Home Weekly Islamic Pages Islamic Banking Page 05-06-2020

Islamic Banking Page 05-06-2020

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What Financial Inclusion means and how through Islamic Finance it can be achieved

Muhammad Arif : Chairman Centre of Advisory Services for Islamic Banking and Finance (CAIF), Former Head of FSCD SBP, Former Head of Research ArifHabib Investments and Member IFSB Task Force for development of Islamic Money Market, Former Member of Access to Justice Fund Supreme Court of Pakistan

There is no universally agreed-upon definition of “financial inclusion”. In simple words it means diverting funds towards eliminating poverty and to bring better life for the people below poverty line. Several different definitions are used globally by various organizations that refer to a set of activities with relatively identical objectives. These objectives include enhancing access to formal financial services for the segments of society that are currently either unserved or underserved by formal financial institutions

The concept of financial inclusion is well grounded in the Islamic economic and financial system. Justice, transparency and equality form the foundation of an Islamic economic system with the objective of developing a prosperous economic and social system. Islamic economics gives just weight to both individual and societal interests and hence encourages social harmony. Social solidarity is also supported by the subsystems of the Islamic economic system, including Islamic finance, which is anchored in a number of fundamental principles such as sanctity of contracts, links to the real economic sector and risk sharing.

In view of their holding a common goal of enabling the development of marginalized individuals and communities. Islamic financial contracts, particularly risk-sharing financing instruments and social solidarity instruments such as sadaqah, waqf and qarḍ can be utilised for financial inclusion.

There are Sharīʻah rules in relation to permissible and impermissible activities. Sharīʻah deems some activities as prohibited (haram), and businesses and/or individuals engaged in these activities may not avail themselves of Sharīʻah-compliant financial solutions. The commonly prohibited businesses in Islamic finance are those dealing with liquor, gambling, vice-related activities (e.g. pornography, trafficking, etc.) and interest-based lending businesses. Hence, operators in Islamic financial inclusion activities must ensure that their operations comply with rules of halal (permitted) and haram (prohibited), and that they only finance activities (of counterparties) that are permissible in Sharīʻah.

On the transaction level, Sharīʻah requires contracts to be free of ribā (interest), major gharar (excessive uncertainty) and maysir (zero-sum/gambling outcomes)

Islamic finance activities need to be under ongoing supervision by qualified experts who are well versed in the principles of Islamic finance and Sharīʻah.

Regulatory and supervisory guidelines also need to clarify the need for Sharīʻah review and audit on Islamic financial inclusion and microfinance activities, including the frequency and type of reporting – whether to the general public, the board of the operator, or the regulator for supervision purposes.

The Islamic jurisprudence of transactions typically requires offer (ijab) of products in clear terms and acceptance (qabul) by the buying party in clear terms with sufficient information to enable reasoned decision making (The offer and acceptance may not be by way of uttering words, but may be through the action of giving and taking). This factor is of importance in both conventional and Islamic micro financing business, where the financial literacy of the customer is always a concern.

There are also rules in relation to exit and restructuring requirements from a financing transaction, including additional operational considerations with respect to late-payment penalties, treatment of early payment, etc. These considerations are typically premised on the Sharīʻah contract (e.g. murābahah, ijārah, salam, etc.) on which the transaction was originally structured.

Aside from own funds, donations, grants and subsidies from various individuals, institutions and governments/donor agencies are typical features of financial inclusion and microfinance activities. Accordingly, NGO-type microfinance institutions are typically non-deposit-taking institutions. In Islamic finance, there are particular contracts that enable donations/grants, such as sadaqah and waqf. These social solidarity instruments, in turn, have their own specific concepts and contractual obligations that need to be duly considered by the institution collecting these funds and utilizing them for financial inclusion activities.

As such, regulations must provide clarity on how defaults and non-performance of obligations should be approached. This need is particularly pronounced in the context of financial inclusion and microfinance, where a relatively atypical segment is introduced into the formal financial sector, bringing with it new risk considerations.

A state where individuals and businesses in a society have access to, and usage of, a range of affordable and quality Sharīʻah-compliant financial products and services that appropriately and justly meet their needs; and that are delivered by formal financial services providers in a transparent and simple manner while duly complying with the rules of Sharīʻah, thus enabling informed understanding and decision making by the customer.” The ultimate goal of both conventional and Sharīʻah-compliant financial inclusion is to enhance the livelihood of beneficiaries while contributing to the overall well-being of the society.

Digital financial inclusion involves the deployment of digital means to reach financially excluded and underserved populations with a range of formal financial services. The concept is particularly noteworthy, and is rapidly gaining traction, since it enables formal financial institutions to reach previously unserved areas (e.g. rural areas, suburbs, villages) in an efficient and cost-effective manner. Reduced operational expenditure (e.g. by avoiding setting up physical branches) also enables service providers to potentially lower transaction costs for the customer, thus increasing affordability and usage.

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