Islamic Finance A Template For Fair Finance In Frontier Markets

Transcription

1. Islamic finance : A Template For Fair Finance In Frontier Markets:  Achieving growth that works for all    Introduction    This article aims to explore the trade challenges faced by emerging  markets, with a special focus on Africa. The authors’ aim to share their  views on challenges faced by African small and medium sized  businesses in seeking capital, and suggest that Islamic finance offers a  potential solution to address such challenges.    Part 1     This  article  focuses  on  challenges  facing  businesses  in  frontier  and  emerging  markets.  Broadly  speaking,  a  frontier  market  is  ​a  developing  1 country  that  is  more  developed  than  the  Least  Developed  Countries ,  but  still  considered  “too  small,  risky,  or  illiquid  to  be  generally  considered  an  emerging  market​”;  an  “emerging  market”  is  “an  2 economy which is progressing toward becoming more advanced”.      Emerging markets typically exhibit the characteristics below to some  extent.     (1) Centralisation of capital​. Thomas Piketty, in ‘​Capital in the  Twenty-First Century​’,​ diagnosed the problem of societies where  capital is largely centralized and deployed at exorbitant rates that  exceed the rate of growth in markets. These societies tend  towards social and economic instability. Capital is increasingly in  fewer hands, and priced at rates of return that exhibit market  power. Inability to access capital means inability to access  growth.    (2) Rentier economies​. Economies with lopsided income distribution  between the top few percentiles and the rest of society, usually  also exhibit lopsided power dynamics, where a privileged few are  able to extract and appropriate concessions or benefits that  entrench their positions. This is a feature we can increasingly  3 expect in such societies.     See ​https://en.wikipedia.org/wiki/Least_Developed_Countries While there is no “official list” of emerging countries, the World Bank, an international financial institution, uses GNI per capita of a country as one of the parameters in determining whether a country is an emerging country. See also: https://en.wikipedia.org/wiki/Emerging_market 3 More information on roots of political centralization in Africa see http://whynationsfail.com/blog/2012/6/25/roots-of-political-centralization-in-africa.ht ml 1 2 1
2. Deflecting the will of the large majority of people who are shut out from   growth may preserve privilege in the short term. However, this is not  conducive to the long term health of societies.     Healthy societies need equitable and broad based growth to take place.  This requires that they address the problem of unlocking growth capital  for small businesses, as it is ultimately from the people that a country’s  prosperity grows.    In this article, we outline the possibility of using Islamic Finance (also  sometimes called “Sharia-compliant financing”, or for those desiring a  secular handle, simply “Fair Finance”) as an efficient and effective tool  in allocating capital for the benefit of the real economy. This piece will:    - highlight certain principles of the doctrine underpinning Islamic  Finance that are c​ ompletely absent​ from classical finance  thinking;   - set out what the status quo is and explain why, because of certain  challenges in the status quo, classical finance will not address the  growth challenge;   - distill what might address the growth challenge;   - consider why certain of the range of Islamic Finance instruments  may present a solution; and finally,   - suggest how the world can benefit from more widespread use of  these instruments.          2
3. SOME KEY PRINCIPLES OF ISLAMIC FINANCE     Risk sharing.​ Commerce and encouraging it are at the heart of Islamic  Finance. The principal ways in which Islamic Finance is delivered are  based on trading, or some kind of exchange of value, that carries some  risk, and this is the special characteristic that separates it from all other  kinds of financing. Risk sharing means both entrepreneurs and financiers  are exposed to risk.    Real economic activity.​ Islamic finance must support real economic  activity, without charging riba ie an increment earned on the sale of  money itself (aka interest).     In the traditional market for finance, the power differential between the  lender & the borrower usually results in all risk in a financed transaction  being passed onto the borrower.     Islamic finance shows no such aversion to risk, but instead implicitly  expresses an understanding that all business carries some risk. As a  doctrine that has its genesis in the early days of commerce, it winds  back to a time when commercial transactions were still based on  interpersonal relationships, and people dealt with other people.     The great economic invention, the ‘corporation’, with its concept of  limited liability, came much later. Hence, Islamic Finance has embedded  within it a set of rules that passed the test of social acceptance to a  large number of people, for how to structure a transaction fairly so  that,in cases where it goes well and when it does not, the upside and  downside are distributed in ways that are recognised to have intrinsic  fairness.     Key to this is the concept of risk.     There’s ample recognition in Islamic Finance that the entrepreneur has  4 value, that the person who takes risk is valuable to society.     There’s also acknowledgement that commerce cannot happen without  engaging those that have money (capital).     However, in the pursuit of fairness, the interests of capital cannot be  allowed to win irrespective of the outcome of the transaction, nor can  they be insulated from risk by passing it all onto the entrepreneur, as  often happens when financiers have market power to set terms.     Usury or interest is prohibited in Islamic Finance. This requires the return  made by capital to be ascribable for having taken some risk.   For a philosophical view of the value of this, see the famous ‘​Man in the Arena’​ speech, referenced at ​https://en.wikipedia.org/wiki/Citizenship_in_a_Republic 4 3
4.   These tenets of Islamic Finance have survived the advent of classical  banking and finance, and remain notable for preserving notions of  fairness, a sharing of risk and the importance of the entrepreneur. As  explained in the following parts of this piece, they are even more  relevant now.     Part 2    THE STATUS QUO IN EMERGING MARKETS     The status quo in emerging markets does not serve the needs of small  businesses with respect to credit availability.     Lack of collateral, absence of property titles, weak business plans and  inadequate financial documentation will continue to pose challenges for  5 Islamic financiers as for conventional ones.     We explore this in two sections:     (a)  characteristics of emerging markets that make it difficult for financiers  to engage with parties there; and     (b)  regulatory  and  policy  elements  that  have  the  effect  of  impeding  engagement    Relevant characteristics of emerging markets    Growing population.​ ​Almost 86% of the world’s population lives in  6 emerging and developing countries . Growth rates of most Sub-Saharan  7 African economies is upwards of 3%. In 1980, just 28 percent of  Africans lived in cities. Today, over 40 percent of the continent’s over  one billion people do. By 2030, this is projected to cross 50 percent,  and Africa’s top 18 cities will then have a combined projected spending  8 power of $1.3 trillion.        5 See report by The Economist Intelligence Unit on ‘Mapping Africa’s Islamic Economy’ at https://www.eiuperspectives.economist.com/sites/default/files/MappingAfricasIslamicE conomy.pdf 6 https://www.imf.org/external/datamapper/LP@WEO/OEMDC/ADVEC/WEOWORLD 7 See further discussions by the World Bank on Subsaharan Africa economic prospects report on https://www.worldbank.org/en/region/afr/brief/global-economic-prospects-sub-sahara n-africa-2018 8 See report by McKinsey & Co on what’s driving growth in Africa at https://www.mckinsey.com/featured-insights/middle-east-and-africa/whats-driving-afri cas-growth 4
5. Underbanked ​. It was reported that as many as 350 million Africans do  9 not yet have a bank account. Interestingly, smartphone penetration  rates for Sub-Saharan Africa are also steadily rising. Mobile subscriber  penetration reached 44% in 2017, up from just 25% at the start of the  10 last decade. This represents significant opportunity for financial  technology solutions to promote financial inclusion such as savings and  micropayments, using a “mobile first” strategy to deliver services.      Information asymmetry​. Emerging markets are characterized by a lack of  trustable credit history. Lack of good credit history that is trustable  reduces the ability of financiers to assess risks, hence reducing traders’  ability to access capital. Financiers are unable to make lending or  pricing decisions on transactions before them.       High default rate.​ Default rates are relatively high in emerging markets.  Financiers therefore tend to either:    (1) make arbitrary demands to cover the uncertainty (not the risk) in  the transaction, such that they ask for terms that they feel will  compensate them and demotivate potential default. This can be  seen in the range of returns expectation for financiers in the same  market, suggesting that what they are pricing is ​uncertainty​, not  risk;     or     (2) withdraw from financing altogether.    Knowledge  gap.  The  continent’s  Muslim  population  is  250  million  and  growing.  Islamic  finance  remains  poorly  understood  across  many  continents,  not  only  in  Africa.  Some  argue  that  it  may  even  be  more  challenging  to  implement  than  conventional/  non  Islamic  finance  products.  This  is  understandable  as  traditional  aspects  of  modern  commercial  banking  have  the  benefit  of  familiarity  whereas  Islamic  finance  is  still  regarded  as  new  and  niche.  Knowledge  gaps  are  often  a  result  of  the  existing  regulatory  regime  (or  lack  thereof)  in  a  particular  jurisdiction.       9 Read more at https://www.economist.com/finance-and-economics/2017/07/13/africa-is-islamic-banki ngs-new-frontier 10 See report on mobile penetration in Subsaharan Africa published by GSM Association https://www.gsma.com/r/mobileeconomy/sub-saharan-africa/​ and recent article by ZDnet at https://www.zdnet.com/article/mobile-in-sub-saharan-africa-can-worlds-fastest-growing -mobile-region-keep-it-up/ 5
6. Regulatory and policy elements     Larger financiers in any market tend to be important to the economy.  Overexposure to bad loans can destabilize a lender and bring it down,  hurting the economy as well. To prevent financiers being exposed to  bad loans, occasionally regulators impose minimum financing criteria or  frameworks within which financing (including financing to businesses)  must operate.     This makes sense – you don’t want a core part of the financial  ecosystem going down because of bad loans.     This action by regulators takes many forms – for example, in Singapore,  there is a reckoning of the total indebtedness of the borrower before  housing loans are extended. In Rwanda, the central bank requires  certain security before loans can be provided to businesses. In Australia,  the credit markets are seeing a tightening as banks become more  prudent following the exposure of rampant financing abuse in the  Banking Commission’s ​recently-released report​.    11 After the Global Financial Crisis, the ​Basel 3 standard was formulated  and is ​increasingly being​ ​adopted​. This channels banks towards safer  territory in their businesses, by requiring provisioning in reserve for  certain activities they undertake. Most financing to businesses for  funding trade requires full provisioning. This makes such financing less  profitable and banks aim to minimise their exposure to this.     What this means    Businesses in emerging markets, which are small and not asset-rich, will  struggle to obtain financing from financiers in these markets as a result  of the guidelines for financing imposed by regulators or adopted  voluntarily by financiers.     The requirements effectively disqualify businesses that do not have    ● verifiable and substantial transactions     ● assets to put up security for loans     Paths to prosperity therefore become ever more difficult for new and  small businesses and the people involved in them.     Certainly, this is not because of the intent of the various actors.  Governments and regulators are correct to want to protect the financial  ecosystems they are responsible for. The regulators are also correct in  11 For more information about Basel III, refer to ​https://en.wikipedia.org/wiki/Basel_III 6
7. recognizing the threat that massive bad loans pose to financiers and to   their economies.     Banks too, would prefer to have more rather than less customers. This is  really a case of everyone acting rationally, but the aggregate outcomes  being sub-optimal.     This is where there is an opening for systems of financing like Islamic  Finance to fill the vacuum. In the next section I cover briefly what such  ecosystems need, so we can see what the gap is that Islamic Finance  can fill.       Part 3    WHAT CAN ADDRESS THE GROWTH CHALLENGE OF EMERGING  MARKETS?      To highlight what Africa needs to address its growth challenge, let’s  look at which sector we most need this growth to touch and why.     Small businesses are an enormous part of the economy of every  emerging market.     If we help small businesses scale up, we directly impact the people that  work for these businesses. The added money they make goes straight  into the economy – usually spent on some important consumption need  like better quality calories and nutrition, better healthcare, better  schooling, a home in a safer district, or even enrichment classes for  children.     Also, scaling up often means these businesses start hiring more staff in  order to service the increased business, thereby increasing the  distribution of income and broadening the building of savings / capital  accumulation at the individual level.    Every person whose livelihood or sustenance depends on a small  business is one less person the state will ultimately be looked at to  provide for.     It stands to reason that we should focus like a laser on increasing the  proliferation of small businesses and their ability to engage in the  economy and meaningfully harvest gains.     ***      7
8. Let ’s consider a typical example of a business that can benefit if we  found such a mechanism:    Take the case of a small trader named Paul (not his real name), in  Rwanda one of the emerging countries in East Africa. Paul has nothing  that the bank could consider collateral, ie no property, no fixed deposit  account balances, only the vehicle he uses to get around and which is  not worth much anyway, certainly not enough to secure his borrowing  for even one container of cargo.     Paul has demand for goods, some money to commit to buying stock, a  willingness to work to sell the stock he buys to earn a profit, and a  history of doing this.    Paul can continue buying rice, at the bonded storage at Rubavu, in  western Rwanda, and resell it the same day to Congolese traders who  will buy it off him. He makes probably twenty cents on a sack of rice,  and makes enough profit over the month to live at a basic level, pay his  family’s expenses and preserve a small amount of working capital to  continue buying the rice at tens of sacks at a time, a couple of times a  day. Over the month Paul probably clears between 4000 to 5000 sacks.  Each container has about 1100 sacks. Paul gets by. Paul’s income from  this will last as long as he can continue working, provided no tragedies  in his life or upheavals in the markets occur.     If you asked Paul what the demand is that he can supply into, he can  estimate it well, and it is enough that he can justify purchasing a  container by himself. If he could order a container for himself, the  improved price to him per sack would probably quintuple (5x) his profit.  That would set him on a path to growth.     Given the frameworks he operates in and his profile as a small trader  without ready collateral, unless something changes, his life will likely be  spent in a holding pattern, making a marginal income and circling the  drain ready to fall into oblivion the month after he stops working.     What kind of mechanism will help him?    We know the mechanisms in the traditional financing sector. All Paul has  to do is to make lots of money, purchase property so he can pledge it  to a bank as collateral for a loan, and use the loan to scale up his  business.     Not a practical prescription for Paul.     The mechanism traders like Paul need, however, is one where the party  that supports Paul’s trade is willing to take cognizance of his existing  8
9. trade flow and helps him to scale up volume regardless of his not having   property to pledge as security.     ***      Banks under their rules (or practices) will not do that.     At best, a bank may engage a third party collateral manager to hold the  goods as security pending payment, as an added protective mechanism  for the bank and only for clients that meet the borrowing criteria.  However, the ability to manage collateral in goods is not something  they would rely on without the trader being a qualified borrower initially.  And for a bank to just rely on the financed goods as the security for the  amount advanced, is ​extremely unlikely​. Whether by practice, or by  regulatory restrictions, the banks would require additional security  before it disburses capital on trade.     The ideal mechanism to help this trader would help procure and then  facilitate the import of goods by him, and hold the goods pending sale  by him. In that way, the party supporting the procurement with  financing can rest secure that its money is safe, in the form of goods  that are held in safe custody pending payment, such that the goods can  be readily liquidated in case of default. It may also ask the supporting  party to take some risk in case the goods cannot be liquidated at the  expected value. Some of the liquidation risk can be offset with a  not-onerous deposit.    Under classical banking today, asking financiers to take risk is anathema.  Also, banks in most cases are not permitted under internal and external  rules to engage in non-banking business. Hence, banks will not be at  the frontline of delivering such a solution.     Fortunately for the trader, there is an established doctrine of borrowing  that envisions exactly such assistance. This is found in Islamic Finance, to  which we now return to discuss specific instruments within the doctrine.       Green shoots for Islamic Finance in Africa    According to The Economist Intelligence Unit, Sub-Saharan Africa  accounts for less than 2% of the total Islamic finance assets of around  $1.9 trillion. There is tremendous potential to scale this given the large  Muslim population on the continent.     Interestingly, this discussion comes at an appropriate time. Some  African countries are considering strategies to position themselves as  African hubs for Islamic finance. Kenya, although with a smaller Muslim  9
10. population than Ethiopia , has three Islamic banks including an Islamic  insurance company. Several other conventional banks provide  shariah-compliant products via Islamic “windows”. Kenya also recently  joined the Islamic Financial Services Board, a Malaysia-based regulatory  12 and oversight body.     A possible reason why Islamic finance has suffered some pushback,  especially in the north African region where Muslims make up over 96%  of the population, is due to perceived fear that it means pushing shariah  13 law through the back door. This may rest in ignorance or prejudice.  However there are sound reasons for countries in Sub-Saharan Africa  considering broadening access to Islamic Finance:     ● The products would appeal to a swathe of the population.     ● It is a doctrine that regulates financing in away that has inherent  fairness. This is particularly useful where a large portion of the  population is impecunious and vulnerable to being offered  predatory terms in financing.     Islamic Finance has much to offer and may end up being the preferred  path to growth for emerging markets.           12 See the list of existing Islamic Financial Services Board’s members https://www.ifsb.org/membership.php 13 Read more at https://www.economist.com/finance-and-economics/2017/07/13/africa-is-islamic-banki ngs-new-frontier 10
11. Part 4     OVERVIEW OF ISLAMIC FINANCE INSTRUMENTS IN TRADE  FINANCE: MUDARABA, MUSHARAKA AND MURABAHA       In this section, we outline three Islamic Finance instruments that can  improve access to capital for traders and businesses.      1. Mudaraba    Mudaraba is a type of equity finance. This is a participatory  arrangement between capital and labour.     Generally two parties are involved, namely:       ● the funder/ financier (​rabb-ul-mal​ in Arabic) which provides the  capital.    ● the borrower (​mudarib​ in Arabic) provides his expertise to invest  the capital for return and manage the project to its outcome.    In a conventional structure, the mudarabah scheme may be similar to  the GP-LP investment structure where a fund manager is appointed by  the investors to invest pooled capital.    Mudaraba is one of the two Profit and Loss Sharing arrangements we  cover here. In a positive outcome, profits are shared, generally 50-50,  sometimes leaning slightly in favour of the funder (eg 60-40). In a  negative outcome, the funder loses his capital investment, and the  borrower writes off his time.     Mudarabah (or equity finance) contract  11
12. Such an arrangement has as its underpinnings in the interpersonal   nature of investing behind someone you know and trust to manage the  investment. Reportedly, even the Prophet Muhammad (pbuh)  participated in such an arrangement, with his wife Khadijah funding a  trading expedition of his under a Mudaraba contract.     Applied to current context, the trader (mudarib/manager/borrower)  would borrow the funds and manage the trading, returning profits to  the funder. However, this requires the trader to have characteristics such  that the funder can trust him to do this. Not every funder will be able to  evaluate the risk of this and hence may need to rely on third parties to  assist or to play some role.      It may be possible to layer one mudaraba arrangement above another,  such that the funder invests in a manager who actively facilitates the  investment, with the manager then laying out the capital to the ultimate  user, the trader, who then manages the investment to generate returns.     2. Musharaka    In a Musharaka arrangement, two or more parties contribute capital and  divide profits (and losses) in pre-agreed proportions. All partners may  contribute to management but need not do so. (This might be familiar  as a classical partnership structure; variants of Musharaka also either  make partners the guarantor for other partners (ie an unrestricted  partnership, or ​Mufawada​), or not (ie a limited liability partnership, or  Shirka al’Inan​.)    Further, the musharaka can be ongoing (ie the pre-agreed sharing of  interests apply indefinitely), or on a diminishing basis (one partner’s  interest is progressively paid out, with incoming returns providing both  his profit and a buyout of his interest). A Diminishing Musharaka is  called a M ​ usharaka al-Mutanaqisa.    In the event of a default, both partners would receive a return on  liquidation of whatever property is left.     It is easy to conceive that if a funder is prepared to do collateral  management, that would easily qualify as a partner’s contribution to  management that would entitle that partner to a return from the  venture, while the other partner (the trader) would focus on selling. To  ensure that the trader partner has also contributed some capital, the  goods can be co-purchased with financing from both parties. The  partners can even agree that the funding partner’s interest is  progressively bought out on an agreed formula.     We set out below a simple table that compares Mudaraba and  Musharaka.  12
13.     Who contributes  money?  Who can manage the  business?  Who owns goods  purchased with the  money?    Who gets profits?  Who carries the  financial losses?  Mudaraba  Musharaka    The capital comes  All partners  solely from the funder.       Capital comes from  Borrower/  parties in a specified  Entrepreneur does not  proportion ie 70:30,  invest capital.  60:40.    Only the manager.   All partners can    participate in  Funder has no right to  management and work  manage the business  for the business    The assets are solely  Ownership is  owned by the  apportioned according  financier/ funder.  to each party’s capital    contribution. This also  means that the assets  can rise or fall in value  due to market forces.  Profits are shared  Profits are shared  according to their  according to their  profit sharing ratio.  profit sharing ratio.      Generally the ratio is  Generally the ratio is  tilted toward the  tilted toward the active  financier because it is  partner which is  the sole capital  usually the  provider.  entrepreneur.      Note that the manager  only gets profits if he  sells the goods. He  cannot take the  benefit of asset  appreciation.   Funder.   All partners according    to their capital  Note that the  contribution.  financier’s liability is  limited to the capital  provided unless it has  given authority to the  borrower to incur debt  on its behalf      13
14. Musharaka arrangements do seem to have potential as a mechanism by   which a funder who is prepared to exercise some role in the venture,  can fund it under Islamic Finance principles.     Musharakah (or partnership/joint venture) contract    3. Murabaha      A Murabaha arrangement is one where the buyer and seller agree on  cost-plus pricing, such that the seller purchases the goods that the  buyer wants to buy, and the buyer then buys these from the seller,  paying him the marked-up price. The mark-up or profit (ribh, in Arabic),  gives this arrangement its name. The price can be paid progressively.     The seller has to take ownership and possession of the goods (in one  variant the buyer itself can wear the hat of an agent of the seller when  purchasing the goods, so that the seller can satisfy this requirement of  taking possession), and the seller must also bear the risk in the goods  while they are owned by him.     As with Muradaba, there is some textual support for the Islamic Prophet  Muhammad having engaged in Murabaha arrangements.     Murabaha transactions are commonly used in the financing of  commodities trades.         14
15. There are 4 variants of Murabaha that are typically used :    Murabaha variant  Features      Bay' bithaman 'ajil  In this, the buyer promised to purchase the goods  (BBA)  on a deferred payment. The original price of the  goods need not be disclosed to the Buyer.  Murabaha to the  Where the Buyer acts as the agent of the funder to  Purchase Order  satisfy the requirement of the funder’s actually  buying and taking possession of the goods.    Bay' al-Ina  In this, the transaction is essentially a refinancing,  with a focus on the purchase of an existing asset  (usually real estate or a vehicle) and sale back to the  Buyer. In such a transaction the focus seems to be  on providing the Buyer with liquidity, and  repayment with the markup.    Bay’ al-Tawarruq  This is a reverse-Murabaha (See diagram below). In  this, the funder purchases a commodity (which  cannot be among a prohibited category of  commodities) and then onsells this to the buyer,  who sells it in the course of his business to other  parties. The funder has therefore funded the  purchase by the buyer of the goods, and is repaid  with a markup in the way of a profit at a later period  of time.        Tawarruq (or reverse murabaha) contract           15
16. Part 5     DRAWING THE THREADS TOGETHER    A few insights jump out:    1. Addressing funding gap​. Current funding solutions do not serve the  needs of a large part of emerging markets. Harnessing growth will  require solutions other than those on offer from traditional financiers.     2. Trade finance as lever for impact and change​. The impact of  providing finance is multi-level and real. New solutions for funding  trade could transform the emerging world. We have written  previously on the impact of trade finance solutions that fund trade, in  14 terms of catalysing development.       3. New mindset needed​. New solutions will require funders to do  more, and actively manage their outlay to de-risk their capital. This  will require them to develop a new set of staff and a class of agents  on the ground whose role will be to get to know companies and  ecosystems well, to facilitate deployment of capital for mutual profit.     4. New insights​. Involvement in the trade finance process gives funders  visibility of traders’ performance. Credit or trading records can  contribute to better insights upon which financiers can make better  financing and pricing decisions in future trades.     5. Trust mechanisms needed​. As noted above, the inability to take a  view on a trader’s history impedes financing. A history of timely  payments made on a public blockchain can be trustably used to infer  credit worthiness. Such use of blockchain mechanisms offers a new  way to create trust among trade participants in emerging markets.  Transparency on transaction costs promote better credit through  recording trust in blockchain transactions. Further, inherent in the  use of a public blockchain, is the economic infeasibility of  double-spending (trying to cheat by showing a payment being made  but then diverting or cancelling it). The cost of faking a transaction in  order to cheat would far exceed the cost of acting faithfully and  honouring payment. Finally on this point, blockchain mechanisms  can also be used to maintain escrow pending fulfilment of payment,  as well as obligations to process the release of goods upon this  being done.       14 Read further on https://medium.com/kommercetf/trade-as-a-lever-for-impact-and-change-bd2394b0a4ff 16
17.   6. Risk sharing through Islamic Finance​. The 2008 subprime mortgage  crisis demonstrated the dangers of speculative leverages in the  traditional banking system. Islamic finance offers a natural circuit  breaker as financiers that have risk in deals and ultimately have to  collect on the deals they write, are unlikely to support writing of bad  deals. Islamic finance also supplies fresh perspective on ethical  dealing, such as respect for the entrepreneur and fair distribution of  profits from a venture. The financier takes actual risk rather than  merely assigning risks to the entrepreneur. This model seems ideal  to meet the needs of emerging markets.     7. Significant Muslim demographics​. The origins of Islamic Finance are  in interpersonal interaction. The sizeable Muslim population in Africa  represents a huge opportunity for the use of Islamic finance to  redefine the funding relationships. Where trust in emerging markets  is generally in short supply, Islamic finance offers perspectives on  conduct governing parties’ engagement in commerce.     8. Regulatory clarity needed​. Clarity will be needed on the legal  enforceability when it comes to Islamic Finance financial instruments  and products. Also, to the extent that the capital or the instruments  originate from within the target markets, governments there may  need to consider and execute changes in their regulatory  infrastructure to facilitate the deployment of and access to Islamic  Finance products. This will only be additive to the connectivity and  vibrance of their economies. It is the authors’ view that new  technologies such as blockchain and smart contracts will  demonstrate the ability for Islamic finance contracts to promote  trade finance and to validate to governments the potential of Islamic  finance in promoting growth and the benefit of taking early action to  promote it.          17
18. “Cometh the hour, cometh the solution”: A ​ doctrine for our times      Islamic Finance offers solutions whose time has come. Africa in  particular has a potential to be a true innovator for the Islamic finance  industry as well as being a market capable of absorbing such financing  in large enough quantities to make the economics significant on a  global level.        To end with a metaphysical view of Islamic Finance: In final analysis, the  doctrine is about regulating commercial interactions to promote  equitable growth, for the wellbeing of communities as a whole.     The Islamic world has over the last one and a half millennia been a  hotbed of enterprise and trade – indeed, Islam was brought to  Southeast Asia and South India by traders. Arabs have been plying the  North and East coasts of Africa for over a thousand years, similar to  Muslim traders from the subcontinent with their trade routes to  Southeast Asia. The story of seafaring cannot be written without  recounting innovations in astronomy and navigation that came out of  the Golden Age of Islam.     When we consider the main pools of capital in the world, three regions  stand out: There’s China, which has at an aggregate amassed great  wealth, through a combination of being the manufacturing base of the  world as well as through a clever bifurcation of its onshore and offshore  currencies. Today China’s wealth gives it an unprecedented level of  access to emerging markets, many of which are being bent to its  One-Belt-One-Road initiative (which is not without its challenges).    Then there is the US, which has led the world in many innovations, given  free rein to the entrepreneurial qualities of its residents, and where the  sheer amount of capital accumulated in private hands brings with it  market power to set terms, which usually pass on risk to borrowers  completely - Broadly speaking a winner-take-all approach to finance and  venture.     And you have the Islamic World, many parts of which since the second  half of the 20​th​ Century have been blessed with resources in abundance  and reaped riches beyond measure as a result.     Of these three very large pools of capital, ​only the Islamic World ​has its  indigenous set of rules on finance that are woven into the cultural and  religious traditions of the majority of its people, and that provide a  sound ethical underpin to how commercial relationships must be struck  and rewards from commerce shared.     18
19. The Guardian discussed the question of whether Islamic Finance was   similar to ethical banking, the response to which is set out below:    “There is some common ground. Some of the tenets of Islamic  banking will appeal to anyone, Muslim or otherwise, who agrees  with the underlying principles of equitable distribution for  everyone, the ideals of fair trading, spending of wealth judiciously,  and well-being of the community as a whole. These principles  15 result in an exacting ethical stance relating to investment.”     There’s a sense of deep unease in the West (bar Scandinavia and parts  of continental Europe) that present systems of commerce and  distributing the rewards from such ventures strips dignity away from  people, and reward only the very few, with everyone else left to feed on  crumbs. Approaches where just a few people win and everyone else  loses cannot throw up solutions for the developing world, nor should we  consider these a template for a better world.     Islamic finance is essentially a set of doctrines that a ​ s a fundamental  aim​, seek to achieve ​fairness a ​ nd d ​ ignity ​for people ​and c​ ommunities.     It is time the Islamic World owned this magnificent piece of their cultural  and religious traditions, and showed the world a new model for  engaging with the developing world. Moral authority and the riches of  emerging markets will crystallise around whoever, and whichever  system, steps up. And among the major pools of capital in the world  today, only the Islamic World starts with the advantage of having a  ready doctrine.     In our view, the conditions are ready for the use of Islamic Finance as a  handle to access and catalyse growth in emerging markets.     As an ancillary outcome, this positive involvement in catalysing growth  would also help change the conversation concerning Islam – too much  of which today is about conflict over religion, or in context of the shift  away from fossil fuels and towards renewable energy. Islamic Finance  may well give the Islamic World and its faith renewed relevance to  billions of people for generations to come, and be a source of renewed  pride for adherents of the faith, even as it gives the world its next surge  in growth.     ***    Author: ​Harveen Narulla  Co-Author: ​Izwan Zakaria  15 See the Q&A on Islamic Finance on The Guardian’s website at https://www.theguardian.com/money/2006/jun/13/accounts.islamicfinance 19