions out of the vicious cycle of poverty by providing access to finances and services tailored for the poor.
At the heart of Islamic finance is a genuine philanthropic spirit that pervades its philanthropic and business practices besides holding the potential to transform the lives of billions of the poorest people in the world. Islamic microfinance is all about financial inclusion, entrepreneurship and risk-sharing through partnership finance – an approach that conventional microfinance lacks. Without any iota of doubt, it represents an opportunity for Islamic finance to develop ethical yet profitable products and services while supporting social entrepreneurship and long-term social investment.
With Shari’a-compliant products being developed, wealth accumulated and assets built across the Muslim world’s landscape, we would do well to ask ourselves if all this really does fall within the purview of “Islamic finance”? The answer is an emphatic NO.
Despite significant progress across all fronts, the IFIs have not succeeded in making financial services widely accessible to the poor: a move that could drive down poverty across the world. However, some microfinance institutions have stepped in to service low-income customers and meet their need for products consistent with Islamic financial principles, leading to the emergence of Islamic microfinance as a new market niche.
Merely pronouncing a service or product as complying with the well-defined Islamic principles might go down well with an unsuspecting – and, in most cases, usually unaware – target market, but it would eventually be a self-serving and brazenly typical business ploy completely at variance with the basic and humane principles outlined in the purpose of Islamic Shari’a.
However, some may argue that the problem may not rest entirely with the financial institutions. A widely held line of thought tends to wonder why governments are not willing to endorse holistic frameworks that would encourage the Islamic finance industry and help it expand sustainably. Others question whether governments, across the borders of Islamic countries, even understand the value that Islamic banking and finance offers. Still others query if policy-makers in these countries understand what Islamic finance even means? But as said earlier, the problem may not rest entirely with the financial institutions.
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 bigger picture appears to provide for a healthy future for Islamic finance, if, of course, its basic principles are followed, in key markets of the future: Africa, Asia and the Far East.
The key here would be the creation of a business model that is truly Shari’a-based – not merely tagged as being “Shari’a-compliant.” Islamic finance experts argue that equity-based products withhold the essence of Islamic Shari’a and creating such services could help Islamic banks to benefit immeasurably.
Even within the world of Islamic finance, many inconsistencies in legal, accounting, regulatory and fiscal frameworks have been pointed out by experts with regard to a heavy industry reliance on exemptions, which they term as being ad-hoc. Additionally, most of the Islamic banks appear to function in a tax-free environment, and regulators have sometimes been thought to be influenced by political agendas or by the presence of dignitaries acting as directors.
In market-driven countries, Islamic Shari’a governance can be an issue and there is a need for some regulatory oversight. Unfortunately, most of the Islamic Shari’a boards appear to only have a role limited to certifying certain products and without proper industry-wide standards. This would appear to be particularly true in Pakistan where the line between so-called Islamic Shari’a-compliant banking and products, and conventional financial options has become increasingly blurry.
Islamic finance experts across the world ask a very relevant question concerning this state of affairs. Does the Islamic finance mission need to be restated? In order to achieve this, a completely new strategy would have to be devised. A more transparent Islamic Shari’a-governance structure would lead to a forward-looking corporate approach for IFIs. This could help this sector clearly define corporate targets for social responsibility. There could be a concerted effort to ensure that these targets are completely aligned with Islamic principles and that the integrity (of these principles) is not compromised.
Unfortunately, it is evident from the current state of affairs that most of the IFIs appear to be bent on trying to justify their actions through what can only be termed as sketchy Islamic Shari’a guidelines tailored to suit their needs. No thought is given to the important concepts of Personal Social Responsibility or Corporate Social Responsibility – both key and indispensable components of Islamic teachings. And no planning seems to have been put into place to attempt to overhaul the state of affairs.
Perhaps, if the Islamic finance sector worldwide is to evolve a definite vision that truly focuses on the socio-religious implications of its financial instruments, it will have to create definitive change; not just in the Muslim world but far beyond. After all, this sector has no shortage of funds. While past performance shows there is still reason for optimism, sustaining growth will require most of the IFIs to do some major work for transformation in the lives of the poor.
In the given scenario, the IFIs need to come up with a revised strategy focusing on niche positioning, compete with conventional banks, and offer services to the poor and the needy. It is high time that to maintain credibility and trust of consumers, the IFIs should offer win-win solutions for the deprived with low socio-income and come up with tailor-made remedies for the marginalised segments for wealth creation; not by banking on the poor, but banking for the poor.
