Islamic Finance: Catalysing Growth

Any engagement regarding regional collaboration would be remiss without financial considerations and the integration such collaboration necessitates. For this reason, the  WIEF-SEACO Foundation Roundtable 2019 in Dhaka brings together experienced stakeholders in Islamic finance to discuss its role as a growth catalyst in the context of developing markets such as Bangladesh.

This session aptly follows a discussion on rethinking infrastructure development during the WIEF-SEACO Foundation Roundtable 2019 in Dhaka. It’s these considerations shared by the six panellists that are acknowledged by chief guest of the session, Abul Hasan Chowdhury who is the former State Minister for Bangladesh’s Foreign Affairs, as well as attending Bangladeshi delegates, for offering ‘their wisdom, their experience and a sense of direction’.

Session moderator, Kunrat Wirasubrata, former director of the Islamic Development Bank Southeast Asia regional office in Kuala Lumpur affirms that, though the tenets of Islamic finance originated in the time of the Prophet Muhammad s.a.w., conceptually, this financial approach is relatively new in the market. ‘Now, Islamic finance is a recent phenomenon. It started small, in the 1960s, and it has grown very slowly until the late 1990s. It has obtained its momentum in the last six or seven years. It is now an industry of [more than] USD2 trillion, and so, has become a phenomenon in the financial sector,’ he points out. The growth rate is testament to the potential of the Islamic finance approach. Although, alongside prospects, panellists note potential challenges.

Panellist Nurul Fazal Bulbul, vice chairman of Islamic Banks Consultative Forum in Bangladesh agrees that the Islamic financial system has the potential to promote inclusive growth along with financial stability and build long-term alliances in innovative ways. He adds, ‘Catalysing growth indicators such as professional treatment from the Central Bank, higher profitability shown, higher efficiency of the officers and executives, the active participation in economic productions and the real economy, are all there. The statistic shows that the total assets of the Islamic banking industry is USD3 billion in 2018. The total shariah compliant financing by Islamic banks from 19 countries all over the world reaches USD1,052 billion in the fourth quarter of 2008.’ These factors demonstrate the viability and, indeed, profitability, of the Islamic finance model.

This model has the potential for global application. However, the tangible benefits need to be unpacked for global investors. The return on investment panellist Khalid Howladar who is the managing director and founder of Acreditus in the UAE, refers to the conceptual gap that exists in people’s minds between religious ideas and banking and profit-making. Panellist Muhammad Abdul Mazid is the former Secretary to the Government of Bangladesh affirms the positive returns stemming from Islamic banking address the profit requirement for investors while the principles of inclusion align to socially-just Islamic practice that encourages sharing and distribution of resources.

Sharing of resources is the basic ritual of Islamic finance through distributive instruments and zakat. Islam provides guidelines and processes that establish comprehensiveness and ethics in all aspects of life, and it has ensured that the accountability for wealth or whatever benefit you have must be to Allah s.w.t and the community. The inclusivity of the Islamic banking system is flourishing but has room for more growth and inclusion. Panellist Abdul Awwal Sarker in his capacity as general manager of the Research Department at Bangladesh Bank concurs. The presented case shows that Islamic finance using technology can be a tool for empowerment of both the supply and the demand side of money, which is something seen by Sarker himself.

‘Islamic banking is a model. We should not mix it with the realism. If we consider this model as a banking model it is superior to the conventional models in terms of stability, in terms of reliance, in terms of shock absorption capacity the Islamic banks proved in this country as viable model for financing,’ Sarker says. In this way, the model is contributing to Bangladesh’s GDP with Islamic banks contributing more day-by-day despite the country not making use of all mechanisms. Further possibilities to support Bangladeshi development exist and the country has expressed a readiness to do business in Islamic banking and Islamic finance. ‘I think that the scope for cross border regional cooperation is great. If we frame some of the rules and policies then it is very easy to come to closer and to benefit each other from our shared experiences,’ he adds.

Khalid Howladar elaborates on the inclusive nature of Islamic finance and its alignment with regional collaboration. He shows a graphic illustration published by the Global Infrastructure Hub indicating how the envisioned Bangladesh of 2040 has a USD200 billion infrastructure funding gap. ‘The international Islamic capital markets are a way of raising funds and, just as an indication, to go back to your USD2 trillion number, you can see in the chart there is USD1.5 trillion dollars in Islamic banks worldwide. So, Islamic banking in Bangladesh is only around USD30 billion. It’s not enough to fund your infrastructure needs. But in the Gulf, in Malaysia, in Indonesia, there’s a lot of money there that can be tapped via the sukuk format,’ says Howladar.

Collaborative intra-region investment can serve infrastructure investment. A similar process can be applied to microfinance with more inclusivity being fostered by technological developments. A microfinance sukuk proves challenging with lawyers, bankers and shariah scholars that need to be paid before the sukuk is even considered. The Indonesian microfinance institution, where Howladar references a partnership that create for themselves a year worth of stable funds in a sukuk format. This offers the stability needed while technology enables access to the microfinance market.

‘So, when you try and do this in the real world you have all these different parties you have to pay. It’s too expensive. You put it onto blockchain using a smart contract, using technology. This makes it very feasible now to do what we call micro sukuk,’ Howladar continues. A first in the world, the digital platform simplifies access for the market and demonstrates further potential. ‘On the left side you have the microfinance portfolio, in the middle you have the blockchain sukuk platform and on the right side you have the investors. So, on the platform we have 2,000 investors registered from Argentina to New Zealand. They don’t know anything about microfinance in Indonesia but yet they want to do something that is socially impactful. It’s not charity. We don’t believe in just giving away money. By investing in micro entrepreneurs by investing in micro businesses and sharing the profit this is much more Islamic then the one and half trillion dollars that was spoken about before and we hope that this will be the future of sukuk,’ Howladar explains further.

Panellist Meor Amri bin Meor Ayob who is CEO of Bond Pricing Agency in Malaysia speaks on how Malaysia’s considered one of the most advanced countries in terms of Islamic finance. This advancement stems from the dual system that has been created which sees both the conventional and Islamic financial system existing side by side, catering to an investment-savvy market supported by government. ‘In the 1980s the government had decided to plant the seed of the concept of investment even to those in the villages. Even those who do not have the capacity to save, they can only save maybe USD1 per month. They have the ability and the potential account to be able to do so,’ he says. That has established a market of individual investors in Malaysia through access.

Business investors, however, require an investment proposition. ‘So, to be able to have sukuk be very, very successful you also need to understand about supply and demand, and profit and loss. If you want to get investors to invest in a sukuk you must prove to the investors that from a profit and loss point of view, the profit is equivalent or even better than investing in conventional bond,’ Meor Ayob continues. As mentioned previously, a good return on investment makes sukuk an attractive proposition. Using the Malaysian example and additional technology, Bangladesh has the opportunity to achieve a similar situation in less time.

Malaysia serves as a role model for Bangladesh and can learn from. The propositions of the panellists offer Bangladesh authorities valuable insight, particularly when the country is poised to take on many infrastructure developmental projects that lie at the heart of developing the economy. For this, Islamic finance remains an untapped resource. ‘Islamic finance must be viewed as an alternate, as a positive, as a significant contribution to the tremendous harms that comes from [today’s economic climate],’ says Chowdhury. ‘As a citizen of Bangladesh, I never will admit that our country is poor. Bangladesh is not poor. It is rich in many aspects. Just look at our huge population. In 1971, when we became independent the population was 75 million and there was a deficit in food supply. Today there is a surplus. In 1971, when we were fighting for Bangladesh nobody even dreamt of RMG (readymade garment). Today look at what we have done.’

Conclusion by Session Moderator
Wirasubrata concludes, ‘This is an invitation basically not only for us here but for the world to come to Bangladesh and I believe the Islamic Development Bank probably is interested in extending their footprint in this specific area of promoting Islamic finance through Bangladesh through collaboration among countries. In order for Islamic finance to be growing even more there are a number of factors that are required. Apparently, the speakers agree that there needs to be a top-down approach. Meaning that the intervention of the authority is needed to support the growth of that sector.

‘Secondly, technology plays a role. Of course this may lead to further questions of who is going to be investing in the technology. Are we going to rent the space from Google or from Amazon? This is something else that needs to be discussed at policy level. Thirdly, we feel the importance of capacity building and in this regard, I believe, the World Bank can play a role in promoting collaborations among countries. Those countries which are more able can help those countries which are less able in terms of building their capacity in Islamic finance.

‘[Lastly], of course inclusiveness is very important and the examples posed to us by Meor and Khalid are quite instructive on how they connect small scale investment both on the supply side and the demand side.’ It’s concluded that the growth of Islamic finance provides opportunities to strengthen financial inclusion, deepen financial markets and mobilise funding for Bangladesh’s development by offering new modes of finance and attracting unbanked populations that have not participated in the financial system. ‘These things, I believe, require a lot of intervention from the regulatory aspect of the sector and also more active involvement of those are who are already active in Islamic finance.’

For details on the Roundtable programme and bio of each speaker, visit event webpage. To read summaries of the Roundtable sessions, visit: Rethinking Infrastructure Development, Halal in the Tech Age and Opening & Session 4.