Transcript Dr. Mehmet Asutay`s Presentation (Members Only)

Assessing the Contribution of Islamic Finance
to Financial Inclusion
Dr Mehmet Asutay
Reader in the Middle Eastern and Islamic Political Economy & Finance
Director, Durham Centre for Islamic Economics and Finance
Durham University Business School
Durham University, UK
E-mail: [email protected]
Presented at
Islamic Development Bank – ADFIMI Joint CEO Seminar on
“Financial Inclusion”, 40th Anniversary of the Establishment of Islamic
Development Bank
Hilton Hotel, Jeddah, Saudi Arabia
23rd June 2014
Introduction: Islamic Finance Futures
 As part of this recognition, we have witnessed the emergence of Islamic
moral economy and Islamic finance since late 1940s;
 Islamic finance industry has progressed from humble beginnings
– Concept has been rediscovered to build a USD 2 trillion industry
– Global momentum behind industry: consumer, corporate and government
– Islamic finance has become the proposition of choice in the GCC, and likely
to become proposition of choice throughout the Muslim world;
 Islamic finance in its original form is located within the foundational claims
of Islamic Moral Economy, as the aim was to creating an Islamic moral
economy with Islamic finance being the operational aspect of that system.
 However, the new debate is: Islam based financing vs. the Shariah
compliant financialisation;
 This debate relates to financial inclusion/exclusion debate through providing
financial services in the form of Islamic moral economy expectation so that
wealth and capital can be expanded on the ground.
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Financial Inclusion
 Financial development is considered to have positive impact on
economic growth by facilitating the expansion of financial activity
and financing economic activity.
 This can be achieved through financial deepening through vertical
and horizontal financial deepening of financial activity, which can
also target to overcome financial exclusion.
 In the horizontal financial deepening, it is expected that traditionally
financially excluded individuals and groups to become part of the
formal economic activity by utilising the available financial
instruments and institutions to conduct their business.
 Thus, financial expansion in such circumstances is considered to take
place through bringing financially excluded individuals into the
financial system whereby economic growth and development can
further be facilitated. As by-product this contributes to overcoming
the dual-economy nature too.
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Financial Inclusion (2)
 In the literature, financial inclusion is mostly related to people’s
access to have a formal bank account.
Demirguc-Kunt & Klapper (2012)
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Financial Inclusion and poverty (3)
 The literature also depicts that there is a correlation between
inequality/poverty and financial exclusion measured by having a bank
account.
Demirguc-Kunt & Klapper (2012)
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Financial Inclusion and Poverty (4)
 However, having bank account is not enough to explain financial
inclusion; as income generation should be the target of any such
strategy:
Demirguc-Kunt & Klapper (2012)
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Trajectories of Financial Inclusiveness
 Static view of poverty—income below poverty line
1970s—provision of microcredit to the poor
 Provide credit over successive years—used in productive activities—
increase income levels above poverty lines

Dynamic view of poverty—prospects of present and future well-being
The poor face many risks and are vulnerable
Negative shocks can move households back to poverty

Paradigm shift—inclusive finance
Expanding financial services to the poor that increases income and
reduces vulnerability
Savings, finance, insurance, money transfer services for the poor
But also develop public policies together with financial institutions
in providing income generation impact to have financial inclusion
Mehmet Asutay, Islamic Moral Economy Foundation of Islamic Finance| 7
Financial Inclusion and the Muslim World
 Formal bank account holding is an issue in the Muslim world as well
as the developing countries:
Mehmet Asutay, Islamic Moral Economy Foundation of Islamic Finance| 8
Financial Inclusion and the Muslim World (2)
 Providing financial services to the poor is important tool in alleviating
poverty
 The poor do not have access to financial services
 Involuntarily due to economic and social reasons (Low income, high
costs, high risks, information framework etc.)
 Voluntarily due to cultural and religious reasons
 Muslim clients—would not deal with interest based financial services
 Many poor (and rich) Muslims are financially excluded due to both
involuntary and voluntary reasons
 Need to provide Shari’ah complaint financial services to help them to
have access to banking and financial services but importantly become
stakeholders in terms of developing their micro and small businesses
so that they can be helped to expand their businesses, for example.
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Islamic Moral Economy Construct suggesting Economic
Development and Financial Inclusion (1)
 The notion of Islamic moral economy rests with a central principle:
embeddedness; financing being embedded in real economy and noneconomic factors, such as the cultural and religious values and norms;
 Islamic moral economy, as a protective social movement and anti-liberal
discourse, has been conceptualised to re-embed the economy in society,
and rescuing resources of the society such as labour, land and money from
being the ‘fictitious commodity’ by de-commodificating them has been
the aim of protective social movements and anti-liberal discourses.
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Islamic Moral Economy suggesting Economic Development
and Financial Inclusion (2)
 Other features of Islamic moral economy are:
 Reciprocity and distribution;
 Community and solidarity;
 Convention and coordination
 Collective action: cooperation including labor sharing
 Embeddedness or non-economic factor.
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Islamic Finance Principles Reinforce the Ethos of Islamic Moral Economy
 Islamic moral economy has an explicit value framework
– Based on justice, equity, human dignity, freedom of enterprise and
moderation through the Islamic economy axioms, among others, such
as tawhid, adalah and ihsan, rububiyah, tazkiyah, amanah, haq and
hurriyah, islah, uhuwwah, khilafah and maqasid al-Shari’ah.
Crass materialism
Islam
Aesthetic spiritualism
– Based on developing and harnessing economic resources to
satisfy spiritual, material and social needs of all members of
the community
– Based on a moral obligation to serve poor and destitute from
share of wealth
Islamic finance is based on socially responsible investing
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Moral Economy Definition of Islamic Finance Principles:
Ethos of Islamic Moral Economy in Practice
(i) Prohibition of interest or riba,
(ii) prohibition of fixed return
(iii) money does not have any inherent value in itself; and therefore
money cannot be created through the credit system.
(iv) profit and loss sharing (PLS) is the essential axis around which
economic and business activity takes places.
(v) risk sharing
(vi) participatory nature of economic and business activity through
participatory financing; i.e. the shuratic (consultative) method of
governing business.
(vii) By essentialising productive economic and business activity, in
addition to prohibiting interest, uncertainty (gharar), speculation and
gambling is also prohibited with the same rationale of emphasising
asset-based productive economic activity.
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Islamic Finance is More than Financial Contracts
Tenet-bound
 Fundamental tenants are derived from Shariah
Principles-based
 Concept is grounded in ethics and values
–
Absence of interest-based transactions
–
Principles akin to ethical investing
–
Avoidance of economic activity involving
speculation
–
Emphasis on risk-sharing and partnership contracts
–
Prohibition on production of goods and services
which contradict the values of Islam
Embedded Financing- Real economy-linked
 Islamic finance offers an alternative paradigm
Social and Development Objectives
 Islamic banking is community banking
–
Asset-backed transactions with investments in real,
durable assets
–
Serving communities, not markets
–
–
Aims to enable and function individuals
Stability from linking financial services to the
productive, real economy
–
Open to all-faith clients
–
Credit and debt products are not encouraged
–
–
Instruments of poverty-reduction are inherent part of
Islamic finance (zakat & qard hasan)
Restrains consumer indebtedness
A holistic approach to financing a society; in essence a value and moral
proposition and more than financial contracts
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Islamic Finance, in an aspirational sense of authentic
meaning, aims at…
Islamic banking and finance aims at:
Community banking: Serving communities, not markets;
Responsible Finance, as it builds systematic checks on financial
providers; and restrains consumer indebtedness; ethical investment, and
CSR Initiatives;
Alternative Paradigm in terms of stability from linking financial services
to the productive, real economy; and also it provides moral compass for
capitalism;
Fulfils Aspirations in the sense it widens ownership base of society, and
offers ‘success with authenticity’.
Historically driving connectivity with the real economy
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Islamic finance aims and positive impact
1
•
Engagement of an under-served and previously un-banked market
−
2
•
Providing an ethical banking solution to local communities to deepen the banking market
Promoting the investment mindset rather than the banking mindset
−
3
•
Investing in real assets rather than promoting speculation and leverage
Making meaningful real economy impact
−
Investing in asset-backed instruments and real economy ventures
A growing industry promising benefits
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Islamic Finance is the Outcome of Islamic Moral Economy
in Financing and Banking
Moral screening process
Banking and finance needs
Shariah sources
–
Moral process through endogenising
substance related issues and also through
consequentialistic approach;
–
Definition of policy objectives
–
Developing risk and profit-loss sharing
economy through embedded financing for
the development of economy and social
capital
Fiqh al-Muamalaat contracts
– Quran
– Musharaka - Partnership
– Sunnah
– Ijma’ (jurist consensus)
Shariah filter
– Qiyas (analogy)
– Ijtihad (reasoning)
– Mudaraba
- Partnership
– Murabaha
- Purchase-resale
– Ijara
- Lease
– Istisna’
- Manufacturing contract
– Salam
- Forward sale
Islamic banking and finance solutions
•
Prohibition on:
– Interest
– Speculation
– Gambling
•
Prohibition of certain investments:
− Sectors (e.g.: alcohol,
armaments, financial services,
gambling, pork, pornography,
tobacco)
− Instruments (e.g. no forward
transactions, limited option use,
no derivatives, short-selling)
•
Asset-backed
transactions
with
investments in
real, durable
assets
•
Credit and
debt products
are not
encouraged
•
Financing solutions aim
capacity building and
empowerment of
individuals and society;
•
Social, human and
economic development
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Conceptually, Islamic Banking is Rooted in Developmental
Aims of Islamic Moral Economy
 IBF can fulfill the moral economy objectives by following strategies:
– Direct investments: Banks independently employ funds in profitable projects
– Participation investments: Banks as capital partner with share in projects in
PLS arrangement
– Equity-based structures: Private equity, venture capital, project and trade
finance
– Ethical underpinning: Investments inherently follow International Equator
Principles*
– Financing the ‘unbankable’ individuals to create social capital for
development through microfinancing; and other financial instruments, such
as zakah funds, qard al-hassan;
– Contributing economic, social and human development by returning the
right of society to society and by engaging with projects to increase the
social return.
*Financial industry benchmark initiative, introduced in August 2006, for determining, assessing and managing social and environmental risk in
project finance
Historically driving connectivity with the real economy
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Islamic Finance and Financial Inclusion: Achivements (1)
 Islamic finance has direct impact on economic growth through
financial development by pooling of funds.
 The developments of the sector indicates this:
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Islamic Finance and Financial Inclusion: Achievements (2)
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Islamic Finance and Financial Inclusion: Achievements (3)
 The expansion of Islamic finance industry with its product differentiation
has reached out to those Muslims who would normally avoid financial
inclusion due to religious reasons; or provided inclusiveness for those
who dealt with conventional banking and finance due to not having
Islamic opportunities.
 Expansion of Islamic finance has expanded the opportunity spaces within
the financial system available for religiously concerned individuals who
have income and wealth.
 Thus, Islamic finance, by offering religiously constructed financial
instruments, provides opportunities for Islamically concerned individuals
to be integrated within the financial system;
 It helps to overcome financial exclusion based on religious reasons.
 In this case, financial inclusion relates to people, who may have savings,
businesses and economic activity to conduct their financial and economic
activity within the norms of Islam.
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Islamic Finance and Financial Inclusiveness
 The challenge is, however, to enable individuals, who would not
normally have any opportunity to engage with the financial system or to
be part of the financial system due to not having any reasonable
economic activity.
 Therefore, an important aspect of financial inclusion is to adopt
proactive strategies develop ‘enabled’ and ‘functioning’ individuals as
economic development necessitates.
 In this vertical financial expansion, it is essential to consider how people
can be made stakeholders by developing their businesses and generate
some wealth.
 In such a case, financial system is expected to develop positive attitudes
and policies for financing social investments (micro enterprises, for
example) in an attempt to help the underprivileged sector of the society
to develop themselves in sustaining their lives without ‘sustained
needing’ through contributing to wealth generation at the same time.
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Islamic Finance and Financial Inclusiveness (2)
 Since this is a developmentalist issue, the experience has shown that
commercial banks are not in a position to respond to such an essential
challenge due to their construct nature. Islamic moral economy
foundations of Islamic finance.
 However, Islamic moral economy based Islamic finance suggests a
different paradigm by going beyond the narrow definition of efficiency
oriented commercial banking and by prioritising ‘human-well being’ as
conditioned by maqasid al-Shari’ah.
 This extensive and alternative paradigm suggests as to how individuals
can be developed and how they can be helped and how their needs of
developing businesses can be responded.
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Islamic Finance and Financial Inclusiveness (3)
 The norms and axioms of Islamic moral economy makes it essential that
underprivileged sections of the society to be made stakeholders in
economy and society as well by providing them the opportunity space
through financial, economic and social projects so that individuals should
be ‘enabled’ and ‘functioning’.
 The ‘profit-loss-sharing’, ‘risk-sharing’ and ‘participatory’ nature of
Islamic finance, hence, aims to serve such a purpose in responding to the
social as well as financial optimality in financing. Such an aim should not
be considered as ‘a voluntary’ action, but the essential consideration
and aspiration of Islamic moral economy as articulated by the Islamic
norms.
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Islamic Finance and Financial Inclusiveness (4)
 Islamic moral economy, hence, suggests that financial inclusion through
Islamic finance can be achieved by two ways:
(i)inclusion of individuals in the financial systems, who have the necessary
means but has not had the expected set of financial options (such as
Shari’ah compliant financing) available for them;
(ii)to serve in line with public policy and through the aspiration of Islamic
moral economy in enhancing economic development in the society by
expanding Islamic financing to the larger and underprivileged sector of
the society so that they can be ‘included’ in a financial system through
the wealth they can create (whatever the size of this wealth can be).
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Islamic Finance and Financial Inclusiveness (5)
 Islamic moral economy based Islamic finance, hence, not only provides a
dynamic approach in expanding financial inclusion through overcoming
the observed financial exclusion of people due to their religious norms,
but also directly engaging with underprivileged sector of the society to
be included in the financial system through wealth generation by
essentialising investment mind-set, embedded financing (embedded in
economic nature and value system)
 In addition, considering community banking through Islamic moral
compass. Islamic norms and Islamic financial principles, hence,
essentialise a world of ‘participating’ and ‘sharing’ economy.
 A critical assessment of the performance of Islamic banks indicates
expansion of the financial sector but not necessarily the expansion of
opportunity space for development objectives. In this new stage, hence,
Islamic finance has to consider such objectives also for legitimacy,
credibility, sustainability and trust.
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Islamic Finance and Financial Inclusiveness (6)
 While Islamic banks have successfully served the first objective, they
have not prioritised development objectives due to their commercial
nature.
 Therefore, non-banking Islamic financial institutions and instruments
should be considered in responding to the second type of financial
inclusion.
 These can be in the form of ‘Islamic social banks’ (as in Mith Ghamr
experience), awqaf system delivering on economic and financial spheres,
zakah funds, Islamic micro-financing and takaful, Islamic
developmentalist funds etc.
 Such institutions would fit into the aspirational position of Islamic moral
economy expecting developmentalist outcomes such as active and
dynamic financial inclusion.
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Assessing the Role of Islamic Finance in Expanding Financial
Inclusiveness (1)
 Application of Islamic modes of financing at the micro-level
Dilution of Islamic modes of financing
 Lack of funds
Limited funds from external sources
Islamic MFIs have not yet tapped the sources of funds from
sources (like zakah, waqf, and other charities)
other
 Lack of knowledge and skills
Training can enhance both Shari’ah compliance and
efficiency
 Importantly, having a commercial mind, has not helped them to develop
strategies to contribute to economic development; it seems that they
only respond to the market.
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Assessing the Role of Islamic Finance in Expanding Financial
Inclusiveness (2)
 Financial inclusion should also be considered from a larger
perspective to include the ‘rich’ in the case of Islamic finance;
 A field study in some of the GCC countries show that some very
large business families have been keeping away from dealing with
any banks and financial inclusion including Islamic bank and
finance due to their concern on shari’ah compliancy issues.
 In addition, another study on SMEs in Saudi Arabia has shown the
existence of ‘financial gap’ in the same way, as they mostly aims
to finance their businesses through family oriented financing.
 Thus, Islamic finance should develop strategies to convince such
group of businesses in expanding financial inclusion, as their
wealth is an important source for financial and, hence, economic
growth.
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Commercialisation and Financialisation preventing Further
Financial Inclusion (3)
• While Islamic finance has to be praised in the sense of providing
resources for the larger Muslim societies and communities, its
commercialisation and financialisation has shifted the paradigm from
original claim on economic development including financial
inclusiveness.
 Financialisation as part of the commercial Islamic banking, as opposed
to ‘financing’ understanding of Islamic moral economy has resulted in
not developing strategies to extend financing to lower income and
poor people, nor has it enabled to spread the wealth and capital as
the original claim states.
 IBF is considered re-generating capitalism within Shari’ah compliancy
rather than prioritising the aspirations of Islamic moral economy in
expanding economic development, poverty alleaviation and
outreaching the lower income segments of the Muslim communities.
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Commercialisation and Financialisation preventing Further
Financial Inclusion (4)
Shari’ah-based financing adheres to the inherent principles of the Islamic
tenets
…however the spirit of Shari’a
principles has lagged from its
ideals
Islamic finance has developed by
remaining competitive with
market demands…

Competitive pricing

Profit-loss share financing

Familiar risk/return profile

Asset price risk sharing

“Buy-now-pay-later” mentality

“Save-now-buy-later” culture

Conducive to debt finance

Discouragement of debt
What is needed is a mindset shift
Mehmet Asutay, Islamic Moral Economy Foundation of Islamic Finance| 31
Commercialisation and Financialisation preventing Further
Financial Inclusion (5)
A Shari’a-based mindset is critical for product innovation
Shariah-based solutions

Income-sharing products

Shift from debt-based
product offering
Examples
 Venture capital and private equity vehicles and instruments to
enable “real economy” play
Savings &
Indebtedness
Investments
x
Shariah-compliant products

Letter of the law

Replicating conventional
credit service offering
 Hedging instruments for risk management using risk pooling
concepts of Takaful
 Savings scheme using infrastructure projects as sources of
investment return
 Substitute commodity-based financing products with specific
asset-backed/linked products
 Debt-based products to be marketed responsibly and
provided conservatively
Significant scope to improve the quality of product proposition
Mehmet Asutay, Islamic Moral Economy Foundation of Islamic Finance| 32
Commercialisation and Financialisation preventing Further
Financial Inclusion (6)
Islamic Financing in IBs and Financialisation
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Commercialisation and Financialisation preventing Further
Financial Inclusion (7)
Islamic Financing in IBs and Financialisation
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Commercialisation and Financialisation preventing Further
Financial Inclusion (8)
Islamic financing methods in 2010 for selected banks
Source: Shafi Jan (2013)
Mehmet Asutay, Islamic Moral Economy Foundation of Islamic Finance| 35
Conclusion
 Commercialisation and market pressures has shaped industry’s development to
date
– Competitive forces have ensured replication of conventional offering
– Global regulators initially dismissive, now “no obstacles, no favours”
– Global debt-friendly monetary system has hampered development of equity
based propositions
 Islamic finance should embrace an evolving role
– Industry should perform role of asset managers with socio-economic banking
concerns to contribute to economic development so that people can generate
income and wealth to have Islamic bank account;
– Islam-based vision based on the aspirations of Islamic moral economy is next
stage of industry development: from replication to innovation to re-embedded
financing and de-commodification;
– Islamic financial institutions have an important role to play in the Islamic
world’s development
The distinctiveness of Islamic finance should be preserved to make a
meaningful change
Mehmet Asutay, Islamic Moral Economy Foundation of Islamic Finance| 36
Conclusion: The Industry Has a Key Role to Play in the Path Towards
Economic Development
Invigorate human
capital
−
−
−
−
Build wealth
distribution channels
−
Promote education and
build academic
“centres of excellence”
Facilitate training and
skill broadening
institutions
Deepen access to
finance
Build social and
physical capital base
−
−
−
Uplift SME sector
contribution to GDP
Provide efficient zakat
distribution system
Grow economy’s
“wealth manager” base
Integrate and develop
waqf models and
institutes with the
objective of developing
Islamic moral economy
system
Promote OIC trade
bloc and connectivity
−
−
−
Instigate and
enhance mutual
cooperation
Build efficient
governments
Grow “OIC-national”
companies
Building a
sustainable
socio-economic
development
model with
human
development
objective
through aiming
at falah with the
ihsani social
capital
Islamic banking is one tool to enable economic development
Mehmet Asutay, Islamic Moral Economy Foundation of Islamic Finance| 37
For socially and environmentally responsible value oriented just economic and financing
system, which can enable individuals to function and which can aim at well-beings of
individuals…
Utopias should exist so that realities can be constructed and engineered…
Thank you…
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