Navigating Islamic Finance: Embracing Divestment or Engagement for Ethical Investments

Prophet Muhammad (pbuh) said:

The world is sweet and green and verily Allah (SWT) has made you stewards in it.
– Sahih Muslim

The notion of convergence of Islamic Finance and ESG continues to be a point of interest particularly for those interested in investing. The question of whether to divest or engage is a continuous debate that is driven by a growing understanding of the significance of ethical investing and gathering momentum in the financial sector, however, with the prohibitions that exist in Islamic Finance which are based on Shariah. The question of whether to divest or engage is clear when it comes to Shariah compliance. This article focuses on divestment or engagement on ESG principles that are in tangent with Shariah principles. 

Islamic finance refers to financial practices that adhere to Shariah, the ethical principles of Islamic law.  As a result, Shariah compliance is a prerequisite for the completion of economic and financial transactions. The Shariah prohibits interest/riba, excessive uncertainty/gharar, games of chances and gambling/maysir and qimar. It also prohibits investments in industries such as alcohol, pornography, and production of ammunition.

Whether an investor decides to divest or engage, the primary motivation remains the reduction of harm.  This is based on Islamic legal maxim – there is to be no harm and no reciprocating harm, “Harm shall neither be inflicted nor reciprocated” (Sunan Ibn Majah, 2340). Everybody has an obligation, based on their capacity, to prevent harm based on the verse of the Quran (Qur’an 2:286) ‘Allah does not burden any soul more than it can bear’. 

Also, the concept of stewardship of the earth and its resources is emphasised in Islam. The responsibility of humans is to do good and refrain from doing bad as a vicegerent of Allah. The verse below underlines that since humans have been placed in charge of managing the earth, they have a duty to do so.

The Quran states that: 

“It is He who has made you successors on the earth and raised some of you in ranks above others, that He may try you in what He has given you. Indeed, your Lord is swift in penalty; but indeed, He is Forgiving and Merciful.” Qur’an 6:165

Divestment versus Engagement

Divestment, also known as disinvestment, involves selling or giving up one’s shares to a company. This is often the result of objecting to a company’s practices or policies.  It involves investors taking out their shares from portfolio businesses that don’t fulfil ESG standards. 

Allah (swt) says in the Quran:

“Corruption has appeared on land and sea by what people’s own hands have wrought; that He may let them taste the consequences of their deeds so that they may turn back” – Qur’an 30:41

In 2019, three Islamic faith-based organizations – the Bahu Trust, Islamic Foundation for Environmental & Ecological Sciences (IFEES), and the Mosques & Imams National Advisory Board (MINAB)  issued a unified demand for the divestment from fossil fuels and reinvestment in cleaner renewable energy as the sole means of ensuring a sustainable future for the current and future generations. This resulted in the first divestment commitment by a Fiqh Council – the Islamic Society of North America on fossil fuels in 2016.

There are arguments for and against divestment. The positives include raising awareness regarding certain issues and impacting consequences on companies that fail to meet certain ethical standards. In industries that rely heavily on investors, this is a more significant threat. However, the negative side of divestment is the loss of maintained influence, as the moment an asset manager sells their shares in a company, they can no longer be a positive influence on said company or pressure its board to implement more pro-social or pro-environmental policies. 

Engagement involves investors working with portfolio firms or issuers to help them manage or disclose ESG performance or concerns more effectively. It can take many different forms, including proxy voting, shareholder activism, and open communication with the company’s management. It is often encouraged before divestment occurs because it motivates investors to improve portfolio firms’ performance in order to achieve ESG goals. For instance, Engine No.1’s engagement effort with ExxonMobil led to it adopting more renewable energy and sustainable value creation by convincing big investors to vote for three new board members with backgrounds in clean energy.

There are verses in the Quran that encourage ‘enjoining good’ which can be used to argue for engagement in Islamic Finance. Investors can lean in to engage with companies that are falling short of their ESG obligations. 

Divestment and Engagement in Islamic finance are effective ways to advance ethical investing while upholding the fundamentals of Islamic finance. Investors can help to create a more sustainable and socially just financial system by divesting from unethical sectors and engaging with companies to promote ethical behaviour. Through these actions, Islamic finance can play a significant role in creating a more ethical and sustainable future for the global financial landscape. The maxim ‘severe harm is removed by lesser harm’ allows an investor to opt for the lesser of two harms. Ultimately, the decision lies with the investor in how much they are willing to engage with a company.

There’s still time to register for the Ethical Finance Global 2023 event by our partner GEFI.

Register today

An Ethical Convergence: Islamic Finance and ESG Principles

By Oyin BamgboseJuly 11, 20230 Comments

HOME / NEWS / FAITH IN FINANCE: COLLABORATING FAITHS FOR ECONOMIC INTEGRITY


In recent years, Environmental, Social, and Governance (ESG) considerations have become increasingly important in the financial industry. The term was first used by the UN Global Compact in 2005. ESG despite having financial relevance, originally was not a part of financial analysis.

The term “ESG” refers to a firm’s overall impact on the environment, society, and the strength and openness of its corporate governance, including matters such as executive compensation, company leadership, audits, internal controls, and shareholder rights. The environmental considerations center on how the company lessens its environmental impact, for instance, resource depletion, greenhouse gas emission, and deforestation. The social component is concerned with the way a company affects both workplace culture and the larger society, for instance, working conditions, including child labour and slavery; and health and safety. The term “governance” describes the procedures for making decisions, reporting, and managing the day-to-day operations of an organisation including issues on donations and political lobbying, corruption, and bribery.

Similarly, Islamic finance, which is guided by the principles of Islamic law (Shariah), continues to grow rapidly. Islamic finance refers to financial services – such as banking or investment – where money is raised and used in line with Shari’ah. It prohibits interests (riba), engagement with gambling (maysir), uncertainty (gharar), and prohibited industries like alcohol and pornography. It offers perspectives that aligns closely with ESG objectives. This blog post explores the reasons why Islamic finance is inherently compatible with ESG principles and how Islamic banks are taking steps to align with ESG principles. One area of convergence between ESG and Islamic Finance is that both encourage economic expansion and financial stability, as well as the protection of the environment and the eradication of poverty. For instance, countries like Saudi Arabia and Malaysia have begun to issue green and sustainable sukuk. These investments in environmental assets and renewable energy are compliant with Shari’ah.

Just like ESG, Islamic Finance requires screening out certain industries, the beneficiaries’/clients’ values must be reflected in the portfolios, together with the objective of creating a just and sustainable society and avoiding environmental or human harm. The screenings could be absolute, for instance, it could prohibit weapons, pornography, and cluster ammunition. Where the screening is relative, the rules can entail for instance barring businesses whose tobacco sales account for at least 10% of their total revenue. Companies or issuers that perform poorly in terms of ESG factors or that transgress international soft laws like the UN Guiding Principles on Business and Human Rights may also be excluded. Investments in conventional financial services, cigarettes, alcohol, pork, pornography, guns, gambling, human smuggling, and other goods and activities that are regarded as illegal are prohibited under Islamic finance, which is based on Shari’ah regulations.

Islamic finance places emphasis on investments in real assets and tangible projects that have a positive impact on society. This emphasis is consistent with the ESG philosophy of investing in businesses and initiatives that meet social needs, produce sustainable value, and improve the general well-being of communities.

Although similarities exist between ESG and Islamic Finance, there are areas of divergence. Islamic Finance prohibits security lending and shorting. ESG does not prohibit it but some investors running ESG investing strategies also will not partake in security lending and shorting, while others will apply rules that allow them to vote on shareholder resolutions.

Islamic banks are taking steps like their conventional counterparts to align with ESG. Some of them are signatories to the Principles on Responsible Banking like Al Baraka Banking Group (Bahrain), Gatehouse Bank (UK) and Jaiz Bank (Nigeria) which are fully Shari’ah compliant. A new three-year ESG strategy to incorporate ESG risk concerns within the banking framework was recently highlighted in the Abu Dhabi Islamic Bank’s second annual ESG report.

Overall, there is a chance to increase the influence of ethical and responsible investing due to the convergence of Islamic finance and ESG. It enables Islamic financial institutions and investors to include ESG factors and support sustainable development while upholding their core values and tenets. This convergence encourages the development of ethical finance, broadens the use of sustainable investment strategies, and helps create a more equitable and sustainable international financial system.


Register here to participate in the conversation on ESG at the Ethical Finance Global 2023 summit organised by our partner GEFI.




Faith In Finance: Collaborating Faiths for Economic Integrity

By Oyin BamgboseJune 16, 20230 Comments

HOME / NEWS / FAITH IN FINANCE: COLLABORATING FAITHS FOR ECONOMIC INTEGRITY


Faith groups have a long history of incorporating values into financial decision-making. For thousands of years, the world’s major faiths have included instructions on how to carry out business in an ethical manner, and the modern ethical finance movement has its roots in religious investment funds seeking to exclude weapons manufacturers from their portfolios in the 1970s. The Pax World Fund, launched in 1971 by Methodists in reaction to the Vietnam War, is still active today and known as Impax Funds.

In 2018, the Edinburgh Finance Declaration was launched by UKIFC in collaboration with GEFI and the Church of Scotland after a three-year dialogue. The Edinburgh Finance Declaration is a ray of hope in a world where economic systems frequently put financial gain ahead of morality. By working together, these institutions strive to promote financial integrity, responsible investment, and economic justice.

In this article, we look at the six shared values in operation in both Islam and Christianity which the Declaration identifies as providing an ethical framework. They are – StewardshipLove of the NeighbourHuman FlourishingSustainability & PurposefulnessJustice & Equity and the Common Good.

Stewardship

Both religions place an emphasis on stewardship which implies that the money we possess ultimately belongs to God and is to be spent in accordance with righteous moral standards, with investments made with the welfare of humanity in mind. In the Holy Quran (Q2:30), human beings have been appointed as vicegerents on earth and Genesis 1.26- 27 has a similar provision.

Love of the Neighbour

It suggests a sense of social duty and a dedication to advancing others’ well-being, rather than just expressing love or other forms of connection. It was reported by a companion of Prophet Muhammad (p.b.u.h) Abu Hurayrah that the Prophet (p.b.u.h) said: “Jibra’il kept enjoining good treatment of neighbours until I thought he would make neighbours heirs.” Loving one’s neighbour is also mentioned in Matthew 22:34-40. This concept helps to develop empathy, kindness, and care for other people.

Human Flourishing

It refers to a person’s condition of maximum well-being and development, during which time they are experiencing personal growth, fulfilment, and potential realisation not just for themselves but for the overall good. Additionally, it entails the capacity to completely embody the virtues of charity, compassion, and justice within a society through not only the advancement of commerce but also one that is mindful of the needs of all.

Sustainability and Purposefulness

The idea of stewardship means that human beings must take responsibility to manage the available resources and use them efficiently. Sustainability and environmental stewardship are frequently values that cross religious boundaries. By working together, religious groups can influence the financial sector to support initiatives that put focus on renewable energy, environmental protection, and ethical business practices.

Justice and Equity

Justice, equality, and compassion are values that are emphasized in both religious traditions. There can be cooperation in the financial sector to combat systematic injustices, poverty, and marginalisation. As a result of his concern for the extreme poverty of his parishioners, Rev. Henry Duncan founded the first savings bank – Ruthwell Parish Savings Bank in 1810 with the intention of promoting saving among the working class and protecting them from the degrading effects of poor relief. Interestingly, Mit Ghamr established the first Islamic bank on his model. Although both banks were short-lived, they were foundations for the recent banking models.

Common Good

This shapes how followers interact with and give back to their communities and the larger world, guiding their personal behaviour and informing both religions’ ethical teachings. This underscores the requirement to pay zakat. It is the third pillar of Islam which mandates that Muslims donate 2.5 per cent of their qualified wealth each year to support Muslims who are in need. Although voluntary, the idea of paying tithes in Christianity can be linked to this.

In conclusion, by working together, these institutions strive to promote financial integrity, responsible investment, and economic justice. The partnership between UK Islamic Finance Council (UKIFC) and the Church of Scotland serves as a model for interfaith cooperation and demonstrates the potential for transformative change within the community.





Investing in SDG-Aligned Products

In our recently published report, Attitudes of banking customers towards the UN SDGs, an impressive 87% of respondents stated that they would be willing to pay extra for SDG-aligned products. For a product to be SDG aligned, it must be connected to one or more of the existing 169 targets under the 17 SDGs. What exactly does that mean?

An SDG-aligned banking product is similar to a sustainability or green product. It can be a loan, bond, sukuk, or any other sort of financial product. The difference from a traditional product is that these specialty products are designed with a specific goal in mind, usually an environmental or social goal that can be measured. For instance, a green loan that is tied to a particular project may have different repayment amounts for different levels of success, such as cutting emissions from a particular business by 20% or 50%. In this case, the borrower would repay less if they achieved more of an emissions cut.

The findings from Attitudes of Banking Customers Towards the UN SDGs, recently released by GEFI and the UKIFC, found that 80% of Global North respondents and 89% of Global South respondents were willing to pay more for an SDG-aligned financial product. On average, the respondents were willing to pay a premium of up to 4.4%. That’s a significant amount, a clear demonstration that this is becoming more and more important to financial product clients all over the world.

There were variations in feedback that were most evident in age, with the lowest (18-24 year olds) and highest (65+) being willing to pay the lowest premium (3.8% and 2.1%, respectively). This is likely due to differences in awareness. Younger respondents are in the process of learning about financial products and exploring what works best for them, while older respondents may have concerns that impact-oriented investing may not be as effective as traditional investing. In both cases, clear educational tools and resources would be beneficial. Luckily, more and more research is finding that investing from a sustainability-backed approach does well to mitigate risk, tends to be less volatile, and is economically profitable.

When developing these financial products, financial institutions have an opportunity to impact genuine positive change. The OECD’s Framework for SDG Aligned Finance presented this beautifully with two primary objectives:

  1. Equality: resources should be mobilised to leave no one behind and fill the SDG financing gaps, and
  2. Sustainability: resources should accelerate progress across the SDGs.

This is pivotal as it emphasizes the need to make socially conscious decisions while addressing the SDGs, to ensure that investments in one area are not detrimental to another. For instance, suddenly shutting down all mining operations may be better for the environment, but it could leave the local population struggling if there is no other industry around. SDG financial products must be carefully designed to maximize positive benefit while mitigating the negative.

With a strong interest in SDG-aligned financial products from consumers and research supporting the economic benefits of such an investment, it is no wonder that impact investing has grown 63% from 2019 to 2021, surpassing $1.2 trillion according to the Global Impact Investing Network (GIIN). Demand is rising for positive investments that are good for people and good for the planet.

The findings from Attitudes of banking customers towards the UN SDGsa joint effort by GEFI and UKIFC, found consistently strong support for financial products that are SDG aligned. These products give banking clients the opportunity to directly support causes they feel strongly about, to invest in their communities, and to see positive returns for socially and environmentally aligned investments. It is empowering for clients, creates opportunities for financial institutions to invest in risk-mitigated, strategic, long-term projects, and fosters a sense of inclusion.


To support this important work, GEFI has designed the SDG Product Platform. Financial products are carefully assessed to ensure that they meet the goals they set for themselves, and GEFI works closely with the asset manager to maintain SDG alignment and economic benefit. Learn more about GEFI’s SDG Product Platform here:

SDG FINANCIAL PRODUCTS PLATFORM

Banking Customer Focus on UN SDGs

In the recently released joint report by the UKIFC and GEFI, banking customers discussed their perceptions regarding the UN and UN SDGs, and revealed where their values lie.

The report, Attitudes of banking customers towards the UN SDGs, took a particularly interesting approach as so often the focus is on how the UN SDGs can be integrated into a financial portfolio. Research is often framed from the perspective of the asset manager, government, or special interest nonprofit. Speaking directly to banking customers in different countries reveals the concerns of everyday people, not just industry experts.

Of the top UN SDGs that banking customers focused on, both the Global North and Global South prioritized Quality Education (Goal 4) (30% and 29%, respectively). There is an awareness of how vital it is, not only for children but for adults, to continue learning and growing as the challenges we face as a planet evolve. This goal spans generations and genders, as it highlights the importance of lifelong and gender-inclusive learning.

The top priorities for both Global North and Global South were focused around social equity and quality of life. Quality Education sets the foundation for the other goals of Zero Hunger (Goal 2), Gender Equality (Goal 5), Clean Water & Sanitation (Goal 6), and Affordable & Clean Energy (Goal 7).

Interestingly, the UN SDGs with the least amount of awareness for both the Global North and Global South are Life Below Water (Goal 14) and Life on Land (Goal 15), likely because they are broad, far-reaching goals. Both of these goals significantly impact those living in vulnerable areas such as islands or in areas sensitive to climate shifts, but they can come across as abstract concepts for people who don’t experience direct impacts of climate change in their daily lives.

The other SDGs that received the lowest engagement are Responsible Consumption & Production (Goal 12) and Partnerships for the Goals (Goal 17). Given that this survey targeted banking customers, it is likely that those particular goals seem best addressed at an institutional level. In support of this, it is worth noting that survey participants were strongly in favour of their banking institutions offering sustainability products.

The Global North and Global South agreed that Reducing Poverty and Hunger was the most important UN SDG to consumers. Of the global population, 8.9% are undernourished and roughly 8% are living in extreme poverty, meaning that these issues impact over 650 million people. With increasing environmental risks from climate change, these percentages are likely to increase as a direct result of droughts, shifting weather patterns, and planetary stress.

Recent publications from ESG Today to Reuters have stressed the importance of ‘zooming out’ to see the bigger picture beyond environmental metrics. It is important to remember that while we focus on particular issues, all of the UN SDGs are connected in one way or another. In cleaning up the oceans (Goal 6), we can create quality employment (Goals 7, 8, and 9), healthier communities (Goals 3, 11, and 12), and encourage global collaborations to unite and strengthen our sense of global community (Goals 16 and 17).


The best Islamic Finance Qualifications in 2022

Islamic finance has been hailed as a means to catalyze economic growth in the UK in 2022. For those of just starting out in the field- or looking to solidify our practice within it- now might be the perfect time to gain a qualification.

Islamic Finance Qualifications are a great way to integrate a Shariah and faith-based perspective to your pre-exisiting financial knowledge. Gaining an Islamic Finance Qualification represents a fantastic opportunity to learn how to implement Shariah principles in a business and insurance capacity, and to increase your subject-awareness more broadly.

Knowing what qualification to take can be a challenge, whatever stage of your career you’re currently at. To help you take your next step on your Islamic Finance journey, we have put together a directory of UK-based and remote qualifications to suit your learning needs.

UK-Based:


Remote Learning / Outside of the UK
:

The UKIFC has specialist capability in advising government agencies, regulatory bodies and financial institutions on creating enabling frameworks for Islamic finance, as well as empowering Shariah scholars and finance professionals. To find out how we can help you or your organisation, contact  info@ukifc.com


REPORT ANNOUNCEMENT: Innovation in Islamic Finance: Green Sukuk for SDGs

New report estimates an additional US$30-50bn can be raised by 2025 through green and sustainability sukuk  to deliver the United Nation’s Sustainable Development Goals.

Indonesia – 28th September 2021, United Nations Development Programme (UNDP), in partnership with the Islamic Finance Council UK (UKIFC), has today launched a pioneering report setting out the important role Islamic finance can play in delivering the finance needed across the world’s most vulnerable regions.

The UN Climate Summit (COP26) in Scotland, in less than six weeks’ time, brings together world leaders to hammer out a deal to reduce greenhouse gases and adapt to the impacts of climate change. The report shows how green sukuk bonds can provide a major part of the US$100bn in climate finance needed for developing countries.

UKIFC Managing Director Omar Shaikh presented the report’s findings to over 500 senior finance leaders at the first Islamic Finance and the Sustainable Development Goals Virtual Global Summit that took place today.

Sales of new Green sukuk bonds have grown from US$500m in 2017 to US$3.5bn in 2019. The Republic of Indonesia (ROI), in partnership with the UNDP, issued the world’s first Government  green sukuk in March 2018 (raising US$1.25bn) and the world’s first retail green sukuk in November 2019 (raising IDR1.4trn or USD$104.4m).

The report takes a detailed look at the best practice approach to green sukuk taken in ROI and other Islamic finance regions.

REPORT FINDINGS: 

  • Upfront investment is needed to develop a green framework and  independent certification to assure investors that green sukuk bonds are not greenwashing.
    • Demand from western global investors for Environmental, Social, and Corporate Governance (ESG) investments gives green sukuk bonds  the opportunity to attract  major new investors who otherwise would not have considered sukuk bonds for their portfolios.
    • Green or sustainability sukuk bonds might lower the cost of raising vital climate finance. Malaysia has seen the largest volume of sukuk issuances supported and facilitated by a number of Government initiatives.
    • Indonesia has a very limited corporate sukuk market and has not seen any corporate green sukuk issuances. There is a need to ensure sukuk have a level playing field with no additional burdens in comparison to conventional bonds; in addition, tax incentives could encourage corporate sukuk issuances.
    • The opportunity is there for Shariah scholars to positively influence ESG aspects as part of their Shariah review of sukuk issuances.
    • A challenge within the Islamic finance industry is the general lack of experience and depth of knowledge in relation to ESG matters. It is recommended organisations such as the Accounting and Auditing Organization for Islamic Financial Institutions take a lead and develop guidance for Shariah scholars.

The principles of Islamic finance are underpinned by the objectives of Islamic law and match many of the aims and objectives of the agenda for sustainable development goals adopted by all United Nations Member States in 2015 to provide a shared blueprint for an urgent call for action by all countries to end poverty, improve health and education, reduce inequality, and spur economic growth – all while tackling climate change and working to preserve our oceans and forests.

The report demonstrates how this unique alignment of the SDGs and Islamic finance provides a clear opportunity for green sukuk bonds to bridge the gap in private sector finance needed to meet countries’ climate targets and  accelerate achieving their wider Sustainable Development Goals.

You can access the report in full here.

See also:

https://ukifc.com/sdg/

https://ifikr.isra.my/library/SR/1

 


UKIFC experts quoted in Chartered Banker Magazine article 'Progressive Pakistan'

The Islamic Republic of Pakistan is by most standards a young country – its founding in 1947 was not without both complication and conflict, and historical political divisions have frequently laid obstacles in its mission to forge a path as an influential and modern Islamic republic. Today, however, the impact of decades of globalisation – along with economic growth across South Asia – puts the country in a strong position, most significantly demonstrated by its increasingly dynamic banking and finance sector.

This article originally featured in the Spring 2021 edition of the Chartered Banker Magazine - click here to download

As the world’s fifth most populous state, Pakistan is nothing if not a significant player in the South Asia region. Its current economic indicators do, however, tell a story of a country that up to now has been relatively slow to develop in its infrastructure, health and education, and business environment.

The hesitant pace of growth and development can be viewed through the lens of a challenging domestic political scene that saw the country struggle until recently to establish a more stable democracy. However, Pakistan has benefited from structural reforms in recent years that have injected new impetus into its continuing transformation as a modernising republic.

A $6.3bn cash facility from the International Monetary Fund (IMF) in 2013, for one, was designed to help Pakistan stabilise its public finances and address energy supply shortages, and measures to attract much-needed foreign investment brought inflows of $3.1bn in 2019-20 – of which the financial sector was the second-highest beneficiary.

Despite some bumps in the road, the positive consequences for banking and financial services in the country are now being felt across the board in Pakistan. The country’s central bank, State Bank of Pakistan (SBP), notes the progress made in financial inclusion across such a vast population, saying: “In June 2018, we had 64 million unique accounts in operation, which reflects a penetration of more than 50% of Pakistan’s adult population. As of June 2020, we now have 73 million unique accounts, of which 61% are active.”

These accounts are a mix of traditional branch accounts and digital/mobile platforms – the very territory that is ripe for further expansion. And, given that the Pakistan Telecommunication Authority (PTA) reports some 93 million citizens as having broadband access, the potential for further penetration looks promising.

It could be cited that there are three ways in which the country’s financial sector has managed to blossom under such a transformative environment for banking worldwide. A key piece in the jigsaw is the autonomy that SBP now enjoys in making vital monetary policy decisions. The reforms go back to 1994, with further powers being subsequently granted in 1997.

“The changes in the State Bank Act gave full and exclusive authority to the State Bank to regulate the banking sector, to conduct an independent monetary policy, and to set limits on government borrowing from SBP”, which had been enacted in the SBP Act 1956. “SBP formulates and monitors monetary and credit policy, and in determining the expansion of liquidity, it takes into account the Federal Governmentʼs targets for growth and inflation that the Bank [operates] in a manner consistent with these targets.”

Secondly, the momentum for digitisation in Pakistan means increasing the share of online banking, whether that includes retail point-of-sale payments or opening and using e-wallets issued by FinTechs. SBP has capitalised on the digital shift by collaborating with the Pakistani government to allow its citizens living abroad easy access to retail investment opportunities back home by launching the Roshan Digital Account (RDA).

“During the past four quarters, the number of registered mobile phone banking users increased by three million to reach8.9 million.”
Institute of Bankers Pakistan

But perhaps a most prominent characteristic of the financial sector here is the growth and development of a highly developed alternate – or Islamic – banking system.

The Islamic banking impact

As an Islamic republic, Pakistan is strategically and culturally well placed to develop Islamic finance products. It is one of the very few jurisdictions to enjoy explicit constitutional support for it, and this in turn has increased incentive and backing for its development from the state.

According to SBP, the government has used a number of legal and regulatory initiatives to help nurture Islamic banking. As part of the National Financial Inclusion Strategy, it is determined to increase the share of Islamic banking to 25% of the banking industry, and its branch network to 30% by 2023. SBP has enjoyed a pivotal role in promotion and development of the Islamic banking industry and, as a result, is recognised today as a stable and resilient segment of the overall sector.

Although often seen as niche banking instruments, Pakistan has been cannily nurturing a sub-sector of Sharia-compliant* products and services since the early 1980s, with the result that it has grown substantially in both appeal and reach.

SBP reports 22 Islamic banking institutions operating in the country, including “five fully fledged Islamic banks, one specialised bank and 16 conventional banks with Islamic banking branches”. In the financial year ending 2020, a further 361 branches were added to a network already spanning 3,274 branches in 122 districts. Lower-income citizens are also are part of the commitment to growth, with banks such as NRSP and MCB-Islamic offering a range of Islamic microfinance solutions.

S. Fahim Ahmad, a Karachi-based Senior Adviser to the UK Islamic Finance Council (UKIFC), has more interest than most in the positive impact of Islamic finance. A former senior banker with Citibank and passionate supporter of sustainable charities, he was asked to set up Pakistan’s representation to the Global Islamic Finance UN SDGs Taskforce, which aims to ensure that it can actively engage with the 17 UN Sustainable Development Goals (SDGs) and make Islamic finance part of this global initiative.

“The team at State Bank of Pakistan were easily convinced of the benefits of such a cause,” he explains. “They had never done this before, as their role is more that of a regulator. But they are ina position to manage the banks much better than I could.”

In November 2020, the Pakistan chapterof the Taskforce was launched, enrolling the support and participation of seven Islamic and conventional banks which it was felt could best drive forward the mission. Its four key objectives include enhancing engagement with the UN SDGs – but also to promote Principles of Responsible Banking (PRB); facilitate alignment tools that deliver on additional areas such as green financing and the Global Ethical Finance Initiative (GEFI); and share international experiences.

“This collaboration between SBP and UKIFC is a novel concept,” continues Ahmad. “The idea is to replicate this in other markets. We have had to catch up in many respects with developed Islamic finance markets, and this is a good chance to make up for that.”This level of engagement is a far cry from the early days when legal issues tended to slow the growth of Islamic banking in Pakistan.

Finally, after 2000, the founding of the country’s largest Islamic bank, Meezan, was made possible when the SBP agreed to scope out proper guidelines and a regulatory framework. Today, Islamic banks in Pakistan are so successful, they have a surplus of liquidity, which inevitably needs to find a home in investment instruments that are considered halal (permissible or lawful).

“There’s no doubt in my mind that there’s a huge demand for Islamic finance products,” adds Ahmad. “The impact of wider regional change in 1979-1980 had fundamentally changed the relationship we have since had with Islam, and the younger generation is, by extension, now more into Islamic banking.

”However, there is still no global uniformity among Sharia scholars about the acceptability of different products – and there is extensive room for growth yet. What will make Islamic banking take off in Pakistan? Ahmad argues that this will happen if the government uses it on a large scale, for example through sovereign or corporate bonds in sovereign sukuk.

“Social good is a key part of Islamic finance,” he adds. “Islamic banks hold a lot of liquidity as we know, and if they can deploy that into productive, socially impactful use, the whole economy will benefit.”

Pakistan banks on faith

A recent joint survey held by SBP and the UK Department for International Development identified an “overwhelming demand” for Islamic banking, regardless of whether or not the respondents were urban or rural. A huge majority (94.51%) came out in favour of the prohibition on interest, with 88.4% regarding contemporary bank interest as a similarly prohibited practice.Even non-banked respondents echoed the sentiment, at 98% and 93% respectively, and 62% of those who are banked would willingly pay more for Islamic banking products due to religious preferences.

As with other jurisdictions worldwide, however, the shift towards contactless and e-wallet transactions is strengthening the hand of the non-bank sector too. This has not been lost on SBP which, in 2019, responded by enabling “electronic money institutions” access to Pakistan’s payments ecosystem. It is only a matter of time before the pace of innovation injected into the sector will transform people’s payment habits across the country.

Facing the future with confidence

As the world starts to deal with the economic fallout from the coronavirus pandemic – which, in many countries, is still in full flow – Pakistan’s financial sector seems to have shown a healthy degree of resilience in the face of the shock of 2020. SBP puts this down to capital buffers put in place over the long term to strengthen the banks’ position. The higher capital adequacy ratio (CAR) of 19.5% at the end of September 2020 put Pakistan beyond the minimum local and global requirements for its banking system. Liquidity has also been uninterrupted following state interventions to support key parts of the economy during this period.

From this position of strength, therefore, Pakistan is able to focus on at least three priorities among many that will shape its financial sector into a growing force for the economy: continued digital transformation, affordable lending instruments for housing, and programmes to reduce the gender gap in access to finance.

On the digital front, the Digital Pakistan Policy and the National Financial Inclusion Strategy are two initiatives that hold promise in the battle to reduce the informal economy and make FinTechs a productive addition to the domestic market. In particular, the launch of Raast, an instant digital payment system, will be an innovative step forward in reducing citizens’ reliance on cash while making transactions cheaper.

This collaboration between State Bank of Pakistan and the UK Islamic Finance Councilis a novel concept... We have had to catch up in many respects with developed Islamic Finance markets, and this isa good chance to makeup for that.
Islamic Finance Council, UK

Long-term property lending policies – where SBP has given mandatory lending targets to banks on their housing portfolios and developers are being offered incentives – should help boost a sector badly in need of modernisation to benefit future homeowners.Third is the launch of SBP’s Banking on Equality Strategy, where a “gender lens” will be applied to the industry to ensure increased financial access for women based on a set of approved measures.

When viewed in the context of an often-turbulent history, there’s little doubting the progress made to date in Pakistan’s journey of banking and finance. The policies, commitment, and liquidity – three factors crucial to any developing economy – should herald a more prosperous and dynamic economy well into this century.

No one left behind

According to State Bank of Pakistan (SBP), women are disproportionately underserved by the country’s financial system. With only around 25% of bank accounts held in the name of women (even fewer are actually active), it has been widely accepted by government that economic development cannot be achieved without a healthier approach to reducing the gender gap. The bank has therefore created a policy entitled Banking on Equality: Reducing the Gender Gap in Financial Inclusion to ensurea manageable but proactive shift towards women-friendly business practices. The draft policy was presented in December 2020 for consultation.


UKIFC is proud to support the Path to COP26 campaign

UKIFC is proud to be a signatory of the Path to COP26 campaign from the Global Ethical Finance Initiative. We are supporting the Faith in the SDGs stream of the campaign, which seeks to bring together, diverse global faith groups to drive change in finance through ethical leadership and stewardship of their endowments, bringing faith to finance, and finance to faith at the crucial Glasgow summit in 2021

Alongside UKIFC, signatories include major financial institutions such as NatWest Group, Baillie Gifford and Aberdeen Standard Investments, professional bodies such as Chartered Banker and CISI, and campaign groups and NGOs including Make My Money Matter and NatureScot.


UKIFC experts explain why UK and UAE fintechs could be taking on the world together - Arabian Business

This article originally appeared at https://www.arabianbusiness.com/banking-finance/457790-why-uk-uae-fintechs-could-be-taking-on-the-world-together.

The UK and the UAE fintech markets will see major regional cross-collaboration in the coming years, according to experts.

Fintech – including Islamic fintech - is a growing industry globally. Britain is now home to 27 Islamic fintechs, followed by Malaysia with 19, the UAE with 15, Indonesia with 13, and Saudi Arabia and the US with nine, according to IFN FinTech.

Global investments in Islamic economy-relevant companies totalled $11.8 billion in 2019/20, according to the State of Islamic Economy 2019/2020 report by Dinar Standard.

Islamic fintech attracted 41.8 percent of the investments. This figure reflects corporate-led mergers and acquisitions, venture capital investments in tech start-ups, and private equity investments, the report said.

British fintech boom

The UK’s fintech start-up scene has seen an injection of Islamic-focused firms in recent months, which abide by interest-free Sharia laws and avoid ‘unethical’ investments, such as alcohol and gambling.

My Ahmed, a sharia-compliant e-money platform, was accepted into the Financial Conduct Authority’s regulatory sandbox in July. In the same month, Islamic peer-to-peer lending platform Qardus launched UK services, along with trading platform Minted and sharia-compliant ethical banking alternative, Kestrl.

This year, Islamic banking app Niyah and sharia-complaint digital bank Rizq also launched in the UK.

My Ahmed is a sharia-compliant e-money platform

The UK’s large Muslim population has played a major role in helping to establish London as the focal point of Islamic financial services in the west. About 4.5 percent of the British population is Muslim, according to the 2011 census. More than a million of the UK’s 2.8 million Muslims live in London.

What’s more, Britain’s Muslim population is growing - and getting wealthier. The average monthly income of those born locally, with at least one parent born in Britain, is £1,219, compared with £815 for those who arrived aged six or older, according to the Economist Intelligence Unit.

UK-UAE crossover

Former Lord Mayor Peter Estlin, the global ambassador for the UK’s financial and professional services industry, visited the Gulf in January 2020 to help strengthen fintech trade and investment ties.

Discussing emerging opportunities for collaboration between the region and the UK, he said: “British business and innovation across financial and professional services has much to offer partners in the region, whether it be in currency trading and asset management, or growing areas like fintech and green finance."

Former Lord Mayor Peter Estlin, the global ambassador for the UK’s financial and professional services industry

According to Umer Suleman, board member, UK Islamic Finance Council (IFC), the UK finance market is mature with a strong regulatory landscape and a legacy of innovation. These British strengths offer partnership benefits for the UAE, Suleman said.

“The UK has launched many products and we know how to utilise financial technology,” the UK IFC board member told Arabian Business. “We know finance can go wrong - however, we’ve seen the resolution and evolution of products and services over time.”

“The Gulf has a great appetite for new innovative ideas. UK experts can offer their experience in terms of implementation and help build the region’s products and ecosystems,” said Suleman, adding that the Middle East’s high mobile phone penetration, legacy-free systems and flowing capital are boons for fintech growth.

“The Middle East is very open to using Islamic fintech but the [domestic] innovation isn’t fully there yet as it takes a while for research facilities to grow,” he added.

Gaurav Dhar, a global fintech investor and founder of Dubai-based digital payments firm Marshal, said London has a “huge history” of creating financial products and exporting them globally.

“This experience has flowed through into the digital age,” Dhar told Arabian Business.

Stella Cox CBE, Islamic finance government lobbyist and managing director at financial market intermediary DDCAP Group

Strong fintech dialogue

The Marshal founder said that a strong fintech dialogue has already begun between the UK and Gulf governments.

“It’s important that this conversation continues. There is a lot of opportunity for the exchange of technology, ideas and learning.

"While the UK has more to offer at this stage in terms of technology, the cross-regional fintech relationship is still in the early stages and will continue to grow organically.”

Stella Cox CBE, Islamic finance government lobbyist and managing director at financial market intermediary DDCAP Group, said there is major scope for cross-collaboration in the fintech space as the Gulf states continue to develop their cryptocurrency and digital payments ecosystems.

“The UK Islamic fintech community are creating its own ecosystem at the moment which is quite exciting. There is a lot of opportunities to share intellectual capital [between the UK and the Gulf] and I’m sure we’re eagerly looking at each other’s regulatory sandboxes at the moment,” she told Arabian Business earlier this month.

The potential for crossover and authorisation in one market attracts the attention of other proximate markets, Cox added.

“I see this dynamic extending beyond the Middle East into South East Asia as the Islamic fintechs create their own dynamic.