Islamic Finance Could Be The Answer To Africa’s Growth Problems

This is source I found from another site, main source you can find in last paragraph

The recent Global Islamic Economy Summit, provided numerous valuable insights into the future of the burgeoning Islamic Economy. According to the State of the Global Islamic Economy Report 2016/2017, the Islamic Economy is set to grow at 8 per cent CAGR, from $1.9 trillion (Dh6.9 trillion) now, to $3 trillion by 2021.

However, the Islamic economy’s growth should not be measured by the accumulation of wealth, but by the positive social impact that this wealth leaves. Money by itself is not wealth, but a means through which we can create a system of production and trade, which creates a social impact in sectors like knowledge, health, education and infrastructure. But how can this theory become a reality — that can be measured by utilising financial assets to create a social impact in the Islamic world?

According to a recent report by Dubai Chamber, around $500 billion financial assets are generated annually from zakat, charity, and Awqaf globally. On the other hand, a recent study by the International Finance Corporation (IFC) that was conducted in nine countries — namely Egypt, Iraq, Jordan, Saudi Arabia, Lebanon, Morocco, Pakistan, Tunisia, and Yemen — confirms that there is a gap in Islamic finance that is readily available to SME projects, which ranges between $8.6 billion to $13.2 billion. If we compare the numbers from both the study and the report, we might ask ourselves: why is this $500 billion not bridging the $13.2 billion gap?

The gap between finance and deposits

The answer is that this gap is not related to “available” money, or financial assets in Muslim countries or in Islamic banks. Liquidity is available, while deposits in the 9 countries covered by IFC’s study range between $9.7 and $15 billion, are ready for investment.

The reasons for this gap can be attributed to a few things. Firstly, the traditional view towards Islamic investments has not yet fully matured globally, despite the social problems that call for the development of Islamic investment’s concept. Unfortunately, this limits the investments on projects that have a social benefit associated with them. This money should be invested in projects that generate sustainable revenues, leading to improved standards of living, increased productivity, best utilisation of resources, and continuing economic growth.

Secondly, the gap between the volume of Islamic financial assets and requirements of developing countries, reflects the challenge that lies in developing Islamic finance tools, and the organisational frameworks for banks and institutions that should direct this money to sustainable investments. Through Islamic finance tools, one can turn the concepts, ethics and principles of Islamic economy into a tangible economic reality. This is why many stakeholders are calling for more innovation in these tools for development projects. However, innovation in these tools will not be enough if we do not have a good understanding of the projects and sectors in which we need to invest. In addition, creating an innovative infrastructure for Halal industries is significantly important, just as is needed for Islamic finance products.

Thirdly, some financial institutions still adhere to traditional, interest-based finance and lending mechanisms, with the debtors assuming all the risk. There is a certain belief that getting a fixed interest from a bank ensures profitability and takes the risk away from those institutions. However, the latest global financial crisis proved just the opposite — since it was caused by debt derivatives and interest-based lending mechanisms.

This differs from Islamic finance, which is an investment that is towards real economic activity and is, by design, more focused on sustainable economic activity and equitable capital movement between owners and the users of capital resources. It is based on a mutual partnership between the customer and the corporation, in terms of profit and risk sharing, whereby both parties share any potential losses according to their determined share of profits.

Lastly, “The Global Islamic Economy Indicator (GIEI) 2016” revealed that the value of Islamic finance assets amounted to around $2 trillion in 2015, of which 73 per cent were bank assets according to estimates by the World Bank’s Islamic Finance Commission. Therefore, the largest part of these assets are still considered banking services.

The impact of Islamic Finance

The Islamic economy has achieved great success, but it has also unveiled new markets and new investments that can have a positive social impact, such as investing in infrastructure, education, health care, manufacturing, and production.

A recent Gallup poll that was conducted in the Mena region, revealed that 70 million of the world’s poor live with less than $2 per day, while 20 million of the poorest segments live with less than $1.25 per day. The poll’s results showed that 95 per cent of adults in the Mena region consider themselves religious. The combination of the above-mentioned results has led to an increased interest in Islamic finance as a tool to promote development that helps to eliminate poverty and pave the way for the right kind of development. Those who are monitoring the Islamic economy are now wondering about the first step that will be taken, to launch a path with a sustainable social impact. There are many Islamic finance structures, which provide a solid platform for launching innovative financial products, however, there is a need to put these structures into workable development financing solutions.

Currently there are a lot of discussions on establishing research centers to study the markets’ needs in terms of Islamic finance tools. I think that we need to create “labs” in order to practically implement the new financial products and measure their results. These “labs” can be specialised units that convene economists, social scientists, and legal experts to meet the necessary demands for sound finance tools.

I also think that we need to develop this thought process on a holistic basis. Rather than focus on individual areas, there is need to study and work on an overall economic development model, along Islamic lines encompassing principles of Islamic finance, concepts of halal industries and other areas of economic activity. Education in academic institutions that teach Islamic banking and finance should expand to create this broader context, rather than just focus on how Islamic banks can replicate conventional banking products — as this is hampering true Islamic innovation.

The writer is the CEO of Noor Bank. Views expressed in the column are the writer’s own and do not reflect those of the newspaper.

This is source I found from another site, main source you can find in last paragraph

Source : http://gulfnews.com/business/sectors/banking/social-impact-of-islamic-finance-1.1924865

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