A big question mark in the Islamic finance industry

Is Islamic finance reaching the poor?

Apparently, it is a matter of pleasure that the global volume of the Islamic finance industry has crossed the USD1.3 trillion threshold, which is definitely providing the best and compatible sources of finance with interest-free modes.

A big question mark in the Islamic finance industry

A big question mark in the Islamic finance industry

According to a careful estimate, there are more than 2,000 Islamic financial institutions that are offering Islamic banking, Islamic insurance (takaful), Islamic funds, mudaraba, Islamic bonds (sukuk), and Islamic microfinance. Meanwhile, some other institutions actively provide Islamic financial services on different modes in adherence to Shariah principles of Islamic finance.

Yet if we look into the market share of the above-mentioned institutions, we get shocked and depressed for a while with the fact that Islamic banking and finance has been nearly confined to the “rich people” and as per the ideology of capitalism.

The profit urge has captured the Islamic financial industry and discriminated against the underprivileged people, letting them be deprived from Islamic financial services. Keeping in view these facts, it can be simply said that commercialism has captured Islamic finance institutions in such a way that business and finance with and for the poor has gone astray from their agenda.

According to the facts and figures from a March report by Consultative Group to Assist the Poor (CGAP), an associated institution to the World Bank, the global volume of Islamic microfinance has reached USD 800 million with service to about 1.3 million beneficiaries.

While as per the latest research (July 2013) conducted by AlHuda Centre of Excellence in Islamic Microfinance, the global volume of Islamic microfinance has reached at USD1 billion. The total number of Islamic microfinance Institutions stands at more than 300 globally, yet Islamic microfinance constitutes less than 1 percent of the overall USD1.3 trillion assets that comprise the Islamic finance industry. This, in itself, is a big question mark on Islamic finance industry and proving its misfortune.

These stated facts and figures give rise to different question such as: is social segmentation between poor and rich 1 percent to 99 percent? Does Islamic finance have financial resources only for the rich people? Not for the poor? Is Islamic finance an option only for the particular segment of society? Furthermore, is it justice system of Islam?

As per the analysis of Islamic finance in the light of Islamic teachings, we get into the heart of Islamic ideology towards finance, which aims at justice, cooperation, and welfare of the poor and financially deprived people of society with its best principles. Islam is in name a revolution, starting from the poor and ending at with the same.

If we have a look at comparative study of different religions regarding the viewpoint of poverty, then we come to know that poverty alleviation is not only a social responsibility in Islam, but rather a religious obligation as well. Zakat, charity, sadqa, fitr, ushur and qarz-e-hasan are all amongst the key religious responsibilities of Muslims, whereas it is a social responsibility in other religions rather than a religious one, a responsibility recognized and branded in the name of “Corporate Social Responsibility” (CSR). These institutions are doing good work for poverty alleviation and social development in the whole world. Unfortunately, the Islamic financial industry has widely ignored its social or religious responsibilities.

If we look at world poverty, we get surprising facts and figures. Currently, 46 percent of world poverty exists in the Muslim World, while the Muslim population in the world is 26 percent[SO1] . The United Nations have marked 26 out of 57 member countries of the Organization of Islamic Countries (OIC), as the least developed countries. Current statistical information is highlighting that the poverty in the Muslim World is increasing day by day.

In serious observation, it can be said that this is caused by no or little response of poor people to microfinance facilities because of interest; none or limited Islamic Microfinancing facilities provided by Islamic financial institutions; and finally, the least attention and interest of International Donor Agencies (UNDP, World Bank, IFC) towards Islamic microfinance. All of which, in turn, is throwing the Muslim world into an era of poverty.

As per the praiseworthy analysis of economics experts of the modern age (Mr. Tariq Ullah and Mr. Ubaid Ullah 2008), 650 million Muslims in the world are living below poverty line with less than USD2/per day income. On the one hand, only 1.3 million Muslims out of 650 million were aided in alleviating their poverty through Islamic microfinance services, whereas the remaining 649 million Muslim, living in poverty, are still looking for any financial assistance through Islamic way.

The Islamic finance industry is facing lot of criticism in different aspects, namely the acceptability of Islamic finance as a whole, but also through internal objections from Shariah scholars and conflicts in Shariah related issues. These are seen as the main challenges to the Islamic finance industry. But the issue of neglecting the poor is very critical, and if not resolved, can damage and bring a perpetual loss to the Islamic banking and finance industry.

Optimal results for the economic prosperity of Islamic finance can be ensured if Islamic microfinance institutions are established by the Islamic finance industry. Although Islamic microfinance can be energized by utilizing the available charity amount of the Islamic banking and finance industry–which is worth millions of dollars–tools such as alia zakat, sadqaat, waqf, and other Islamic microfinance products such as murabaha, musharaka, salam and istisna’, can be used prolifically for poverty reduction and social development.

Our Shariah scholars are also responsible for pursuing and insisting that the Islamic financial institutions execute and promote Islamic microfinance.

Otherwise, there is a definite chance of rumors that Islamic banking and finance services are only for rich people, creating the discrimination of “Do Have and Have Not” and ensuring that the industry ultimately benefits only rich people.

About: Muhammed Zubair Mughal is Chief Executive Officer of AlHuda Centre of Islamic Banking and Economics (CIBE) and has been working consistently for the last nine years towards poverty alleviation through the Islamic microfinance concept. He can be reached at [email protected]

© Business Islamica 2013