Opinion: Does Islamic finance understand what is expected of it?

Does Islamic finance understand its external market, conditions and challenges? Is it comprehending that external events, from 9/11 to Boston Bomber and Charlie Hebdo, will impact on its growth beyond Muslim majority countries?

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?


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 time has arrived to marry “compliant liquidity with compliant opportunity” as the status quo is no longer acceptable under the law necessity.

The necessity is change to be relevant. – February 15, 2015.

* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.