Mohammad Mahbubi Ali

Mohammad Mahbubi Ali

Friday, 19 October 2018 11:45

Islamic finance promotes inclusion

Financial inclusion or access to finance at an affordable cost has, since the early 2000s, been a focus of renewed concern for many governments and central banks.

The World Bank’s 2017 Global Findex Database discovered that about 1.7 billion people worldwide remain unbanked — without an account at a financial institution or a mobile money provider. The United Nations Development Programme’s Sustainable Development Goals (SDGs), therefore, seeks to improve financial access into its main development agenda.

A plethora of academic evidence confirms that financial inclusion can support the achievement of broader sustainable development goals.

As a business established within the ambit of Syariah principles, values and goals, Islamic finance aims to promote economic wellbeing and creates socio-economic justice; and serve as a catalyst for development, in line with the spirit of the UN sustainable development agenda.

The International Monetary Fund, in its press release on May 9, also acknowledged that “the growth of Islamic finance presents important opportunities to strengthen financial inclusion, deepen financial markets, and mobilise funding for development by offering new modes of finance and attracting unbanked populations that have not participated in the financial system.”

Islamic finance could contribute to the financial inclusion agenda through two main mechanisms: profit and loss sharing (PLS) or risk-sharing instruments, like musharakah and mudharabah, as an alternative to conventional debt-based financing and risk transfer; and Islamic social finance instruments, such as zakatwaqf (endowment fund), shadaqah, and qard hasan (benevolent loan), which complement PLS instruments.

PLS promotes the financial inclusion agenda because the concept can offer access to finance to low-income segments at an affordable and fair rate: the imposition of cost and the distribution of profit are based on the actual performance of the business.

As a result, the optimum application of PLS will create an equitable distribution of income and wealth among partners or between wealth owners and entrepreneurs, presenting the concept of justice and fairness in financial dealings.

Risk transfer underlying the conventional financial system, on the other hand, implies asymmetric exposures to economic risk, and does not, therefore, promote economic justice and financial inclusion.

Furthermore, social finance, mandated or otherwise, is an integral part of the Islamic financial system to offer equal opportunity to financial access to the low-income segments, that is, the underserved and poor, “so that it may not (merely) make a circuit between the wealthy among you” (QS 59:7).

Islamic social finance instruments help improve financial access via various initiatives, such as microfinance empowerment and poverty alleviation programmes.

Financial technology (fintech) is a perfect device to reinforce the role of Islamic finance in promoting the financial inclusion agenda. The use of digital finance, such as blockchain and crowdfunding, can lower transactional costs and minimise asymmetric information.

Santander FinTech issued a report in 2015 estimating that blockchain could reduce transactional costs attributable to cross-border payment, securities trading and regulatory compliance between US$15 billion (RM62 billion) and US$20 billion per annum by 2022.

Furthermore, the ability of blockchain to transmit and to record the ownership of the digital assets and immutably store information — where all blockchain participants have access to the same information — might significantly reduce information asymmetries.

Fintech can also open financial access to unbanked individuals. According to World Bank estimate, there are approximately 240 million to 334 million people in developing economies that could participate in crowdfunding.

It is also a powerful tool to widen access and outreach of Islamic social finance instruments such as zakahwaqf and sadaqah.

Bank Negara Malaysia Assistant Governor, Datuk Ahmad Hizzad Baharuddin, at the Association of Shariah Advisers’ Shariah Fintech Forum 2017, affirmed that fintech promises to revolutionise finance and bring a broader range of benefits to financial institutions and the public.

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The writer is a research fellow at the International Institute of Advanced Islamic Studies Malaysia

Published in: New Straits Times, Friday 19 October 2018

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Monday, 19 March 2018 14:50

Malaysia's green sukuk

Over the last few years, environmental preservation has been the focus of renewed investor attention, as evidenced by growing interest in socially responsible investment (SRI) instruments. Green sukuk, a syariah-compliant SRI instrument for renewable energy and other environmental sustainability projects, is an important and commendable initiative.

Malaysia, being home to the world’s largest sukuk market, has pioneered the issuance of green sukuk. On July 27, the Securities Commission announced the debut of the world’s first green sukuk under its SRI sukuk framework. This milestone is the result of a joint effort between SC, Bank Negara Malaysia and the World Bank Group to facilitate the development of green financing and investor participation in SRI sukuk.

Issued by Tadau Energy Sdn Bhd, a Malaysian-based renewable energy and sustainable technology investment firm, and structured on the Syariah principles of istisna’ (manufacturing sale) and ijarah (leasing), the RM250 million Green SRI Sukuk Tadau is to finance the construction of large scale solar (LSS) photovoltaic power plants in Kudat, Sabah, with a tenure of two to 16 years.

Following the success of Green SRI Sukuk Tadau, Quantum Solar Park Malaysia Sdn Bhd launched the world’s largest green SRI sukuk — RM1 billion — in October to fund the construction of Southeast Asia’s largest solar photovoltaic plant project in three districts: Kedah, Melaka and Terengganu.

More green sukuk is expected to be issued in Malaysia to support environmentally sustainable infrastructure projects and to strengthen the country’s position as the main catalyst for Syariah-compliant green instruments.

Certainly, the future of green sukuk in Malaysia is promising for a number of reasons. Firstly, the government aspires, as envisioned in the 2014 Budget speech, to position Malaysia as the home for SRI as part of its ambition to make Malaysia a green technology hub by 2030.

In response, SC revised its sukuk guidelines in 2014, incorporating new requirements for the issuance of SRI sukuk. The new sukuk guidelines state that the proceeds of SRI sukuk can be used to preserve the environment and natural resources, conserve the use of energy, promote the use of renewable energy and reduce greenhouse gas emissions.

Also, a number of incentives have been offered to stimulate greater utilisation of SRI instruments as a fundraising channel. These include tax deductions on the issuance costs of SRI Sukuk approved or authorised by SC and tax incentives for green technology activities. The government also introduced a special financing scheme, Green Technology Financing Scheme, with a total fund allocation of RM5 billion until 2022 to support the development of green technology.

Secondly, a substantial increase in the demand for both energy supply and energy financing in Malaysia has opened up room in which green sukuk can grow. The government has put in place a renewable energy generation target of 7,200 megawatts by 2020. Malaysia’s Green Technology Master Plan also aims to boost the growth of its green technology sector, with a targeted revenue of RM180 billion alongside the creation of 200,000 green jobs by 2030.

Thirdly, there is a growing awareness of SRI among both conventional and Muslim investors. Green sukuk facilitates and increases the broader participation of conventional investors in the sukuk market, especially those looking for more ethical and socially responsible investment opportunities. It helps bridge the gap between sustainable investors and sukuk investors who aim to place their money in a scheme that complies with certain values.

Other positive factors include the design of sukuk, which is naturally supportive of green principles because it requires a specific pool of assets. Also, the progress of green sukuk is, and has evolved into, an indispensable part of the natural evolution of the global Islamic financial market.

Islam is fully supportive of the idea of green financing. The Quran and the prophetic traditions emphasise the importance of environmental conservation and sustainability. Islam commands mankind, as the vicegerents of God, to take care of the environment and nature, and to avoid any act that is detrimental to them. This corresponds to the principal purposes of syariah (maqasid al-Syariah) which are intended to realise public benefit (maslahah) and eliminate harm and destruction (mafsadah), outlined under five main headings: protection of life, preservation of religion, upholding the integrity of the human intellect, protecting the family and protection of lawfully-owned property.

Al-Qardhawi, however, added environmental conservation and preservation as another ultimate objective of syariah, having an equally important position as the five goals.

On the whole, green sukuk, like other SRI instruments, is a funding channel that plays an important role in the preservation of the environment and the sustainability of the earth. Islamic finance should, therefore, provide more avenues for the growth of green sukuk as a financial instrument for sustainable development.

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The writer is a research fellow at the International Institute of Advanced Islamic Studies Malaysia

Published in: New Straits Times, Saturday 17st March 2018

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Islamic financial products have evolved from simple and straightforward structures to highly sophisticated and multifaceted instruments. During the 1980s and 1990s, Islamic financial products were dominated by deposits and savings, syndicated project financing, syariah-compliant stocks and mutual funds.........................Download the full article in pdf attachment (below)




Friday, 09 June 2017 15:53

Unleashing the potential of cash waqf


Waqf (an Islamic endowment of property to be held in trust and used for a charitable, or religious purpose; or a Muslim religious or charitable foundation created by an endowed trust fund) has a long history in Islam. It has played — and, in many cases, continues to play — a pivotal role in the advancement of socio-economic well-being of the Muslim community..........................Download the full article in pdf attachment (below)





Friday, 24 November 2017 15:36

Islamic finance calls for more talents

Islamic finance has witnessed, over the last few years, a remarkable growth at 15 to 20 per cent Compounded Annual Growth Rate (CAGR), emerging as one of the fastest growing financial sectors in the world. The total assets of the Islamic financial industry in 2015 was around US$2 trillion (RM8.3 trillion) and estimated to surpass US$4 trillion by 2020. This industry’s rapid growth undoubtedly creates a huge demand for new expertise.........................Download the full article in pdf attachment (below)