Musings on Micronance Charles Selestine

INSIDE04

ISLAMIC MICROFINANCE-SOME THOUGHTS Malcolm Harper 20

28 32

trusts-gateway to Europe?38 Abdelilah Belatik 42

Islamic nance economic valueJoy Abdullah

Islamic Finance & Financial Repression

Abbas Mirakhor

Talent Development

Reuben Buttgieg

We also have Dr.Amjad Saqib, founder of Akhuwat which provides interest-free loans based on the Qard Al Hasan principle enunciated in the Qur'an to the most deserving communities in his homeland of Pakistan, a nation that has to contend with the twin evils of poverty and extremism engendered by the misguided policies of Zia Ul Haq which has driven that once beautiful country to the plight of failed state.

As such Akhuwat's initiatives should be seen as a silver lining in an otherwise dark cloud. In fact such initiatives serve as a good example of how true Islamic principles could serve as a force for social good, which needless to say is its real purpose.

We also have exclusive interviews with the Founders of Savings Revolut ion and Making Cents , two organizations that are contributing much to promoting opportunities especially for young people and from whose experience Islamic Finance Providers can learn much.

Also interviewed is the CEO of MicroEnsure, a conventional microinsurance provider whose observations and comparison of microtakaful vis-à-vis conventional insurance is an eye opener for Islamic Insurance providers.

Poverty is a trap and the best way out is giving the victims the means to move out of it. This is what Islamic Microfinance is all about.

Read on….

Serving the Underserved

EDITORIAL

Asiff HusseinEditor-in-Chief

Islamic Finance Today

In this special edition focusing on Microfinance, we have pieced together some interesting ideas and observations on this very important yet much underrated area of Islamic Finance by some leading academics and hands-on activists.

We hope that our readers will benefit from the views expressed by our contributors who have devoted much of their life to serving the underserved sections of society. New trends such as crowdfunding are in fact already making their mark in all rungs of society but have yet to percolate to the really depressed sections of society who survive on USD 2 Dollars a day or less and don't have access to any type of financial services. It is to these really deserving sections of society that this special issue of IFT is dedicated.

Particularly interesting is Professor Malcolm Harper's pioneering work on the benefits and shortcomings of various forms of Islamic microfinance based on well known Islamic Financing methods such as Murabaha, Mudaraba and Musharaka.

As the good professor shows, Murabaha is overrated and is not much different from conventional interest-based transactions with hardly any real benefit to the poorest sections, hence the need to focus more on profit- and loss-sharing methods such as Musharaka and Mudaraba if there is going to be any meaningful improvement in these people's lives.

Islamic Finance Today is a monthly magazine exclusively dedicated to Islamic Finance & Banking published by Pioneer Publications (Pvt) Ltd. It contains a variety of interesting articles including exclusive interviews, news and views on various aspects of the industry.

No part of this publication may be reproduced in any form without the prior written permission of the publisher. Views expressed in this publication are not necessarily those of the publisher.

Editor in Chief - Asiff HusseinLayout & Design - Nimry MarikkarMarketing & Circulation - Anfas AneesPR & Communication - Fazna Fazmi

No 4, Collingwood Place, Colombo 06, Sri Lanka. Phone: +94 11 7395090-3Website: www.iftmagazine.com

ISLAMIC FINANCE TODAY

Joy Abdullah

Joy Abdullah is a marketing executive with substantial experience in designing brand experience, leading and implementing a broad range of corporate growth and realignment initiatives across industries in Asia. He is head of strategic planning & corporate affairs at INCEIF- The Global University of Islamic Finance and writes on ethical brand marketing, strategic brand management and sustainable business strategies.

As the world reels from a continuous series of financial, economic, humanitarian and natural crises, the world of Islamic finance is growing. In the past decade the various projected global industry growth figures show this industry to be going up, up and away. Yet if one were to co-relate this growth with social development a direct correlation is, as yet, hard to find.

Is there an anomaly?

Within the global industry the strain of growth is starting to tell on the business models in use as issues of talent, technology and socially responsible investments are now the topics of discussion in industry conferences. Couple this with the developments occurring in the mainstream finance industry where areas like social responsible investment, alternative currency and crowdfunding are forcing organizations to view the disruptions taking place and review their business strategies and models.

On ground, technology has empowered people to be able to seek intellectual, financial and managerial collaborations, generating entrepreneurship and a mushrooming of small businesses. The financial industry, as a whole, is looking at the way investment is changing and the way finance is being run against a backdrop of increasing reliability on word-of-mouth (WOM) reference as the base for trust.

Against such a backdrop Islamic finance, the way it is operating today, is beginning to look isolated and bereft of a clearly defined economic and societal value.

Decades ago as Islamic finance came in, as an alternative financial system, organizations took the system for use within the regulatory environment that existed. Regulations changed over time to accommodate market sentiments and with those changes organizations seemed to focus on compliance and not on the purpose of their business.

Therein is the anomaly!

The global industry undertook Islamic finance activities based on their then business models and processes.

Can Islamic nance show its economic and societal value?

By Joy Abdullah

IFT 29Islamic Finance Today - April 2016

Models that focussed on shareholder return of dollar value as primary objective not social or community development and, thus, purpose was not in the picture anywhere.

Light at the end of the tunnel?

The numerous financial, environmental, economic and socio-political crises, coupled with the advancement and adoption of technology, over the past 20 odd years has brought about seismic shifts in the common man's buying behaviour. Trust in organizations has eroded given the numerous scandals.

A clearly recorded increase on the dependency of word-of-mouth reference, with regards to engaging with organizations, has come about, resulting in organizations needing to have specific competencies that simply weren't in existence 20 years ago. Social media usage has resulted in organizations having to depict simply and authentically their business purpose.

Institutional business has come to the realisation that it's people who make the deals. People who want to work with credible, honest and trustworthy counterparts. Trust has come a full circle and is now at a premium. At the same time, Boards are driving organizations to be more socially responsible and to ensure that the eco-system, in which a concerned business operates, benefits from the services of the organization.

This provides an ideal setting for Islamic finance which, inherently, has economic and societal benefit in-built in its ethical use. Let me clarify through a simplified example—a conventional bank would evaluate various parameters when opening a new branch, in a remote area, including cost-recovery and present a cost-benefit analysis to its board when recommending to open a new branch.

The decision would be based on the return its investment would earn and the period in which it would occur. Currently an Islamic bank or financial institution would be doing the same.

But therein is the opportunity!

Purpose of Business

For an Islamic financial institution the purpose of business is not profit but providing, ethical, financial service to the community. Community and social development becomes the purpose of the business through which it generates profit. Profit is a secondary objective coming after the benefit to the community has been established.

IFT30 Islamic Finance Today - April 2016

This impacts in two ways with regards to the business model:

1. Return on investment and risk calculation parameters change. From being focussed on current rate of return in a shorter time frame one needs to focus on developing the investment made in order to recoup planned returns over a longer time period. In a nutshell instead of shifting the risk i.e. calculating cost of money loaned the institution has to move to equity sharing thus ensuring how that equity can earn the necessary return.

2. Such a change in business model impacts on the existing regulatory structure where significant changes would be necessary to enable the institutions to have financial stability over time.

Coming back to the example of opening a new bank branch, an Islamic finance institution opening a new branch in a remote area should be driven by the societal responsibility of providing services in an area where no such service is available. This involves disrupting the current business models and thinking afresh on the purpose of the institution's business and developing the business strategy from it to generate required financial gains.

Just like parenting, institutions have to look at their business not in terms of the usual one to three years but in terms of three to ten years. Just as parents nurture their children for twenty plus years before the children stand on their feet, in the same way Islamic finance institutions would need to nurture their investments on longer term basis, ensuring in the process that their eco-system develops and benefits, in order for the institutions to profit and grow.

Social Purpose

Here are three examples of mainstream organizations that focussed on the social purpose of their business and are today global names:

1. In 2010 Uber launched in San Francisco, providing full size luxury cars for hire, “UberBlacks”, as they were then known. But they were also marketing themselves as a ride sharing Company to ease the pain of being unable to locate a cab on the streets of San Francisco.

2. Airbnb started because its founders couldn’t afford to pay rent and led to the biggest accommodation service provider.

3. Alibaba’s Jack Ma’s story is the classic rags to riches type. The purpose of Alibabe, in Jack Ma’s words—“Our focus is on helping small and medium-size companies make money “.

Disruption is knocking on the doors of the Islamic finance institutions today. A back-to-basics approach will help the industry in moving forward and delivering the economic and societal value that is the purpose of Islamic finance.

IFT 31Islamic Finance Today - April 2016

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