Renewed focus on poverty in Islamic Finance

In recent weeks we've seen a growing debate on the role that Islamic finance can play in the poverty alleviation domain, particularly through Islamic microfinance. In April a forum sponsored by the International Islamic Finance Forum that included Nobel Prize winner Muhammad Yunus, asserted that Islamic finance players needed to play a bigger role in the microfinance movement, an area where very little has been done so far (see link here) . Even the Islamic Development Bank, the Islamic analog to the World Bank, has established a $10 million poverty alleviation fund that focuses primarily on microfinance.

It is a bit puzzling why Islamic bankers haven't jumped into this market quite awhile ago given the ethics of Islamic business and finance and the fact that one of the five pillars of Islam is the payment of alms, or zakat. Of particular interest could be Islamic insurance or takaful. Islam forbids riba and gharar (risk). Western insurance entails investment of capital in a way that violates the prohibition against riba, or making money from money. Furthermore, the prohibition against gharar is largely against speculation and gambling and one of the most important juristic rulings against conventional insurance is based on the assertion that insurance is the sale of risk or uncertainty and this violates Islamic teachings on ethics in contracts. To get around this prohibition the institution of takaful was created which is a form of solidarity insurance or joint guarantee. Now, anyone familiar with the microcredit practices of Grameen Bank will immediately recognize the "solidarity" aspect that forms the basis of the mutual guarantee that drives high repayment rates at Grameen. Back in the early 1990s I spent a year studying Grameen Bank and its replication and from the narratives of members I often mused that savings and insurance might be just as important, if not more powerful, than micro-loans for the poorest of the poor. The way the solidarity circles worked in practice was itself an informal type of insurance. In the latter half of the 1990s we saw growing interest in microinsurance in Africa where high HIV rates jeopardized the sustainability of many microfinancial institutions and even Grameen created a health insurance scheme, Grameen Kalyan, after they discovered that over half of the defaults on loans were linked to health crises that depleted household assets.

So where might all of this lead in terms of innovation in the Islamic banking sector? There will be tremendous opportunities for those who recognize that 'innovation' often means creating the appropriate products and delivery mechanisms to reach the so-called "base of the pyramid" (no comment on the terminology here!). The ethics of Islam, if we can put substance over form as Mahmoud Al-Gamal has been insisting for years, could create the platform for numerous products and services in Islamic banking or for those wanting to engage with predominantly Muslim populations. Microtakaful, shari'a compliant microloans and social businesses could come together in a number of ways to impact the triple bottom line for those savy enough to engage with Islamic law, social entrepreneurship and Islamic business practices. Just take a look at the current market for mortgages in the West and the growing ethical/financial crisis to see the opportunities for how Islamic banking could make inroads, even in the West, soon!