Islamic Finance and Microfinance (Article)

Muhammad Yunus calls for an increased role of Islamic finance and microfinance to end poverty
Posted on April 29, 2008 by RIBH

Courtesy: RIBH

Grameen Bank founder Muhammad Yunus delivered the keynote speech at the International Islamic Finance Forum (IIFF) held in Dubai from 13 to 17 April 2008.Yunus, who won the Nobel Prize in 2006, is headlined the opening of the forum with a special-day session on the role of Islamic finance and microfinance.

Muhammad Yunus, founder and MD of micro-credit bank Grameen has called for more emphasis on social businesses that help the poor. ‘Take off your profit maximising glasses and put on your social business glasses and the world will look so different,’ he told delegates at the IIFF. Social business, he said, is more than just CSR programmes and can help people climb out of the poverty trap.

Muhammad Yunus was to address the question of questions facing many in the industry – how is CSR social responsibility defined by Islamic banks? Islamic finance today is Sharia-compliant but to make it Sharia-based will be the main challenge.”

In his first address, Yunus said the consequences of the turmoil in credit markets represented an opportunity for the global finance sector to consider its current rules and regulation. “It is a good time to reflect on what a bank is and does,” said Yunus, speaking to a packed-audience of delegates in Dubai. “If I were to ask for a billion dollars for a good global cause, there would be a lot of uproar – but a trillion dollars down the drain, everyone off still playing golf, and not a word spoken.”

He also advised corporations and business in general to contribute more of their CSR funds to ’social businesses’, non-profit driven businesses for the good of society,” Usually most businesses have someone in charge of CSR, who sponsors a cricket match or exhibition,” said Yunus. “But if you create a social business out of CSR, then everyone can benefit.”

In Bahrain, Grameen is involved in a government-backed micro-credit bank being launched called Family Bank. The Bahraini government has recently signed a Memorandum of Understanding (MoU) with Dr Muhammad Yunus, the Nobel Peace Prize winning founder of Grameen Bank, a micro-finance institution which provides funding for the poor. Through a network of financial institutions, the bank gives small loans, usually less than US$200, to individuals to establish or expand small, self-sustaining businesses.

 

The bank also provides technical assistance, training and technology-transfer to these individuals (mostly women) who would otherwise not have access to financial funding. According to the MoU, the Grameen Foundation will help Bahrain establish a new bank called the Family Bank.

Islamic finance professionals from all over the world stated that the global Islamic finance sector needs to undergo a paradigm shift to begin alleviating poverty. “There is a blueprint for microfinance – it is an issue of someone championing it in our space,” said Rushdi Siddiqui, global director of Dow Jones Islamic Indexes. “At this point, we are still working out the technicality of Islamic finance in the sector, but have yet to look at its spirituality.”

 

Microfinance is a critical issue which needs to be patronised in the Islamic finance sector, a group of panellists led by Nobel Prize winner Muhammad Yunus said.

Wasim Saifi, chief executive of UAE Islamic mortgage firm Tamweel, also participated in the panel and spoke of why Islamic banks had failed to effectively work in Islamic finance. “I don’t think any of the Islamic banks have had much success in microfinance,” said Saifi. “It is primarily because the pressures are still there to create the Islamic finance sector, and widening its scope was not part of the immediate focus.” Nevertheless, microfinance and Islamic finance are intrinsic to each other, Saifi said. “The scope is certainly there, and it is really a marriage match made in heaven,” said Saifi. “Once realised, microfinance will be able to tap into the cash-rich Islamic finance industry for its activities.”

Claire Cabanel Rey, executive director of PlaNet Finance UAE, said that there were currently successful Islamic microfinance programmes in Afghanistan and informed delegates that a significant portion of the $10 billion poverty-reduction fund established by the Islamic Development Bank is dedicated to microfinance.

Ahmed Al Janahi, deputy group CEO of UAE-based Noor Islamic Bank, also on the panel, said that his bank is currently creating unit dedicated to 15% of the UAE finance market who are deemed “unbankable”. “Most banks in the UAE find many Emiratis are unbankable – it is embedded and it doesn’t make sense to open accounts for small businesses, students, or address the smaller customer,” Al Janahi said. “We have spotted this at Noor Islamic Bank – we have been creating another bank in the main bank, with a different structure so we can break down the cost per product. This way, we can reach the 15% in the UAE who have not banked till now.”