–The following is an extract from the Unlocking Investment and Finance in Emerging Markets and Developing Economies (EMDEs) World Bank program
–Building Robust Financial Markets and Institutions in EMDEs presented by Zamir Iqbal
Islamic development bank is a multi-lateral Development Bank established in it has fifty seven member countries predominantly Muslim countries members of OIC. And we’re fully committed to helping our member countries achieve achieving the sustainable development goals. Now it is indeed my pleasure to talk about the role of Islamic finance in development finance. Now Islamic finance is relatively a new modern term which came in last forty to fifty years. The practice of commerce and finance based on the principles of Islam had been there for centuries. But it was not built last couple of decades when the term Islamic finance came. First it came as Islamic banking and then it was converted into much broader term. It is practiced in more than fifty countries all over the globe in different ways and forms.
If we bring everything in a very summarized fashion one can say Islamic finance is nothing but a special form of structured finance which is based on the risk-sharind principles as well as an asset-based finance. Given the current state of financial engineering where in the conventional system you could construct any kind of financial instrument using very basic fundamental instruments. Therefore Islamic finance could be considered another form of a structured finance which says that financing should be done on the real sector activities and without having an outright debt and leverage and without creating too much of financialization of the system.
Zakat is one of the distributed instrument prescribed by Islam where the network and earnings are subject to wealth tax of two point five percent and that particular money is used for up lifting the social life of the least privilege. Similarly there’s a lot of emphasis on developing and endowments like called Waqf where the people could give properties and the cash as and all meant for the benefit of the society. The other instruments called Qard al-Hasan which means that a interest free loan which is given to the individuals and the entrepreneurs in order to make them part of the economic activities.
There are many microfinance institutions which had established using the principles of Qard al-Hasan where the micro finance is provided to poor people without charging any interest. Therefore that it provides the poor people an opportunity to become part of the economic life. Even the challenges of the sustainable development goals Islamic finance can indeed play a very important role. So Islamic finance can play a play a critical role in mobilising long term financing. One of the challenges of a financing of infrastructure is that nobody’s is willing to take the risk. So if you have a financial transaction which is based on asset financing and risk sharing that brings that makes the infrastructure financing a bit more attractive. Well certainly Islamic finance can play a very critical role in enhancing the financial inclusion and there has been a lot of studies done to show that thing and there have been many projects being undertaken to enhance the financial inclusion in many of our member countries.
To get the best out of the potential of Islamic finance certain pre-requisite needs to take place. We need to make sure that there is a good enabling environment in a particular country where asset based and a risk sharing finance is which is conducive for such kind of finance. We want to make sure that there are adequate institutional arrangements and there are legal framework in place there are some tax implications because Islamic finance deals with the real assets with the commodities and therefore it may have a taxation issue in addition to that we would have to make sure that all the standard for the transparent disclosures are there.
Well I’m very confident that Islamic finance can play a very important and significant role in achieving sustainable development goals and promoting the economic development all over the globe. However this comes with a certain challenges and prerequisites. We can achieve this objectives through mobilizing resources through Islamic finance provided there is adequate a regulatory framework adequate legal framework all the associated institutions institutional set ups in a particular member country in order to attract financing which is based on asset based financing and risk sharing financing. In addition to promoting financial inclusion in order to achieve that we also need to enhance the financial literacy in our member countries. And I believe that together we can all this can be done in order to achieve sustainable development goal and to enhance the prosperity in our member countries and all over the globe.