Islamic Finance: Tunisian Fruit Seller & Financial Democracy

By Rushdi Siddiqui, Global Head, Islamic Finance & OIC Countries, Thomson Reuters

Arab Revolution 2.0 opens an interesting closed window of opportunity for financial inclusion of the devout. Islamic finance was implicitly linked to Muslim Brotherhood, much like ‘creeping Shari’ah in selected G-20 countries, by ex-dictators in the Maghreb to keep themselves entrenched and populace ignorant, on edge and suppressed.

Query: Can it be said that in denying Islamic finance, these Muslim ‘leaders’ were encouraging interest-based lending/finance, hence, contravening the teaching of the Koran? The Koran mentions explicitly about the treatment of ‘… those giving and taking of interest [and those witnessing the transaction] …’ (2:278-279) Then, can it said these leaders have implicitly invoked God’s wrath on themselves as ‘disbelievers’ of Islamic finance in a Muslim majority country? Thus, it seems, for these leaders, fear of Muslim Brotherhood was greater than fear of Almighty?

But, history was made in our lifetime by a highly educated but jobless Tunisian fruit/produce seller, Mr Mohamed Bouazizi, whose act of desperate dignity sparked an electron revolution that bullets and bullying could not suppress. The end result: one gutless dictator with 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 ‘Moumar’ is, well, a piñata in the wait.

The Arab democracy is real-time in the making, from cleaning house and recovering stolen assets of future generations to establishing new political parties to ‘credible’ parliamentary elections to finding 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 Muslim Brotherhood agenda, hence, avoid going from a secular suppression to spiritual manipulation. To showcase an established and meaningful Islamic finance since the 1980s, two countries, Malaysia and United Kingdom, are prime examples of secular democracies with an inclusionary Islamic financial hub! Neither country is the 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 immediate demand 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 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, i.e. Malaysia, will be the proper stage managed growth roll out.

The last thing the region, man on the street or Islamic finance needs is another Egyptian type Ponzi scheme of the 1980s. Thus, any Islamic financial entities, in GCC or Europe or Asia, interested in the region need to curb their enthusiasm for selling ‘Islamic loans/funds.’ They need to understand there is a real first mover advantage, but it entails education, awareness, and more education to build interest/desire then loyalty.

Second, Mr. Bouazizi, the educated Tunisian fruit/produce seller, showcased two important financial issues: 1. Wholesale corruption prevents any benefits reaching the intended audience with appropriate consequences, and 2. banks will not finance 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 in the region are bankable, have bank accounts or have invested in the local stock exchanges? Simple answer, not many!

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

However, in the Maghreb, Islamic finance can move beyond the rhetoric of financial inclusion and social justice and actually be a contributing stakeholder in the Jasmine revolution for financial democracy. Let the people decide for 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.

Thus, a two-prong approach may be the way forward: 1. An Islamic Development/Industrial Bank for financing selected sectors (industrial policy?) based upon applied research; and 2. Funding pilot programs tied to the real local economy: 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 here 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 without a comprehensive regulatory and supervision environment is typically a ‘DND,’ 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.

Its morally and ethically difficult to tell financially disenfranchised people to wait for funding till Islamic banking regulations or scholar sign off are in place. Islamic finance needs to be both human and relevant to all people seeking dignity of a livelihood for themselves and their families, otherwise ‘whats the difference?’