Rushdi Siddiqui asks a question he has asked before (and which I have written about before) about whether Islamic finance is missing a focus on microfinance and making institutions whose focuses include social responsibility (a focus on environmental, social and governance, or ESG, metrics, in addition to profits). When I talk to people about Islamic finance, one of the areas that sparks the most enthusiasm is Islamic microfinance, and using Islamic finance as a way to broaden financial inclusion.
Yet, there is too little attention paid to these issues by Islamic financial institutions, where the focus is more on creating new alternatives to conventional products like allowing brokerages to offer 'Islamic margin accounts'. There is a demand for these products, I'm sure, and they help Islamic financial institutions compete with conventional brokerages for business, but is that the best use of resources for broadening Islamic finance?
Why not help new initiatives to reach the broad majority of Muslims who are not thinking "well, can an Islamic brokerage allow me to make leveraged bets on stocks?" but are instead thinking "I want to use microfinance to start a business, but I don't want to be involved with an interest-based microfinance institution".
There are new Islamic microfinance institutions starting up, including one, the Zayd Chit Fund in Bangalore, India (a form of rotating savings and credit association, or ROSCA), which launched last weekend, in a market that has huge potential for Islamic finance, but where political constraints have limited the ability of large Islamic financial institutions to enter. What better way to enter the market than to go support (financially and with technical knowledge) the development of Islamic microfinance institutions, including Shari'ah-compliant chit funds. It provides a way to enter a large, untapped market, and a way to show that the Islamic bank is focused on more than just the next quarterly earnings report.
The Islamic finance industry is vast and rich with resources and talent (although, as many have noted, not as successful in finding jobs for the recent graduates). It is also by its nature supposed to be concerned with providing ethically-based financial services that do not just preserve wealth for those who have it, but also in providing opportunities for people who, with an oppportunity, can create wealth, and jobs. In addition to providing banking products for higher-income people and those with significant wealth, it should also support financial institutions that provide for people with lower incomes or with no access to Islamic finance. Not just because it makes nice PR material, but because it will help attract and retain talented employees, and will create a market of people familiar with Islamic finance who will then look to Islamic banks for services into the future.
5 comments:
The major concern I have for Islamic microfinance as an industry and a practice is the fact it is not regulated and no established standard setting body for Islamic microfinance. Accordingly no entry barriers which will eventually will lead to abuse and mishandling as well as misrepresentation considering the target customer tends to be at the lower end of education if not illiterate making them perfect victim for their predicaments (illiteracy, poverty). The best to lead such initiative at the macro level would be IDB in coordination with IFSB and AAOIFI. At the country level the regulator should play a leading role in regulating Islamic microfinance in their jurisdiction.
Some of the leading UK based Islamic aid and development charities run shariah compliant microfinance schemes as part of their development work in poor Muslim majority countries. Islamic Relief and Muslim Aid both run such projects. Their work is regulated by the UK Charity Commission, whose requirements are quite rigorous, so this may offer a valuable alternative to commercial lenders which have the potential for abuse of poorly educated people who will trust anything that claims to be Islamic.
Dhafer,
I think there should be more focus more on ensuring that microfinance institutions are regulated, rather than focusing on setting standards at this point, since these may limit the development of new products. It is important, I think, to provide strong customer protection standards for Islamic microfinance institutions (because as you mention, their target customers are more vulnerable due to low levels of education). For example, the chit fund mentioned in the post is regulated under the Chit Fund Act in India.
Elaine,
I am somewhat familiar with Muslim Aid's Islamic microfinance work in Sri Lanka. However, I am not familiar with the UK Charity Commission and whether it can (and does) provide any oversight that protects the clients of the microfinance institution from harm. I would guess that their focus is on protecting donors to the organizations by ensuring that the charities manage their finances in an honest and transparent way, and are not misleading in their descriptions of the work they do for fundraising purposes. It would be more difficult, I think, for them to provide any oversight of the charity's work overseas, particularly oversight of their microfinance interactions with clients outside of the UK.
Blake - it's true that the Charity Commission can't observe day to day interactions with clients overseas, but then it can't do that with clients within the UK either. It has undertaken several investigations into charities that were accused of involvement in terrorism or inappropriate political propaganda (none of these accusations were found to be valid) and if anyone approached them with a prima facie case that a charity registered in England was 'causing detriment or harm' to clients, as the regulations put it, even if the clients were overseas, they would certainly investigate. The charity regulations in this country do not just cover honest financial management, they set out strict rules about the activities of the charity and the way it treats its clients.
Blake - it's true that the Charity Commission can't observe day to day interactions with clients overseas, but then it can't do that with clients within the UK either. It has undertaken several investigations into charities that were accused of involvement in terrorism or inappropriate political propaganda (none of these accusations were found to be valid) and if anyone approached them with a prima facie case that a charity registered in England was 'causing detriment or harm' to clients, as the regulations put it, even if the clients were overseas, they would certainly investigate. The charity regulations in this country do not just cover honest financial management, they set out strict rules about the activities of the charity and the way it treats its clients.
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