Islamic banking industry expected to play positive role in poverty reduction

Amanullah Khan

Karachi—Islamic banking industry posting huge profit earnings and running in a top gear to increase its market share in the financial sector, is really expected to play its due role by strengthening the government policy of poverty reduction in the society. Increasing number of poverty primarily stemmed from growing rate of unemployment calls for concerned efforts to generate economic activity at least by support small enterprises through micro finance at an affordable price, otherwise making huge profits only would not differentiate the Islamic finance from the convention financial system.
In the face of growing number of population living below the poverty line it deems quite fit for the Islamic Banking industry to facilitate Islamic microfinance as a strategic tool to provide financial access to the poor. Islamic microfinance can play a major role in poverty alleviation in under-developed nations across the world. A huge part of the Islamic population is unwilling to use conventional financial products due to their strong faith with Islamic principles. Islamic microfinance is a way to promote financial inclusion among such population.
Islamic Microfinance can eradicate vast poverty in the Muslim world. Half of global poverty resides in Muslim world while the Muslim population is 24 percent of the total global population. There are various causes of rapidly increasing poverty in the Muslim world i.e. lack of education, lack of employment, political instability and so on. But on the other hand, the main hurdle is non availability of the proper financial products, which are in line with the Muslim’s religious values and social norms. Micro financing is not utilized by Muslim population due to interest and thus is excluded from financial inclusion.
Globally speaking over 300 million people were graduated from Micro to SME level in past year, and the countries mentioned in the list are China, India, Brazil and Chili etc. but when we look at the enlisted countries we will come to know that then countries mentioned in the list are not Muslim and by this we will come to know that the poverty is decreasing in non-Muslim countries and increasing in Muslim world. Islamic microfinance is not given the proper place in the poverty alleviation strategies of International development agencies (e.g. World Bank, UNDP, IFC, USAID etc.) in the way it should have been given. Islamic microfinance is just 1 percent of the total micro financing of the world that is just 1 billion USD.
There is no religion of poverty but religion plays an important role in poverty alleviation. It may be recalled that the Islamic microfinance has a total estimated global outreach of only 0.38 million customers according to Microfinance Gateway. Many of Muslim countries are providing supportive regulatory framework to promote and protect the Islamic financing. Indonesia and Pakistan are two of such examples where Islamic financing and micro-financing is supported by the regulatory frame work. Islamic banking and finance is confined mostly to the rich class.
It totally ignores the downtrodden class. The share of Islamic microfinance is less than 1 percent of the total volume of $1.3 trillion of the Islamic finance industry. The total number of Islamic Microfinance Institutions is more than 300, operating around the world. Poverty alleviation is not only the social responsibility in Islam but also a religious obligation. Zakat, Charity, Sadqa, Fitr, Usher and Qarz-e-Hasan etc. are amongst the key religious obligations of Muslims. The social responsibility for removing poverty has been taken by Conventional Banks in some countries.
Islamic microfinance is focused on just a few countries, with the top three Indonesia, Bangladesh and Afghanistan accounting for 80 percent market share globally. However, in the recent past demand has also grown in countries such as Jordan, Algeria, Syria, Sudan, Somalia, Yemen, Azerbaijan, Kazakhstan, Pakistan, Mauritius and even Bosnia and Herzegovina, where between 20 percent and 40 percent of people cite religious reasons for not accessing conventional microloans. Islamic microfinance model of partnership has appeared as a productive and workable model for development. It does not only gain the poor enabling them to establish a small scale business, but also generates profit for the donor.
At present Islamic microfinance institutions are offering their services to 1.6 million clients in around 32 countries. Due to Islamic microfinance’s pivotal role in reducing poverty, international donor institutions and multilateral organizations like USAID, IDB, ADB, IFAD, UNDP, World Bank and IFC etc. have precisely explained their policies in various countries to further invigorate Islamic microfinance which would ensure the rapid advancement of Islamic microfinance in the near future. There is an extensive need for research in Islamic microfinance industry so that new Islamic microfinance products can be popularized.
Currently only Murabaha has 80 percent share of the total Islamic microfinance market. About half of the world’s poverty is common in Muslim countries. One of the reasons of high poverty rate in Muslim countries is the disapproval of Muslims to take interest-based loans. State Bank of Pakistan has stressed upon the Islamic finance industry to make the individual as well as cooperative efforts to develop Islamic microfinance in the country. It will provide every support and facilitates to the industry in efforts to build and expand its portfolio in these sectors. It is stressing on the research and development to develop solutions for bringing monetary and fiscal policies and practices in conformity with Shariah principles.

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