Can Islamic Finance Promotes Sustainable Development and Inclusive Growth?

Transcription

1 Can Islamic Finance Promotes Sustainable Development and Inclusive Growth? Dr. Azmi Omar Director General Islamic Research and Training Institute

2 Presentation Outline o Value Proposition of Islamic Finance o State of Global Islamic Finance Industry o Can Islamic Finance Increase Financial Inclusion and Alleviate Poverty? o Key Findings from IRTI s Islamic Social Finance Report,

3 VALUE PROPOSITION OF ISLAMIC FINANCE Direct link to real economy Certainty supported by underlying activities (avoidance of gharar - uncertainty) Less leveraging Avoidance of unethical activities e.g. hoarding Avoidance of maysir (gambling), & riba (interest) Greater transparency & disclosure - additional Shariah governance unique risks Greater fiduciary duties & accountability Shariah values consistent with universal values Different contractual relationship Equity-based & risksharing transaction Clearly defined risk & profit-sharing characteristic served as additional built-in mechanisms Increase financial inclusion promote just, fair, trustworthy & honest, while ensuring equitable wealth distribution inherent features in Islamic financial transaction promote and sustain global financial stability

4 Islamic Finance fastest growing segment in global Islamic Banks US$ trillion financial system Global Sukuk US$ 178 billion Islamic Mutual Funds US$ 60 billion Takaful US$ 15.2 billion

5 An Enormous Potential Total Assets US$ 6.5 trillion by 2020* Number of IFIs 600 IFIs in the US$ 1.4 world trillion by 2013 Shari ah Compliant Global Funds 680 funds Global Market Capitalization of Dow Jones Islamic Index US$ 10 trillion *GIFF 2012 by KFH

6 Can Islamic Finance Increase Financial Inclusion and Alleviate Poverty? Use of Social Finance Sector for Economic Development Not-for-Profit Islamic Finance Zakat and Poverty Alleviation Awqaf Microfinance Institutions 6

7 Key Findings from IRTI s Islamic Social Finance Report, 2013 Country Population Below $1.25 a day (%) Poverty gap at $1.25 a day (%) Population Below $2 a day (%) Poverty gap at $2 a day (%) Bangladesh Indonesia Malaysia Pakistan Poverty headcount ratio at NPL (% of population) 7

8 Potential of Zakat in Meeting Resource Gap Zakah Potential: Estimated under three different schools of thought regarding the method of estimation Country z1 as % GDP z2 as % GDP z3 as %GDP Bangladesh Brunei Darussalam India Indonesia Malaysia Pakistan Singapore

9 Potential of Awqaf in Meeting Resource Gap India: Estimated market valuation of registered awqaf assets: USD24 billion 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 Indonesia: Market value of registered land wakaf assets: Rp 590 trillion (USD 60 billion) Minimum expected annual cash flows: USD6 billion (0.849 percent of GDP) Resources required to push all Indonesians above USD1.25 income per day: percent of GDP 9

10 Trends in Zakah Collection & Distribution While potential zakah CAN meet resource shortfall for alleviation of poverty, actual zakah mobilized falls short of potential Indonesia: percent of GDP (0.411 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 Bangladesh: 1.4 percent of GDP (5.6 percent resource shortfall) 10

11 Summary of Good Practices for Zakah Sector Government may be responsible solely for regulation and leave mobilization to private bodies Where state is sole collector with agency agreement with private corporate entities, there should be no competition between the two Zakah regulations should be dynamic with scope for continuous reforms Zakah payment should be made compulsory with effective deterrents against evasion Zakah payment should be allowed as a deduction to income tax payable and not just to taxable income 11

12 Summary of Good Practices for Zakah Sector Corporatization is desirable as it enhances convenience for Muzakki; improves transparency Accountability and good governance are key to sustainability and growth in zakah mobilization; require ensuring separation of zakah funds from other forms of charity; flow of zakah funds to designated beneficiaries by Shariah and by the Muzakki Effective deterrents against misuse of zakah proceeds and violation of Shariah mandates relating to application of zakah funds must be in place 12

13 Summary of Good Practices for Zakah Sector Effectiveness in zakah management requires ensuring that zakah payment does not encourage dependence but leads to economic empowerment Priority rules of distribution require fulfillment of basic needs (relief and rehabilitation) of ultra-poor first and avoidance of carrying or investing any surplus Efficiency in zakah management requires ensuring that cost of zakah mobilization is pegged below oneeighth of funds mobilized. 13

14 Good Practices for Awqaf Sector Proactive regulations ensure continuous reforms Individual as well as institutional role in making and managing waqf encourage new waqf creation Private financing of waqf development should be permitted for finite and limited period ensuring the perpetual character of waqf, thus balancing the apparently conflicting concerns of preservation and development Additional financial as well as non-financial costs with waqf (as compared to trusts and foundations) must be avoided to provide a level playing field 14

15 Good Practices for Awqaf Sector Issues relating to remuneration and accountability of mutawallis should be explicitly addressed with effective deterrents against misuse of waqf assets Expressed and documented Intention of waqif regarding intended application of waqf proceeds must be respected and complied with Emphasis on cash waqf encourages new waqf creation; investment of waqf funds should be permitted in financial as well as real portfolios while avoiding highly speculative investments Waqf was always meant to be in voluntary sector and should be allowed to remain so. 15

16 Good Practices for IsMf Sector Emphasize access by ultra-poor Encourage alternative models of microfinance: seek to retain strengths of replications of conventional models and avoid their weaknesses Strengths of replications: simplicity; transparency; standardized procedures & documentation; higher staff efficiency and professionalism Weaknesses of replications: Overwhelming concentration of murabaha; less emphasis on project viability; high cost of finance; women only approach; perpetuation of debt 16

17 Good Practices for IsMf Sector Integrate zakah, awqaf with microfinance for Provision of safety nets, relief and rehabilitation (DD, Indonesia) Lowering of cost of finance to ensure affordability (RDS, Bangladesh; Akhuwat, Pakistan) Economic empowerment through skill enhancement and provision of business development services (DD, Indonesia) Provision of micro-takaful (BMTT, Indonesia) 17

18 Good Practices for IsMf Sector Institutionalize charity and good giving; encouraging past beneficiaries to donate (35 percent of operational costs for Akhuwat Pakistan is absorbed by donations from past borrowers growing by 5 times during last 3 years) Institutionalize voluntarism (one-third of workforce for Akhuwat Pakistan are voluntary) Use innovative ways to reduce operational costs, e.g. use of masjids and churches for loan delivery and ensure zero default (For Akhuwat, operating cost as percentage of loan amount pushed below 6 percent per annum) 18

19 Good Practices for IsMf Sector Encourage cooperation & solidarity (most indigenous IsMF experiments follow cooperation-structure) Avoid debt, especially for ultra-poor; make use of multitude of Shariah-compliant modes (Wasil Pakistan uses 8 not-forprofit and for-profit debt-based and participatory modes) Encourage family cohesion by treating family as a whole unit (avoiding women-only models, e.g. RDS Bangladesh) Ensure Shariah compliance of contracts (Some IsMFIs still depend on interest-based government finance) 19

20 Good Practices for IsMf Sector Ensure one-member-one-vote rule or consensus-building as the basis for decision-making for cooperation-based institutions (e,g, BMTs) Ensure transparency, establish standard operating procedures and self-regulatory mechanisms Underscore inclusiveness and integration of microfinance with the formal financial system 20

21 Conclusion Islamic social finance sector for economic development can increase financial inclusion and alleviate poverty These include the use of Zakat, Awqaf, For-Profit and Notfor-Profit Islamic Microfinance institutions Recommendations to improve the Islamic social finance sector include the right enabling environment, effective management and governance of these institutions, institutionalizing charity and voluntarism and integrating Zakat, Awqaf with microfinance 21

22 Thank You 22