Islamic finance: Tunisian fruit sellers and financial democracy

Bouazizi had a dream

The Arab Spring opens an interesting window of opportunity for financial inclusion of the devout. Islamic finance was implicitly linked to the Muslim Brotherhood – much like ‘creeping Shari’ah in selected G-20 countries – by ex-dictators in the Middle East and North Africa (MENA) region to keep themselves entrenched and the populace ignorant, on edge and suppressed.

Could it be said that in denying Islamic finance, these Muslim ‘leaders’ were encouraging interest-based lending and finance, hence contravening the teaching of the Qur’an? The Qur’an mentions explicitly the treatment of ‘…those giving and taking of interest [and those witnessing the transaction]…’ (2:278-279). Have these leaders have implicitly invoked God’s wrath on themselves as ‘disbelievers’ of Islamic finance in Muslim majority countries? For these leaders, fear of the Muslim Brotherhood was apparently greater than fear of Almighty.

But history was made in our lifetime by a highly educated but jobless Tunisian fruit and produce seller, Mr Mohamed Bouazizi, whose act of desperation sparked a revolution that bullets and bullying could not suppress. The end result: one gutless dictator with a hairdresser wife can now make multiple umrahs locally, another will soon be joining his sons on a ‘farm,’ where his rivals resided, and our man ‘Moammar’ is, well, a piñata in waiting.

The Arab democracy is real-time in the making, from cleaning house and recovering the stolen assets of future generations to establishing new political parties for credible parliamentary elections. It was the 2008 ‘Obama – Yes, we can’ moment. Obviously, Islamic finance just does not evoke the same human emotions or interest, but for many mosque-going citizens, issues related to savings, financing, and investing must also be addressed.

The ‘policy’ question is how introduce (in Tunisia and Libya) and reconnect (in Egypt) meaningful Islamic finance without it viewed as part of a Muslim Brotherhood agenda. In other words, how do we avoid going from secular suppression to spiritual manipulation? To showcase an established and meaningful Islamic finance approach, two countries, Malaysia and United Kingdom, have become prime examples of secular democracies with an inclusionary Islamic financial hub since the 1980s. Neither country is a hot bed of extremism or suppression.

The message about Islamic finance must be a combination of public-private partnership and, most importantly, about the right products and services that are market-driven and commercially viable. Concurrently, there may be decades-old pent-up demands for Islamic finance, but building a holistic approach in enabling environment will take time.

First, Islamic finance needs to a public-private partnership, acting as a system of checks and balances, where the former provides the level regulatory and tax playing field and the latter provides the products and customer services. Thus, a top down and bottom up approach (as conducted in Malaysia) could be a proper stage-managed growth roll out.

The last thing the region, the man on the street, or Islamic finance needs is another Egyptian-type Ponzi scheme of the 1980s. Any Islamic financial entities – in the Gulf Cooperation Council (GCC), Europe, or Asia – interested in the MENA region need to curb their enthusiasm for selling ‘Islamic loans/funds.’ They need to understand that although there is a real first mover advantage, it entails education, awareness, and yet more education to build interest and desire before loyalty can be nurtured.

Second, Mr. Bouazizi showcased two important financial issues. One is that wholesale corruption prevents any benefits reaching the intended audience with appropriate consequences. Secondly, banks had not financed the entrepreneurial economy, which will ultimately absorb the many unemployed and underemployed.

The priority in the region is not Islamic hedge funds, derivatives, and possible even equity mutual funds, but funding and financing start-ups and expansion capital for small businesses. The question to ask is how many such businesses in the region are bankable, have bank accounts or have invested in the local stock exchanges? The simple answer is not many.

Conventional banks have not been able to address the needs of the local start-ups and Islamic banks will probably continue to target established bankable and investable entities. However, those at the ‘bottom of the pyramid,’ the starts ups and the non-real estate entities requiring expansion capital may well continue to flounder without the requisite ‘attention financing.’

However, Islamic finance can move beyond the rhetoric of financial inclusion and social justice and actually be a contributing stakeholder in the revolution for financial democracy. Let the people decide between Islamic finance and/or conventional banking by their deposits, by their funding and financing needs, by their investment needs, and so on. If Islamic finance is indeed a solution, then it must be stress tested in the market places of ideas and demands.

A two-prong approach may be the way forward. An Islamic Development/Industrial Bank should be initiated for financing selected sectors based upon applied research. Also, pilot programs tied to the real local economy should be funded: micro-finance, micro-funds, SME financing, etc., with focus on mudarabah (fund financing) and musharaka (partnership financing) funds.

Presently, many Islamic banks in the GCC outsource fund management to established asset management firms, and the same approach should be deployed in MENA’s developing democracies with seeded funds and incubated over one/two years. This becomes another asset class with geographic diversification for Islamic banks and their investors.

For Islamic banks, new geographical markets withoutt a comprehensive regulatory and supervision environment is typically a ‘DND’ – a “do not disturb” sign. But a professionally seeded, mandated and operated Islamic fund may be the entry strategy to serve the funding needs of the likes of Mr Bouazizi.

It is morally and ethically difficult to tell financially disenfranchised people to wait for funding until Islamic banking regulations develop or a scholar’s sign off is in place. Islamic finance needs to be both human and relevant to all people seeking the dignity of a livelihood for themselves and their families. Otherwise, what’s the difference?

Rushdi Siddiqui is the Global Head of Islamic Finance at Thomson Reuters. Recognised as a thought-leader in Islamic Finance, Rushdi was a key force in the creation of the Dow Jones Islamic Index, and is now a leading advocate of the convergence between Islamic Finance and the Halal industry.