IslamicFinance.de

Prime Minister David Cameron of the United Kingdom has announced that the U.K. will become the first non-Muslim country to issue a Sukuk, with a £200 million issue planned for early 2014. Cameron also announced plans for a new Islamic index on the London Stock Exchange. These initiatives are all part of a grand plan by the U.K. government to turn London into a global capital of Islamic finance. At the same time, the World Bank Global Islamic Finance Center in Istanbul is the result of the collaboration between the Turkish government, Turkish private-sector entities and the Bank Group, aiming to create a “center of excellence” for the development of Islamic finance. However, there is a need to strengthen its legal foundations and develop robust regulatory and supervisory frameworks globally.

Islamic finance is based on two intrinsic features: risk-sharing and the link between financial transactions and the real economy. This critical link brings prudence to the system, promotes equity relative to debt, broadens financial participation, and minimizes overall vulnerability. Another dimension of Islamic finance is the promotion of economic welfare and social justice guided by the objectives of Shariah. Whether Islamic finance is a catalyst for inclusive growth and sustainable development is not as straightforward as one may hope. There are several other areas of Islamic finance which need significant improvements, including regulatory oversight, tax treatment, risk-management practices, and the level of awareness. Despite these limitations, Islamic finance has potential to serve as a tool for financial inclusion through leveraging the entrepreneurial potential of micro, small and medium enterprises (MSMEs) across sectors and bringing the financially underserved into the economic mainstream.

Ensuring the provision of financial services to the poor can address the challenge of poverty alleviation. A large portion of the poor population, however, is excluded from formal financial services. Although access to Islamic microfinance is critical to growth and prosperity in many countries it is provided only by a small number of providers covering less than 1% of the total microfinance outreach. Sustainability of Islamic microfinance institutions (MFIs) is also an emerging challenge. Moreover, Islamic MFIs tend to predominantly use murabaha (cost-plus credit sale) and qard hassan (interest free loans). These products have implications related to sustainability and outreach of MFIs as the cost can be higher in the former and the latter does not generate any return. Innovative solutions are needed to develop more comprehensive and efficient instruments which build on sustainable business models and product diversity.

Islamic finance and socially responsible investing (“SRI”) have been two of the most rapidly growing areas of finance over the last two decades. Although both types of investors seek to achieve a strong return on their investments, Muslim and non-Muslim SRI investors are also looking for their investments to make a positive impact on their societies. Islamic finance and SRI both suffer from a distinct lack of liquid fixed income investment options. A socially responsible sukuk could fill a need for both markets simultaneously and also help bridge the divide between the conventional and Islamic financial markets.