Islamic finance industry: the widening profit-purpose gap
An exponential growth in the business of the Islamic Finance Institutions (IFIs) has cumulatively led to wealth creation, but, at the same time, it has conspicuously failed in value creation for the socio-economic development of the marginalized segments of society.
Merely pronouncing a service or product as complying with well-defined Islamic principles might go down well with an unsuspecting - and, in most of the 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 the Islamic Shariah.
Islamic finance is based on the laws of Islamic jurisprudence, where the IFIs are involved in Halal Halal (permissible according to the Islamic Shariah) and interest-free transactions. An economic transaction may be considered Riba (interest) free if it avoids the multiplier mode of money-making, profit-taking and capital creation. But, the potential of the IFIs to address poverty has been conspicuously undermined due to misplaced priorities.
At the heart of the Islamic finance is a genuine philanthropic spirit that pervades its giving and business practices besides holding the potential to transform lives of billions of the poorest people in the world. Hence, the Islamic finance is not a business for profit only. But this (business) must be for a purpose; to uplift teeming millions out of the vicious cycle of poverty by providing them necessary access to finances and services tailored for the poor.
With the Shariah-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 the "Islamic finance"? The answer is resounding "NO"!
Despite significant progress across all the 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 the Islamic financial principles, leading to the emergence of the Islamic microfinance as a new market niche.
The 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 the Islamic finance to develop ethical, yet profitable, products and services to support social entrepreneurship and long-term social investment.
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 the Islamic countries, even understand the value that the Islamic banking and finance offers. Still others query if policy-makers in these countries understand what Islamic finance even means? But the problem may not rest entirely with the financial institutions.
Since the Shariah dictates pure Islamic values and provides direction to religious goals, perhaps, if the Islamic banks were to adhere to these basics, they could end up playing a much bigger role on the new frontiers of banking and finance. The bigger picture appears to provide for a healthy future for the Islamic finance, if, of course, its basic principles are followed in the key markets of the future i.e. Africa, Asia and the Far East.
The key here would be the creation of a business model that is truly Shariah-based - not merely tagged as being Islamic "Shariah-compliant." The Islamic finance experts argue that equity-based products withhold the essence of the Islamic Shariah and creating such services could help Islamic banks benefit immeasurably.
In market-driven countries, the Shariah governance can be an issue and there is a need for some regulatory oversight. Unfortunately, most of the Islamic Shariah boards appear to only have a role limited to certifying certain products and they still do not have industry-wide standards. This would appear to be particularly true in Pakistan where the line between the so-called Shariah-compliant banking and products and the conventional financial options has become increasingly blur.
The Islamic finance experts across the world put 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 Shariah-governance structure would lead to a forward-looking corporate approach for the IFIs. And, this could help this sector clearly define its responsibility towards poverty reduction. There could be a concerted effort to ensure that these targets are completely aligned with the Islamic principles and that the integrity (of these principles) is not compromised.
Unfortunately, it is evident from the current state of affairs that most the IFIs appear to be bent on trying to justify their actions through what can only be termed sketchy Shariah guidelines tailored to suit their needs. No thought is given to the important concepts of personal or collective Social Responsibility - both key and indispensable components of the 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 the past performance shows there is still reason for optimism, however, sustaining growth will require most of the IFIs to do some major work to transform the lives of the poor.
Since the Covid-19 pandemic has exposed millions more to the economic vulnerability, the IFIs need to come up with a revised strategy focusing on niche positioning and compete with the conventional banks in offering tailor-made remedies. It is high time that the IFIs maintain their credibility and authenticity to win the much-needed trust of consumers; not by banking on the poor, but, banking for the poor.
- Tariq H. Cheema is the founding chair of the World Congress of Muslim Philanthropists. Views expressed are his own and do not reflect the newspaper's policy.
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