It isn’t
just about prohibition of pork, interest, speculation and uncertainty that wins
people over!
Today,
Muslims are encountering continuous and concurrent streams of political/social
“hurricanes, typhoons, tornados and earthquakes, resulting in a groundswell of
a ‘tsunami stress’ test”.
We are in a
fluid state of extremists trying to hijack the religion in the Muslim world
(Nigeria, Syria, Iraq, Afghanistan, Sudan, Pakistan, etc) and coordinated/lone
wolf attacks in high-profile non-Muslim countries of US, UK, Australia, France.
As a result,
there is a vocal minority anti-shariah and halal-hysteria movement in US,
France, Australia, etc.
For example,
the recent Facebook-led halal boycott movement in Australia is equating the
local halal certification body fees as a (1) Muslim tax on local non-Muslims
who purchase the halal products – ignoring Kosher and organic higher prices –
and (2) suggestions, without proof, that such fees are directed towards funding
terrorism.
(Hint to the
halal hysteria movement in Australia – look at oil revenue, kidnapping revenue,
raiding bank vaults, sale of looted antiquities, etc, as source funding and not
Australian certification body fees.)
Now, it
would seem almost trivial to lump financial inclusion in context of the
above-mentioned challenges, but disenfranchisement not only affects
dignities of people, but is also an important pre-condition recruitment tool
for those espousing hate, violence and the hoped-for “implosion and ensuing
clash of civilisations”.
According to
the website of Co-Exist, an organisation dedicated to building bridges of
understanding among various faiths and followings, “there is a crisis of
understanding that tears at the social fabric of societies around the world.
Globalisation has outpaced understanding, creating divisions that plague
societies with prejudice, misinformation, hate, and violence”.
Rounding
error
Islamic
finance was a rounding error in the pre-Arab Spring countries of Egypt,
Tunisia, Morocco, and Syria, and continues to be a few years later.
Furthermore,
the emergence and atrocities of the extremist cult, Boko Haram, in Nigeria combined
with the departure of the former central governor, Lamdo Sanusi, has not only
stalled Islamic finance in the country, but also put it on the defensive.
Thus, the
spread of Islamic finance in non-Muslim countries, beyond money raising
exercises, absorption of “Islamic liquidity” by way of Sukuk in Hong Kong,
South Africa, Luxemburg, UK, has not sparked locally based corporates to follow
the lead of their sovereign.
There have
been number of high-profile Islamic banking “hiccups” in the West. For example,
HSBC Amanah, Islamic banking unit of global giant HSBC Bank, ceased operations
in US, UK, etc.
The only
depositing FSA approved in the UK, Islamic Bank of Britain, now Al Ryan Bank,
has had two capital rescue injections. Islamic finance in France was stalled
after Christine Lagarde, former Minister of Finance, moved to the IMF and the
recent Charlie Hebdo tragedy has indefinitely suspended it.
Thus, the
external environment in many non-Muslim countries, where there may be an
established Muslim population, is still “studying” Islamic finance. A nice code
word to appease all stakeholders, and when/if the political climate is right,
there will be noise about it again.
A simple
question: Islamic finance is positioning itself as ethical finance, where Islamic
banks like Abu Dhabi Islamic Bank (ADIB) are looking to change their name to
Abu Dhabi International Bank (still ADIB) for non-Muslim country presence, but
is ethical finance embracing Islamic finance?
So, is the
natural growth of Islamic finance in the Muslim world: the “have not” Muslims
or and/or something else?
Financial
inclusion
After 40
years, Islamic finance has touched less than 1% of the Muslims, 38 million
according to an Ernst & Young study, and less than 1% of the global banking
assets.
Notwithstanding
the small percentage numbers, 1 and 1, it is still a remarkable feat when
placing in context of an entrenched, inter-connected and expanding of
centuries-old conventional banking system.
So, let’s
pause and look back and be proud of the achievements, but we also need to look
up and realise we only reached the first base-camp on our climb to the summit,
a parallel financial inclusionary system linked to the real economy.
Thus, we
need to continue moving forward, from imitation to innovation and from
limitation to inclusion, far beyond the core “middle class bankable
population”.
Bottom of
pyramid
Does Islamic
finance have a “blue ocean” strategy for the Muslims at the bottom of the
pyramid?
Those
Muslims at the bottom of the pyramid, 500 million and growing in 22 of 57 least
developed Muslim countries, need to be viewed beyond donation of zakat, beyond
donation of purification income, and so on.
They need to
be viewed as “lower middle/middle class in the wait”, and their wait is access
to risk capital with a human face combined with connecting (mobile/smart-phone)
technology.
The
Economist recently stated, “Muslim people across the developing world are
particularly at risk of financial exclusion. They tend to be excluded from
formal financial systems, with rates approaching 90% in Pakistan. That has bad
knock-on effects. In the six countries with the largest Muslim populations
(Indonesia, India, Pakistan, Bangladesh, Egypt and Nigeria) half a billion
people live on less than $2 per day”.
There are
continued important conversations about Islamic micro-finance, Islamic
micro-funding, micro-takaful, etc, as way to connect with those living on a few
dollars a day. The jury is still out on the question “has the Islamic finance
version of Grameen Bank worked for financial inclusion across the Muslim
world?”
One of the
most exciting developments in the emerging markets, i.e., all Muslim countries,
is the increasing availability of Internet and penetration of mobile phones.
Why? It’s not about only about “surfing and talk-time” but, the opportunity for
financial inclusion via mobile banking and mobile e-commerce as an entry wedge
for financial inclusion.
Thus, a good
beginning but still a long journey on the road ahead.
Can Islamic
finance find a lower hanging fruit for diversification and (a different kind
of) inclusion?
Compliant
liquidity and opportunity
Islamic
finance is supposed to finance real economy activity. Islamic finance is
supposed to help SMEs, backbone of all economies, grow and develop. Islamic
finance is supposed to encourage trade. Islamic finance is supposed to
enfranchise and empower people for better livelihoods.
But, Islamic
money (compliant liquidity) has been traditionally directed towards real
estate/infrastructure (complaint opportunity), and this has produced
concentration risks. However, it has also been looking to reduce the “realty
risk”, as the financial/credit crisis (l and ll) had an actual and collateral
confidence crisis impact.
Witness the
balance sheet damage with increase in non-performing loans (NPLs) and
write-offs of GCC-based Islamic (and conventional) banks, especially in UAE and
Bahrain.
For example,
Arcapita, Bahrain-based Islamic “investment” bank, declared bankruptcy in US
courts, Gulf Finance House, also Bahrain based, changed their business model,
Investment Dar, Kuwait based, undertook structuring, etc, and all are still
struggling to find a business model.
Thus, the
Islamic banks want to diversify funding, financing, and investing, but the
expansive activity must be both Shariah-compliant/friendly and within the
bandwidth of the, say, credit committee risk parameters, as it may impact on
their credit rating cum cost of capital.
The concept
of Islamic venture capital does not exist in any meaningful manner in the
Muslim world, although Malaysia is leading the effort with, say, Mavcap’s
Musharaka Fund of Funds.
Furthermore,
Islamic crowd funding, or people’s capitalism, need better support from Muslim
governments on regulations and providing seed money to spark it.
But, is
something more immediate possible?
Convergence
As Islamic
finance looks to define and refine the “Islamic micro” model for the masses and
as it looks to find the appropriate entry strategy for non-Muslim countries, it
needs to look no further for diversification than the US$1.1 trillion halal
food and beverage industry.
Islamic
finance and the halal industry, both subsets of the massive US$2.4 trillion
Muslim lifestyle market, are actually twins separated at birth requiring
reconnection. The reference to money and food are mentioned in the same chapter
of the Quran.
You who
believe, eat the good things We have provided for you and be grateful to God,
if it is Him that you worship. 2:172-172
Those who
devour usury will not stand except as stands one whom the Evil by his touch
hath driven to madness. That is because they say: “Trade is like usury, but
Allah hath permitted trade and forbidden usury. Al-Quran (2:275)
Thus, the
convergence opportunity includes:
Companies,
mostly SMEs, with only dedicated halal products, have conventional debt on
their balance sheet. The debt is beyond the accepted financial (debt) ratios,
one-third to assets or market capitalisation, to make it Shariah compliant,
hence, opportunity to refinance with an asset backed sukuk (if the economics
makes sense).
Thus,
end-to-end halal offering, both on product and financial structure.
The
machinery, producing halal certified products, is conventionally
(interest-based) finance, hence, an opportunity for Shariah-compliant leasing.
The factory
and company offices that are conventionally insured, hence, an opportunity for
takaful, and expand to machinery, lorries and employees.
Pension and
investments may have portfolio of companies that are not Shariah compliant,
hence, Shariah-complaint companies from Islamic indexes, like S&P or Dow
Jones, or from the Sami Halal Food Index.
(The
Malaysian Insider / 15 February 2015)
