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ISLAMIC FINANCE & CAPITAL MARKETS

Why Has Islamic Finance Not Been Able To Reduce Poverty in Muslim Countries?

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By our Special Correspondent

Islamic finance is a financial system based on principles derived from the teachings of Islam. It aims to provide an alternative to the traditional, interest-based financial system, which is considered haram (forbidden) in Islam. One of the main goals of Islamic finance is to promote economic development and reduce poverty in Muslim countries. This is achieved by investing in socially responsible and ethical projects that provide a tangible benefit to society, and by sharing profits and losses among investors.

However, despite its noble goals, Islamic finance has faced numerous challenges in its efforts to reduce poverty in Muslim countries. In this blog, we will examine the principles of Islamic finance and the challenges it has faced in promoting economic development and reducing poverty in Muslim countries. We will also look at case studies of successful Islamic finance initiatives and consider ways in which Islamic finance can be better utilized to achieve its goal of reducing poverty and promoting economic development in Muslim countries.

Background on poverty in Muslim countries

Poverty is a persistent problem in many Muslim-majority countries. According to the World Bank, over 30% of the population in Muslim-majority countries lived below the international poverty line of $1.90 per day in 2015. This is a higher poverty rate than the global average of 9.2%.

Several factors contribute to poverty in Muslim countries. One major factor is conflict and insecurity. Many Muslim-majority countries have experienced ongoing conflicts or civil wars, which have disrupted economic activity and led to the widespread displacement of people. These conflicts have also disrupted the delivery of basic services such as education and healthcare, which can further exacerbate poverty.

Another factor contributing to poverty in Muslim countries is corruption. Many Muslim-majority countries rank poorly on global corruption indices, and corruption can undermine economic development and increase poverty by diverting resources away from those who need them most.

Economic inequality is also a significant factor contributing to poverty in Muslim countries. In many cases, the wealth of these countries is concentrated in the hands of a few elites, while the majority of the population struggles to make ends meet. This can lead to a lack of opportunities for the poor and can make it difficult for them to lift themselves out of poverty.

These are just a few of the factors that contribute to poverty in Muslim countries. In the next section, we will examine the principles of Islamic finance and how they aim to address these issues and promote economic development.

The principles of Islamic finance

Islamic finance is based on several principles that are derived from the teachings of Islam. One of the main principles of Islamic finance is the prohibition of interest-based transactions, which are considered usurious and exploitative. Instead of charging or paying interest, Islamic finance relies on profit and loss-sharing arrangements. This means that investors and borrowers share the risks and rewards of a financial transaction, rather than the borrower paying a predetermined rate of interest to the lender.

Another principle of Islamic finance is the emphasis on ethical and socially responsible investment. Islamic finance prohibits investment in certain industries or activities that are considered harmful or unethical, such as gambling, alcohol, and tobacco. Instead, it encourages investment in projects that have a positive impact on society, such as education, healthcare, and infrastructure.

In addition to these principles, Islamic finance also utilizes profit and loss-sharing arrangements to allocate risk and reward between investors and borrowers. In a profit and loss sharing arrangement, the investor and borrower agree on a fixed return or a percentage of the profits to be shared between them. If the project is successful and generates a profit, the investor and borrower share the profits according to the agreed-upon terms. If the project is not successful and incurs a loss, the investor and borrower also share the loss.

These principles of Islamic finance aim to promote economic development and reduce poverty by providing access to finance for socially responsible and ethical projects, and by sharing the risks and rewards of financial transactions fairly between investors and borrowers. In the next section, we will examine the challenges that Islamic finance has faced in achieving these goals.

Challenges to the effectiveness of Islamic finance in reducing poverty

Despite its noble goals, Islamic finance has faced several challenges in its efforts to reduce poverty and promote economic development in Muslim countries. One major challenge is the limited availability of Islamic finance products and services. Many Muslim-majority countries lack the necessary infrastructure and regulatory frameworks to support the development of Islamic finance. This makes it difficult for Islamic finance institutions to operate and for consumers to access Islamic finance products and services.

Another challenge is the lack of regulatory frameworks and infrastructure for Islamic finance. In many cases, Muslim-majority countries do not have clear guidelines or regulations for Islamic finance, which can create uncertainty and hinder the development of the sector. Additionally, many Muslim-majority countries do not have the necessary infrastructure, such as Islamic banks, to support the growth of Islamic finance.

A third challenge is the limited adoption of Islamic finance by governments and businesses. Many governments and businesses in Muslim-majority countries are more familiar with conventional finance and may be hesitant to adopt Islamic finance. This can limit the reach and impact of Islamic finance in these countries.

Finally, Islamic finance faces competition with conventional finance, which is often more established and has a stronger presence in many Muslim-majority countries. This can make it difficult for Islamic finance to gain a foothold and achieve its goal of promoting economic development and reducing poverty.

In the next section, we will examine case studies of successful Islamic finance initiatives and consider ways in which Islamic finance can be better utilized to achieve its goals.

Case studies of Islamic finance initiatives to reduce poverty

Despite the challenges it faces, Islamic finance has had some success in reducing poverty and promoting economic development in Muslim countries. Here are a few examples of successful Islamic finance initiatives:

  • The Grameen Bank in Bangladesh: The Grameen Bank, founded by Muhammad Yunus, pioneered the use of microfinance to provide small loans to poor women in rural Bangladesh. The bank’s loans are based on the principles of Islamic finance and have helped millions of women lift themselves out of poverty and start their businesses.
  • The Islamic Microfinance Network: The Islamic Microfinance Network (IMN) is an international network of Islamic microfinance institutions that provides small loans and other financial services to the poor in Muslim-majority countries. The IMN has helped thousands of people escape poverty and improve their living standards through access to finance.
  • The Islamic Development Bank: The Islamic Development Bank (IDB) is an international financial institution that provides financing for development projects in Muslim-majority countries. The IDB’s projects are based on the principles of Islamic finance and aim to promote economic development and reduce poverty in these countries.

These are just a few examples of successful Islamic finance initiatives that have had an impact on poverty reduction in Muslim countries. Some of the lessons learned from these initiatives include the importance of targeting the most vulnerable and marginalized populations, the need for appropriate regulatory frameworks and infrastructure, and the importance of building the capacity of local institutions.

In the next section, we will consider ways in which Islamic finance can be better utilized to achieve its goals of reducing poverty and promoting economic development in Muslim countries.

Conclusion

Islamic finance has faced several challenges in its efforts to reduce poverty and promote economic development in Muslim countries. These challenges include the limited availability of Islamic finance products and services, the lack of regulatory frameworks and infrastructure for Islamic finance, the limited adoption of Islamic finance by governments and businesses, and competition with conventional finance.

Despite these challenges, Islamic finance has had some success in reducing poverty and promoting economic development in Muslim countries, as demonstrated by the examples of the Grameen Bank, the Islamic Microfinance Network, and the Islamic Development Bank.

To improve the effectiveness of Islamic finance in reducing poverty and promoting economic development in Muslim countries, there are a few steps that can be taken. One important step is to increase the availability of Islamic finance products and services, particularly in underserved areas. This can be achieved through the development of the necessary regulatory frameworks and infrastructure to support the growth of Islamic finance.

Another step is to increase the adoption of Islamic finance by governments and businesses. This can be achieved through education and awareness-raising campaigns to promote the benefits of Islamic finance and through incentives to encourage the use of Islamic finance.

Finally, it is important to build the capacity of local institutions to effectively implement and manage Islamic finance projects. This can be achieved through training and technical assistance programs that provide the necessary skills and knowledge to local institutions.

By addressing these challenges and implementing these suggestions, Islamic finance can play a greater role in reducing poverty and promoting economic development in Muslim countries.


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ISLAMIC FINANCE & CAPITAL MARKETS

The Future of Financial Services Talent

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Cities like Dubai and Singapore have witnessed an influx of financial services professionals from more traditional global financial hubs

The Covid-19 pandemic led to the `Great Resignation’ as many professionals reconsidered elements of their careers, including career progression, compensation, corporate culture, training opportunities, working arrangements, and wellbeing. Employers who are receptive to these new expectations are more likely to attract and retain talent. Financial institutions recognise that they can access a wider pool of talent if they improve their career development programmes.

Since the pandemic, large financial institutions have been providing more career opportunities at new offices in cities such as Dubai, as a way to retain current employees and attract new highly skilled professionals. Dubai offers an enticing array of benefits for international talent, including its strategic location, easy immigration processes and a high quality of life that supports a wide array of lifestyles.

The “Future of Financial Services Talent” report, the third in a series covering recent trends in Dubai’s financial industry, is a collaborative effort between DIFC and LSEG Data & Analytics. It offers an overview of the financial services talent landscape and insights into the new expectations talent has from employers, which will influence management styles in the industry. Furthermore, the report outlines DIFC’s value proposition as a global hub that attracts world-class specialized talent.

Click here to access the full report: 


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ISLAMIC FINANCE & CAPITAL MARKETS

Malaysia As An Islamic Finance Hub: From Humble Seed to Global Sun

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Malaysia’s rise as the world’s premier Islamic finance hub is a compelling tale of vision, perseverance, and unwavering commitment to ethical principles. It’s a story not just of numbers and financial products, but of a nation transforming itself into a beacon of hope for a more equitable and sustainable financial future. Let’s delve into the key chapters of this remarkable journey:

Planting the Seeds: 1960s-1980s – A Spark Ignites

While the concept of Islamic finance predates modern history, its modern incarnation began in the 1960s. In Malaysia, the embers of change were first stoked in the 1980s with the establishment of Bank Islam, the nation’s first dedicated Islamic bank. This pioneering step, however, faced challenges like limited awareness and nascent regulations. The industry remained a small sapling, yearning for sunlight and nourishment.

Blossoming Under Policy Sun: 1990s-2000s – Government Nurturing Propels Growth

The 1990s witnessed a transformative downpour. Recognizing the economic and ethical potential of Islamic finance, the Malaysian government adopted a proactive approach. Landmark initiatives like the Islamic Banking Act of 1989 and the establishment of the International Centre for Education in Islamic Finance (INCEIF) provided the vital nutrients the industry needed to flourish.

With government backing, public trust blossomed. Innovative products like sukuk bonds and microfinance options catering to diverse needs emerged, painting the financial landscape with vibrant hues of Sharia-compliant solutions. By the early 2000s, Malaysia had transformed from a humble sapling to a thriving tree, attracting international investors and solidifying its position as a regional Islamic finance hub.

Beyond Banking: 2010s-Present – Diversification Unfurls New Branches

The past decade has seen the Malaysian Islamic finance ecosystem diversify beyond mere banking. Sharia-compliant insurance, capital markets, wealth management, and fintech solutions have taken root, creating a sprawling canopy of ethical financial activity. This diversification strengthened Malaysia’s position as a comprehensive one-stop shop for global investors seeking Sharia-compliant solutions.

Specifying Milestones:

  • 1983: Bank Islam, the first dedicated Islamic bank in Malaysia, established.
  • 1990: Islamic Banking Act of 1989 laid the legal foundation for the industry.
  • 1993: International Centre for Education in Islamic Finance (INCEIF) established, becoming a global leader in Islamic finance education.
  • 1998: International Islamic Financial Market (IIFM) launched, facilitating cross-border sukuk issuance.
  • 2004: Global Sukuk Challenge launched, driving innovation and growth in the sukuk market.
  • 2008: Financial Sector Blueprint 2009-2015 introduced initiatives to further develop the Islamic finance industry.
  • 2011: Securities Commission Malaysia (SC) established a dedicated Islamic Capital Market Unit.
  • 2016: Financial Services Act 2013 implemented, creating a single regulatory framework for all financial institutions, including Islamic finance providers.

Looking Ahead: A Future Rooted in Innovation and Ethics

Today, Malaysia’s Islamic finance industry boasts a robust infrastructure, a diverse product range, and a thriving ecosystem of players. It contributes significantly to the national economy, attracting foreign investment, creating jobs, and promoting financial inclusion. But Malaysia’s ambitions reach beyond its present borders.

The country is actively embracing technological advancements, with blockchain and big data being explored to enhance reach and efficiency. Research and development initiatives are paving the way for new Sharia-compliant instruments, ensuring Malaysia remains at the forefront of Islamic finance innovation.


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ISLAMIC FINANCE & CAPITAL MARKETS

Nigeria’s Finance Minister Advocates Shift to Islamic Finance for Economic Growth

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Nigeria’s Finance Minister and Coordinating Minister for the Economy, Wale Edun, addressed a gathering in Abuja, shedding light on the Federal Government’s decision to embrace Islamic Finance as an alternative economic model. Edun highlighted the pressing need to move away from “elevated high levels” of interest-based financing, stating that global financial dynamics can no longer sustain such practices.

Speaking at a program organized by the Security Exchange Commission (SEC) and the Islamic Financial Services Board (IFSB), Edun pointed out that both man-made and natural shocks have driven interest rates to unsustainable heights. He emphasized how these elevated rates have become a significant constraint on development, particularly due to the soaring cost of borrowing.

“The detrimental impact of high interest rates makes it impossible to access the funds needed for development, infrastructure, and even social services,” stated Minister Edun, underlining the severe consequences on vital sectors such as infrastructure, education, and healthcare.

In a notable shift towards alternative financing, Edun drew attention to a recent $30 million grant from the United Arab Emirates (UAE), dedicated to climate action and adaptation in Nigeria. What sets this grant apart is that it was funded through Islamic finance principles, signaling a change in the landscape of available resources.

“Funds these days are with those who practice Islamic finance. You better follow the money,” urged Edun, pointing to the increasing prominence of Islamic finance in global financial flows.

Edun stressed the importance of a deeper understanding and utilization of Islamic finance, labeling it “a veritable tool for financing development,” as endorsed by the IFSB (Islamic Financial Services Board). He emphasized the imperative of harnessing the potential of Islamic finance to fuel economic growth effectively.

“With Nigeria’s objective of achieving rapid, inclusive, and sustainable economic growth, it is crucial to learn from the IFSB and educate oneself to make optimal use of this financing tool,” said Edun.


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