Islamic Finance and Financial Inclusion

Transcription

1 Global Financial Development Report Seminar Series Islamic Finance and Financial Inclusion Zamir Iqbal Lead Investment Officer World Bank Treasury June 13, 2013 Washington, D.C.

2 Building Blocks of Islamic Economic System Risk Sharing Reduction of Information Asymmetry (Gharar) * Prohibits contracts with high uncertainty (Speculation/Gambling) * Requires Full Disclosure before, during and after the contract Prohibition of Interest (Riba) Eliminates Debt contracts and Leverage Economic and Social Justice Wealth, Ownership and Property Rights Preservation of Individual Property Rights, Protection of Property Rights of Stakeholders, Significance of Rights of the Society The role of Wealth, Money, and Capital Sanctity of Contracts 2

3 Islamic Finance A pro-development financial system? Prohibition of Interest, Promotion of Exchange and Trade Information Asymmetry (gharar) Risk Sharing Corporate Governance and Leadership Economic Institutions Property Rights Contracts, Trust Rules of Markets Business Ethics Financial Inclusion Economic Development Entrepreneurship Redistributive Instruments (Zakaat, Qard-al-Hassan, Waqf, Sadaqaat, etc) Economic and Social Justice Inclusive Growth

4 Concept of Financial Inclusion in Islam Economic development and growth, along with social justice, are the foundational elements of an Islamic economic system. From Islam s concept of Property Rights view, property is not a means of exclusion but inclusion in which the rights of those less able in the income and wealth of the more able are redeemed. Risk-Sharing or Hybrid Financing Instruments Micro-Finance (MF) Small-Medium Enterprises (SME) Micro-Insurance (Micro-Takaful) Distributive and Re-Distribution Institutions Zakah (Mandatory contribution) Sadaqat (Voluntary contribution) Qard-al-Hassan (No cost debt ) Waqf (Endowment)

5 Can Zakat help alleviate Poverty? Moheildin, Iqbal, Rostom, and Fu (2011) find supporting evidence that 20 out of 39 OIC countries can actually alleviate the poorest living with income under $1.25 per day out of the poverty line simply with proper Zakat collection and management. (1) (2) (3) (4) (1) (2) (3) (4) Country Zakah (% of GDP) resource shortfall under $1.25 per annum as % of GDP Does Zakah cover (3)? Country Zakah (% of GDP) resource shortfall under $1.25 per annum as % of GDP Does Zakah cover (3)? Albania y Bangladesh n Algeria y Benin n Azerbaijan y Burkina Faso n Cameroon y Comoros n Djibouti y Cote d'ivoire n Egypt y Gambia n Gabon y Guinea n Indonesia y Guinea-Bissau n Iran y Guyana n Iraq y Mali n Jordan y Mozambique n Kazakhstan y Niger n Kyrgyz Republic y Nigeria n Malays ia y Senegal n Maldives y Sierra Leone n Morocco y Suriname n Pakis tan y Tajikis tan n Syrian Arab y Togo n Turkey y Uganda n Yemen y

6 Potential of Islamic Social Finance for Poverty Alleviation Estimates of Resource Shortfall for Poverty Alleviation & Potential of Zakah in Meeting the Gap Country Resource Shortfall per annum as % of GDP For incomes below $1.25 a day Resource Shortfall per annum as % of GDP For incomes below $2 a day Zakah (1) as % GDP Zakah (2) as % GDP Zakah (3) as % GDP Zakah estimated under 3 difference methods of estimation Malaysia Pakistan Indonesia Bangladesh Tajikistan Source: Islamic Research and Training Institute (IRTI), Islamic Development Bank Group

7 Potential of Islamic Social Finance for Poverty Alleviation Estimates of Resource Shortfall for Poverty Alleviation & Potential of Awqaf (endowments) in Meeting the Gap: Case of India Estimated Market Valuation of Registered Awqaf Assets: USD24 billion* Minimum expected annual rate of return: 10 percent or Minimum expected annual cash flows: USD2.4 billion (0.325 percent of GDP) Resources required to push all Muslims (153 million) above USD1.25 income per day: percent of GDP * Source: Report on Social, Economic and Educational Status of the Muslim Community of India, 2006 Source: Islamic Research and Training Institute (IRTI), Islamic Development Bank Group

8 Trends in Zakah Collection & Distribution Actual zakah mobilized falls far short of potential Indonesia: percent of GDP (0.41 percent resource shortfall) Pakistan: 0.06 percent of GDP (o.709 percent resource shortfall) Malaysia: 0.24 percent of GDP (0.012 percent resource shortfall) Brunei Darussalam: 0.10 percent of GDP Growth in mobilization of zakah has been steady Indonesia: Increased by over 25 times over 9 years (178.9 mill USD in 2011) Pakistan: Increased by 40 percent over 3 years (105 mill USD in 2011) Singapore: Increased by 20.2 percent over 3 years (20.4 mill USD in 2012) Brunei Darussalam: Increased by 55 percent over 10 years (13.8 mill USD in 2010) Malaysia: Increased by 22 times over 19 years (454.6 mill USD in 2010) Source: Islamic Research and Training Institute (IRTI), Islamic Development Bank Group

9 Qard-al-Hasan Case Study: Akhuwat, Pakistan Key Features Interest-Free Loans (Qard-al-Hasan) Use of Mosque/Church Family Loans Local Philanthropy Volunteerism Borrowers become Donors Simple Operations leading to Cost Efficiency Cost Structure Interest Processing Fee Profit Application Fee Zero Zero Zero Zero Progress Total Total Loans 300,000 Amount Disbursed Rs. 4 billion Approx. $ 40 million Active Loans 140,000 Percentage Recovery 99.85% Number of Cities 110 Number of Branches 157 Source: Akhuwat, 9

10 II - Entrepreneurship and Intermediation SMEs Finance Gap is Significant Source: IFC

11 Well Developed Financial Sector is Vital for Islamic SMEs due to Risk-Sharing Aspects of Islamic Finance Credit Information Ranking Starting New Business Ranking Enforcing Contracts Rankings Private Credit bureau coverage 6 OIC GCC OPEC 61 OECD 5 OIC-GCC 1 Low income 7 MENA 18 developing Strength of legal rights index (0-10)

12 Policy Recommendations I - Need for Developing Supportive Regulatory and Supervisory Framework Countries with a Financial Inclusion Strategy Document II - Strengthen Financial Infrastructure for Financial Inclusion Core components of the financial infrastructure such as credit information, investors rights, insolvency regimes, etc. are essential irrespective of type of financing, i.e. conventional or Islamic

13 Policy Recommendations III - Ensure a Level Playing Field for Islamic Microfinance, SME, and Micro Takaful. The lack of Shariah-compliant micro-finance services is constraining financial inclusion to a proportion of the population. When designing the financial inclusion reform plan, OIC governments should take three points into their consideration specifically i) allowing banks to expand access through agents and use of technology (e.g. mobile phones), ii) providing a Shariah-compliant finance company model for microfinance and microinsurance, and iii) removing interest rate caps for microcredit and strengthen customer protection laws. Governments should play a critical role in promoting an enabling environment in which private banks can fulfill their SME finance targets prudently and responsibly. IV - Institutionalization of Islamic Redistributive Instruments V - Financial Engineering Hybrid Models Securitization of Micro-Finance and SME portfolios

14 Thank You 14

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