Tuesday, 13 June 2017

We should uphold the True Spirit of Islamic Finance

This blog was written by Dr Ajaz Ahmed Khan, Senior Microfinance Advisor at Lendwithcare, CARE International UK. It was first published in the True Banking online magazine, and has been reproduced here with their permission.

Tell us something about yourself and your journey to CARE International UK?

I have worked as Senior Microfinance Adviser for CARE International UK for the past seven years. CARE is a large international aid organisations with headquarters in Geneva, Switzerland and has operations in more than 90 countries around the world. I work specifically on the www.lendwithcare.org microfinance crowd-funding project. Through Lendwithcare we support 12 microfinance organisations with a strong social development mission in 10 countries in Asia, Africa and South America. We provide our microfinance partners with interest-free capital to increase the scale and outreach of their operations. Our partner in Pakistan is Akhuwat and we have been working with them for the past four years.

With regard to my qualifications and background, I undertook all my studies in the United Kingdom and have a BA in Economics and Agricultural Economics, an MSc in Agricultural Economics and a PhD in Development Economics. I came to CARE after working as an agricultural economist for the previous 17 years in countries as diverse as Honduras, Nicaragua, Ecuador, Bosnia & Herzegovina, Kosovo, Pakistan and Sudan. As well as helping to establish microfinance organisations in various countries with support tens of thousands of small-scale businesses I have written widely on small business development, microfinance, Islamic microfinance in particular, as well as more generally on faith and development. My latest book ‘Islamic Microfinance: Shari’ah compliant and Sustainable?’, written together with Professor Malcolm Harper, was published in April 2017.

How might Islamic finance aid development and reduce poverty?

My personal focus has always been on trying to find ways to improve the lives of poor people, so this is a question of particular interest to me. An estimated two-thirds of the world’s poor still lack access to basic financial services, such as loans, savings, insurance/takaful and money transfer facilities. Therefore, most obviously, increasing the scale and outreach of Islamic finance will promote financial inclusion and help people to manage their personal and business affairs better. However, simply increasing the provision of financial services is not enough – it must be the right type of service. This means that it should be specifically tailored and adapted to the needs of the poor if it is to have any meaningful impact on alleviating poverty.

In addition, I would be keen to explore the role that Islamic finance might play in supporting more general development. Even at a conservative estimate there are several hundred Islamic financial institutions worldwide with net assets of more than US$2 trillion. How much good might be achieved by systematically channelling the zakat and sadaqah of Islamic financial institutions into development projects such as providing clean water in rural communities, building schools and promoting the welfare of orphans?

What are the strengths of Islamic finance and how do you see the development of Islamic banking worldwide?

There are of course certain principles that distinguish Islamic finance, and these include the prohibition of riba, only financing socially productive activities, and linking financial transactions to real, tangible economic activity as opposed to financial speculation. All these are likely to promote ‘better outcomes’. However, I think the main strength of Islamic finance is that it is not an end in itself but it possesses an underlying core spirit that seeks to promote social justice through ethical behaviour, fairness and transparency in the conduct of commerce and trade. As Islamic finance develops, which undoubtedly it will, I think it is imperative that we abide by the spirit of Islamic finance; otherwise it just becomes an exercise in ‘financial engineering’ – indeed when this happens, we should even be hesitant in calling the sector ‘Islamic’. The corollary of this is that unless the users of Islamic finance are convinced that the services being offered are truly ‘Shari’ah compliant’, they will always be reluctant to use them and in the longer-term the sector will simply not develop and grow as it should – I think that this ultimately will influence the manner and size of the Islamic financial sector the most. In this regard, Islamic finance is simply ‘ethical finance’ and perhaps it should be promoted as such – I am sure that it would attract a greater number of potential clients – in many Western countries, for example, there is a growing appetite for ‘ethical’ or ‘fair’ finance.

Do you think a lack of knowledge is impending the growth of Islamic finance?

Certainly the lack of suitably qualified personnel used to be a significant problem. However, it is less so now. Indeed, over recent years, organisations such as Al Hudo Centre for Islamic Banking and Economics, have promoted a range of excellent academic courses and training opportunities for Islamic finance professionals and has increased the number of skilled Islamic finance professionals.
However, I do think Islamic finance is constrained by a lack of innovation, particularly in my particular area of expertise which is microfinance, that is the provision of financial services for poor people. Instead, what we have observed are institutions providing microfinance following the example of the larger Islamic banks in the design and delivery of financial products and services. This is of course neither always appropriate nor cost effective since microfinance clients require, for example, relatively small sized loans, often for working capital rather than fixed assets, and live in geographically isolated rural areas with poor infrastructure. Furthermore, I think there is sometimes the issue of authenticity – Islamic finance will only really develop if clients are convinced that Islamic products and services are ‘truly Islamic’ rather than a series of re-packaged and re-branded interest based instruments.

How might Islamic finance be used to promote agricultural and rural development?

Islamic finance possesses a range of instruments that are particularly appropriate for promoting agricultural and rural development but these have, by and large, been under-utilised in the provision of financial services because of a reluctance of banks and microfinance institutions to provide them rather than because of lack of demand. Suitable mechanisms such as bai salam, whereby the full price for a crop can be agreed and paid up-front in cash by the bank or microfinance institution. This would ease liquidity shortages for the small farmers by enabling them to receive advance payment so that they have money to buy inputs to grow their crops and feed their families up until harvest time.
Other financing mechanisms are variants of profit and loss sharing arrangements, and include musaqat, which is a specific type of musharaka contract for orchards in which the harvest is shared among all the equity partners according to their contributions. Under such a contract a bank may provide a farmer with orchards, gardens or trees that they own or which are otherwise in their possession. This is done for the purpose of gathering the harvest of the orchard of garden and dividing it in a specified ratio. The harvest may be the fruit, leaves, or flowers of the trees or plants in the orchard or garden. Yet another instrument is a muzar’ah contract which is essentially a mudaraba contract in farming where the financier can provide land or funds in return for a share of the harvest.

Do you have a message for the general public through True Banking Magazine?

Yes, demand financial products and services that adhere to the spirit of Shari’ah, not just the letter. We should always keep uppermost in our minds that rules and ideas behind Islamic finance were created for a purpose – to promote social justice. Once more authentic products and services are offered, I am certain that demand for Islamic finance will increase, from Muslims and non-Muslims alike.

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