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Sunday, 10 May 2015

How Islamic banks can better serve the poor

What has been the contribution of Islamic banks to helping the poor and the needy? Almost nothing, and it’s about time to change that, according to Abdul Halim bin Ismail, the recipient of the Royal Award for Islamic Finance 2014.
These charity houses would collect donations from the private sector and utilize the funds to make sound investments, with profits supporting programs that improve livelihood, health and education services for disadvantaged populations.Bin Ismail is proposing a new way for the Islamic finance sector to do more for society. His idea calls on central banks, most notably in Muslim-majority nations, to issue licenses to Islamic banks that would allow them to establish subsidiaries — or Sadaqah houses — catering to the social welfare sector.
“It would be very humbling and very rewarding if this initiative is implemented in my lifetime,” bin Ismail said. “And I hope to encourage other like-minded individuals to push the envelope and introduce innovations in Islamic finance that will grow the industry and also use it to help others.”
In this exclusive interview, the renowned Islamic finance expert from Malaysia shared his aspirations for the proposal and the Islamic banking sector.
What makes your proposed solution unique, and what do you see as its biggest socio-economic benefits for Muslims?
I believe that the fortunate, including myself, have a responsibility to society, and my proposal is to introduce a charity scheme to be operated by Islamic banks that would make it easier for people to give to the needy and, in the process, raise the bar around the notion of “ethical banking,” which Islamic banking is strongly associated with.
By introducing banking products and services specifically for charity, it would create a radical new way of facilitating donations to society’s most needy that would also be ethical in its approach to charity.
Islamic banking has achieved tremendous growth in the past 30 years, particularly in the private and public sector, but it still needs to address the gap in social welfare by prioritizing charity to the poor as a key area of business.
There are over 1 billion Muslims in the world today and in Southeast Asia, the population is 250 million. Sadly, poverty is a common problem among many Muslim-majority nations. Over half a billion of the world’s poor, who earn below $2 per day, come from Indonesia, Bangladesh, Pakistan, Nigeria and Egypt.
These are often people who have tried very hard, but they have not had the good fortune to secure all that is required to make ends meet and sustain a certain quality of life. These are the people we can and should reach out to and help, by providing them the support and opportunity they need to rise from poverty.
I hope the Sadaqah houses will result in a sustainable charity system for the less fortunate, raising millions and effecting real, lasting change.
What is the level of interest in contributing to these efforts?
I believe my proposal for Sadaqah houses taps into the social sensibilities of Muslims around the world as it makes it easy for individuals to contribute to charity in perpetuity, with their donations channelled toward initiatives that will allow society to continue benefiting from in the long term.
Charity is one of the main tenets of Islam, which teaches its followers to give to the less fortunate and that they will be rewarded for their good deeds in the thereafter. Muslims will view these donations as an investment — an investment in their lives in the thereafter, as these contributions to charity in perpetuity continue to be counted as good deeds even after death.
However, it is crucial for the banks to develop an efficient and transparent transaction system. The demand is already there, but there is not yet a system in place where transaction is easy and non-time consuming for people who have the means and the desire to give to charity. Currently, these people don’t know who to reach out to, and the proposed Sadaqah house can facilitate that process.
What would also get more people to contribute is if banking groups can come up with highly differentiated or imaginative products under the Sadaqah house.
I do also see interest coming from the non-Muslim segment, the same way this segment has supported the growth of Islamic banking in the past 30 years. Though Islamic banking was initially aimed at addressing the banking requirements of the Muslim community, its current wider acceptance across the world has been encouraging. I believe the appeal is in the fact that their donations will be channelled towards initiatives which society can benefit from for the long term.
What role does Islamic financing play in financial inclusion?
Islamic finance is deeply connected with the real economy, offering ethical investments and funding options for businesses. The principles of Islamic finance also encourage inclusiveness and collaboration to create a fair and equitable financial system that is accessible to all.
Islamic finance has achieved such phenomenal growth in the past 30 years, supported by both Muslims and non-Muslims alike. It has expanded its presence to almost everywhere in the world. However, these growths are limited to the public and private sector so I see much potential for Islamic banking to achieve further growths.
Its development is incomplete when it comes to the social welfare sector. There are areas where more could be done to make Islamic banking sector more aligned to Islamic principles. In particular, Islamic banks need to address the gap in social welfare by prioritizing charity to the poor as a key area of business.
With my proposal, I hope to see banks integrate charity into their businesses, which would benefit families living below the breadline, the homeless and the long-term unemployed from all over the world.
(Devex / 07 May 2015)
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How Islamic finance could be about to take off in China

Islamic finance has been growing rapidly across the world in recent years. Today, the operation of Islamic banks and their associated financial institutions has created a trillion-dollar industry and is becoming a crucial mechanism for countries looking to increase their trade with Muslim nations in Asia and the Middle East especially.

Its popularity largely stems from operating under the principles of risk sharing and interest-free transaction. In contrast to conventional finance, transactions under Islamic finance operate under strict, risk-averse conditions.

Britain became the first non-Muslim country to issue an Islamic bond or sukuk in 2014. Hong Kong then raised US$1 billion from its inaugural issuance of sukuk in 2014. And recently, Goldman Sachs became the first conventional US bank to issue a sukuk, raising US$500m with its debut sale of one. And the Bank of Tokyo-Mitsubishi UFJ, Japan’s largest lender, has also got in on the game.

Despite this global spread, mainland China remains a major market that Islamic finance has not yet reached. But this could be set to change in the coming years – and one province in particular is leading the way. Ningxia, in the north-west of China, is an autonomous region where 35% of the population is Muslim and there has recently been talk of establishing an Islamic Financial Centre there in the next five to seven years.

Developing the Chinese market

The development of an Islamic capital market in Ningxia could be the start of a new financial relationship between China and the Islamic world. For this to flourish, however, Islamic finance must be open to and adopted by non-Muslims as well, so that it can gain a larger foothold in the country.

Perceived by many in China as being for Muslims only, Islamic finance has struggled to take off. Ningxia’s initial focus should therefore be on developing a wholesale Islamic capital market, including Islamic bonds, equities and funds and making sure it is seen as a real alternative to the conventional market.

Ningxia can learn from the best practice of its neighbours, where Islamic finance is the norm: Malaysia, Indonesia and Singapore. This includes establishing separate regulatory standards for Islamic finance and developing a well-functioning Islamic capital market. This way the region can immediately serve the international Islamic market.

There is also a need to change local laws so that Islamic finance is on an equal footing with conventional finance. Local laws and tax regulations need to be modified to permit shariah-compliant investments. This needs the central and local government to set up an administrative mechanism to push things through to make it happen.

Attracting outside interest

Ningxia is also spearheading the development of a halal market in China, which will play an important role in boosting the country’s ties with the Muslim world. In September 2014, Ningxia Halal Food International Trade Certification Centre that established in January 2008 became the first Halal certification body in China with government’s stamp of approval. This is an important signal that they are serious about shariah-compliance.

China must be careful that it comes across as sincere in this endeavour, however. The effort could be undermined by cultural insensitivities such as allowing Muslim restaurants to serve alcohol alongside halal food. This is commonly found in big cities such as Shanghai, Beijing and Guangzhou. Muslims outside China may conclude that these restaurants are not Halal and may lose confidence in China’s commitment to it – and by implication, Shariah law more generally.

In recent years, trade between China and the Middle East has considerably increased. For example, trade between the UAE and China has increased five-fold over the past ten years – a growth rate of 395%. This will only have a positive influence in developing Islamic finance in China.

The launch of the Shanghai Free Trade Zone in 2013 has generated a great deal of interest in the growth possibilities of financial services in general. Many of the big Islamic banks have stated their interest in opening branches in China and Bank Muamalat Malaysia has already teamed up with China’s Bank of Shizuishan to establish its first Islamic bank in Ningxia.

Banks from the Gulf are taking a greater interest in China too. Qatar International Islamic Bank and its compatriot QNB Capital recently signed an agreement with China-based Southwest Securities to develop Shariah-compliant finance products in the country.

These banks are no doubt attracted to the huge number of infrastructure projects that China has planned. With 9% of GDP per year spent on infrastructure projects and an expression of interest in Islamic finance for projects from hospitals to metro stations, according to London-based Dome Advisory, there is a huge market to tap.

The growth potential of Islamic finance in China is huge given the country’s 1.3 billion population. If we take on an optimistic approach, that Islamic finance is for everyone and is just an alternative to conventional finance, there is a tremendous pool to tap, given the huge banking and capital market opportunities in China. But even if you take the worst-case scenario and narrow the target to just the Muslim population, the prospects are still bright. At 2% of the Chinese population, there are still about 23m Muslims in China.

(Scroll.In / 10 May 2015)
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