Islamic finance and the Post-2015 Development Agenda
1. ISLAMIC FINANCE
AND THE
POST-2015 DEVELOPMENTAGENDA
Dr. Mahmoud Mohieldin
THE DURHAM ISLAMIC FINANCE SUMMER SCHOOL
September 3rd, 2014
1
2. Outline
ā¢ Financing Sustainable Development: from Millennium
Development Goals (MDGs) to Sustainable Development
Goals (SDGs)
ā¢ Key Pillars of Sustainable Development Financing
ā¢ Financial Development and Poverty Alleviation
ā¢ Islamic Finance ā A Pro-development Financial System
ā¢ Examples of Shariah Compliant Instruments for Financing
Development
2
5. 1. End poverty in all its forms everywhere
2. End hunger, achieve food security and improved nutrition, and promote sustainable agriculture
3. Ensure healthy lives and promote well-being for all at all ages
4. Ensure inclusive and equitable quality education and promote life-long learning opportunities for all
5. Achieve gender equality and empower all women and girls
6. Ensure availability and sustainable management of water and sanitation for all
7. Ensure access to affordable, reliable, sustainable, and modern energy for all
8. Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent
work for all
9. Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation
10. Reduce inequality within and among countries
11. Make cities and human settlements inclusive, safe, resilient and sustainable
12. Ensure sustainable consumption and production patterns
13. Take urgent action to combat climate change and its impacts*
14. Conserve and sustainably use the oceans, seas and marine resources for sustainable development
15. Protect, restore and promote sustainable use of terrestrial ecosystems, sustainably manage forests, combat
desertification, and halt and reverse land degradation and halt biodiversity loss
16. Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and
build effective, accountable and inclusive institutions at all levels
17. Strengthen the means of implementation and revitalize the global partnership for sustainable development
5
Proposed Sustainable Development Goals
(SDGs)
6. Financing Development Post-2015
6
Source: Financing for Development Post-2015, World Bank (2013)
Innovative Financing
ā¢ Improve taxation capacity
ā¢ Harness sustainable streams of natural resource
Revenue
ā¢ Improve expenditure efficiency
ā¢ Curb illicit financial flows
ā¢ Encouraging private investment through an enabling policy
environment, which includes a good public investment program, is
crucial for growth and for creating opportunities.
ā¢ Developing financial institutions and markets will facilitate economic
growth by mobilizing savings and allocating savings to the most
productive uses.
ā¢ Improving financial inclusion enables better access to finance for
small firms and to financial and payments services for households.
ā¢ Developing countriesā financial markets will play an increasing role in
intermediating external capital flows than they do today.
ā¢ Developing countries are projected to account for about half of
global capital inflows in 2030, up from about 23 percent in 2010.1
ā¢ ODA has been relatively stable source of development
financing for the poorest economies.
ā¢ A substantial increase in ODA is unlikely in the near future.
ā¢ Evolving aid landscape:
ā¢ Aid from OECD-DAC donors declining in importance
o Other official flows (OOF) less dynamic, more volatile
o Non-DAC donors and private institutions growing
o Emerging market economies contributing more
o Private philanthropy, vertical funds on the rise
ā¢ New partners promote their own economic and strategic
interests and meet needs not addressed by traditional
donors.
ā¢ Foreign direct investment (FDI) has been a dominant source
of external private financing.
ā¢ Over the past decade, many countries have demonstrated an
increasing ability to access international capital markets,
despite some slowdown after the recent crisis.
ā¢ Between 2000 and 2012, international long term debt flows
ā bonds and syndicated bank lending ā increased four-fold.
ā¢ Low income countries have less market access, however.
ā¢ Overall, there is great need to leverage diverse sources of
financing to meet investment needs for development, such
as for infrastructure.
Domestic Resource Mobilization
Better Smarter Aid
Domestic Private and Financial Sectors
External Private & Financial Sector
8. Key Pillars of
Sustainable Development Financing
ā¢ Domestic public financing
ā¢ Domestic private financing
ā¢ International public financing
ā¢ International private financing
ā¢ Blended finance
Source: Report of the Intergovernmental Committee of Experts on Sustainable Development Financing (2014), United Nations
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9. Financing Flows by Type of Finance
9
Source: Report of the Intergovernmental Committee of Experts on Sustainable Development Financing (2014), United Nations
10. Financing Flows by Type of Finance
(Contād)
Developing Countries Least Developed Countries
10
Source: OECD DAC Stats, World Bank Migration and Remittances Data, 2014.
11. Net capital flows to developing countries
Estimated world inward FDI flows to developing
economies by sector and industry 2009-2011*
Net capital flows to developing countries in 2012 ($ billions)
11
Source: World Bank ā World Development Indicators Database, 2014.
12. Magnitude of Investment Needs to achieve
Sustainable Development
12
Source: UNTT Background Paper1, axis is in logarithmic scale
13. Flows of funds from international and
national financing sources to sustainable
development
13
Source: Report of the Intergovernmental Committee of Experts on Sustainable Development Financing (2014), United Nations
15. Higher levels of financial
development cause:
ā¢ a faster decline in the fraction of
population living below the
poverty line.
ā¢ a lower incidence of poverty
compared to other countries at
the same income level
Empirical evidence shows:
ā¢ a 10 percentage point increase in
private credit to GDP ratio
reduces the share of the
population in poverty by 2.5 to 3
percentage points
ā¢ a 1 percentage point increase in
private credit to GDP reduces
malnourishment by 0.2 to 2.5
percentage points
Romania
-2 -1 0 1 2
-4
-2
0
2
4
Slovenia
Jamaica
Malaysia
Thailand
Mali
Zambia
Uganda
Ghana
El Salvador
LAO PDR
ā Residuals ā Fitted Values
Cluster Representing
Most Countries
Change in poverty
headcount
Sources: Beck, DemirgĆ¼Ć§-Kunt, and Levine (2007); Honohan (2004), Claessens and Feijen (2007).
Private credit as a
share of GDP
15
Research has shown that financial sector
development reduces poverty levels
16. In countries with more developed
financial intermediaries:
ā¢ Income inequality falls more
rapidly (declining Gini
coefficient)
ā¢ Income of the poorest 20%
grows faster
ā¢ Credit constraints on the poor
are less severe, helping capital
allocation and improving
growth
Vertical axis: Income Inequality āchanges in Gini coefficient (1960-2005);
Horizontal axis: Financial Sector Development ā logarithm of private sector credit to GDP ratio
(period average).
Source: Beck, DemirgĆ¼Ć§-Kunt, and Levine (2007).
16
There is also evidence that financial sector
development reduces income inequality
17. ā¢ The global financial crisis created 22 million new unemployed in a single year as many economies
around the world slid into recession (World Development Report, 2013)
ā¢ In a crisis, the poor are often the most vulnerable to the loss of assets, increased unemployment
and the disappearance of income-generating opportunities.
17
Soundness of
financial systems is critical to
ensure sustainable development
19. Foundations of an
Islamic Financial System
19
ā¢ Encourages its banks to have greater capitalization.
ā¢ Consistent evidence of higher capitalization of Islamic banks.
ā¢ Eliminates pure debt securities from the financial system.
ā¢ Calls for bank deposits to be collected on a profit/loss- (PLS) sharing basis rather than fixed
predetermined liabilities.
ā¢ Ensures a close link between the real economy and financial sector.
ā¢ Affirms property rights and contract enforcement (honoring of debt obligations).
ā¢ Emphasizes principles of morality and ethics in business conduct.
ā¢ Advocates the sharing of risk and reward between the rich and poor.
20. Improving financial
stability
Improving depth,
breadth and efficiency
Enhancing access to
financial services
ļ§ Islamic financial institutions may be more resilient
to unforeseen shocks
ļ§ They also help to further diffuse risk in the financial
system (the spare tire argument)
ļ§ Diversification of financing sources
ļ§ Providing competition to conventional financial
institutions
ļ§ Widening the range of products and services
available to businesses and households
ļ§ Improving access of the underserved to financial
services
20
Islamic finance improves overall
financial sector development
21. Islamic Finance ā
A pro-development financialsystem
ā¢Economic and
Social Justice
ā¢Inclusive Growth
ā¢ Entrepreneurship
ā¢ Redistributive
Instruments (Zakaat,
Qard-al-Hassan,
Waqf, Sadaqaat, etc)
ā¢ Economic Institutions
ā¢ Property Rights
ā¢ Contracts,
ā¢ Trust
ā¢ Rules of Markets
ā¢ Business Ethics
ā¢ Prohibition of
Interest,
ā¢ Promotion of
Exchange and Trade
ā¢ Information
Asymmetry (gharar)
Risk Sharing
Corporate
Governance
and
Leadership
Economic
Development
Financial
Inclusion
21
22. The Islamic Financial System
and Sustainable Development
ā¢ Foster Inclusion through Community Banking
ā¢ Encourage Ethical and Socially Responsible Investments
ā¢ Embrace Socio-economic Justice
ā¢ Emphasize Fair Wealth Accumulation and Distribution
ā¢ Reinstate value for money and streamline its supply as a
medium of exchange
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23. ā¢ Islamic principles of poverty alleviation are based on the Islamic
views of social justice and the belief in Allah Almighty.
ā¢ Islamic approach involves a holistic approach with set of anti-poverty
measures:
23
Poverty Eradication Scheme of Islam
Positive Measures Preventive Measures Corrective Measures
Income Growth
Functional Distribution
of Income
Equal Opportunity
Control of Ownership
Prevention of
Malpractice
Compulsory Transfer:
Zakah
Recommended Transfer:
Charity
State Responsibility
The Islamic Financial System
and Sustainable Development
24. Financing business enterprises, including
SMEs and innovative entrepreneurs
Financing infrastructure projects
Improving the poorās access to financial
services
Supporting social investments in education
and health
Supporting āgreenā investments to address
climate change
24
Islamic finance contributes to higher growth, reducing
inequalities and enhancing the sustainability of growth
25. Islamic Financial
Institutions
Profit Oriented
Business
process
Asset growth
Good
Corporate
Governance
Zakat and
Islamic Social
Institutions
Social Oriented
Empowerment
process
Beneficiaries
coverage
Good Amil
Governance
25
The Role of
the State
Economic Justice
and Welfare
Oriented
System Approcah
Economic
Growth and
Distribution
Efficient and
Accountable
Bureaucracy
The Role of
the Society
Individual
Productivity
Oriented
Careness, Love
and Affection
Fulfillment of
āSharing Spiritā
Support to IFI
and ZISI
The Islamic Financial System and Sustainable
Development (Contād)
26. Zakah can fill Poverty Gaps in 20 Muslim Countries
26
(1)
Country name
(2)
Survey year
(3)
GDP
PPP
Current USD (Billion)
(4)
Muslim pop.
(%)
(5)
Adjusted GDP PPP
USD (Billion)
(6)
Domestic Zakah
(Billion USD)
(7)
Incoming
remittances
(Billions USD)
(8)
Domestic savings rate
(% of GDP)
(9)
Zakah considering
Remi-ttances
(% of GDP)
(10)
resource shortfall
under $1.25 per
annum as % of GDP
(11)
Does Zakah
cover (10)?
Albania 2008 26.45 79.9 21.13 0.38 1.50 1.60 1.44 0.01 y
Algeria 1995 129.75 98 127.16 2.29 1.12 28.11 1.77 0.14 y
Azerbaijan 2008 76.73 99.2 76.12 1.37 1.55 64.89 1.82 0.01 y
Bangladesh 2005 163.73 89.6 146.70 2.64 4.31 18.06 1.62 5.58 n
Benin 2003 9.14 24.4 2.23 0.04 0.06 5.98 0.44 5.78 n
Burkina Faso 2003 12.09 59 7.13 0.13 0.05 4.51 1.06 9.83 n
Cameroon 2007 39.77 17.9 7.12 0.13 0.17 18.53 0.32 0.26 y
Comoros 2004 0.63 98.3 0.62 0.01 0.01 0.00 1.77 8.89 n
Cote d'Ivoire 2008 34.30 36.7 12.59 0.23 0.20 17.85 0.66 2.05 n
Djibouti 2002 1.24 96.9 1.20 0.02 0.01 4.87 1.75 1.49 y
Egypt 2005 333.22 94.6 315.22 6.30 5.02 15.71 1.90 0.04 y
Gabon 2005 17.84 9.5 1.69 0.03 0.01 58.35 0.17 0.03 y
Gambia 2003 1.46 95 1.38 0.02 0.06 11.05 1.72 5.42 n
Guinea 2007 9.78 84.4 8.25 0.15 0.15 9.68 1.52 6.71 n
Guinea-Bissau 2002 1.26 42.2 0.53 0.01 0.02 0.00 0.76 8.21 n
Guyana 1998 1.54 7.2 0.11 0.00 0.01 16.94 0.13 0.88 n
Indonesia 2009 965.57 88.2 851.63 8.52 6.79 33.76 0.89 0.39 y
Iran 2005 643.50 99.4 639.64 11.51 1.03 41.09 1.79 0.02 y
Iraq 2007 94.97 99 94.02 1.69 0.00 0.00 1.78 0.09 y
Jordan 2006 26.14 98.2 25.67 0.46 2.88 0.00 1.77 0.01 y
Kazakhstan 2007 169.63 56.4 95.67 1.72 0.22 43.84 1.02 0.00 y
Kyrgyz Republic 2007 10.62 86.3 9.17 0.16 0.71 0.00 1.55 0.02 y
Malaysia 2009 384.88 60.4 232.47 4.18 1.13 36.03 1.09 0.00 y
Maldives 2004 1.20 98.4 1.18 0.02 0.00 46.15 1.77 0.02 y
Mali 2006 12.67 92.5 11.72 0.21 0.21 14.75 1.67 8.20 n
Morocco 2007 127.85 99 126.57 2.28 6.73 23.37 1.81 0.06 y
Mozambique 2008 18.89 22.8 4.31 0.08 0.12 1.57 0.41 13.62 n
Niger 2007 9.25 98.6 9.12 0.16 0.08 0.00 1.77 8.31 n
Nigeria 2004 224.62 50.4 113.21 2.04 2.27 0.00 0.91 8.26 n
Pakistan 2005 340.26 96.3 327.67 5.24 4.28 15.21 1.55 0.91 y
Senegal 2005 18.21 96 17.48 0.31 0.79 14.09 1.74 3.05 n
Sierra Leone 2003 2.72 71.3 1.94 0.03 0.03 0.00 1.28 16.10 n
Suriname 1999 2.02 15.9 0.32 0.01 0.00 11.25 0.29 0.61 n
Syrian Arab 2004 70.02 92.2 64.56 0.97 0.86 20.20 1.39 0.02 y
Tajikistan 2004 8.77 84.1 7.38 0.13 0.25 0.61 1.51 1.70 n
Togo 2006 4.96 12.2 0.61 0.01 0.23 0.00 0.22 6.42 n
Turkey 2005 781.24 98 765.62 14.55 0.89 16.49 1.86 0.04 y
Uganda 2009 39.81 12.1 4.82 0.09 0.75 12.52 0.22 3.10 n
Yemen 2005 46.13 99.1 45.71 0.82 1.28 0.00 1.78 0.87 y
Source: Mohiedin et al. 2011
27. Potential of Awqaf in Meeting Poverty Gap
27
India: Estimated market valuation of registered awqaf assets:
USD24 billion
ā¢ Minimum expected annual cash flows: USD2.4 billion (0.325
percent of GDP)
ā¢ Resources required to push all Muslims (153 million) above
USD1.25 income per day: 0.301 percent of GDP
Indonesia: Market value of registered land wakaf assets: Rp 590
trillion (USD 60 billion)
ā¢ Minimum expected annual cash flows: USD6 billion (0.849
percent of GDP)
ā¢ Resources required to push all Indonesians above USD1.25
income per day: 0.411 percent of GDP
Source: Islamic Social Finance Report, Islamic Development Bank, 2013.
30. Inclusive Growth
and Equity
Source: World Council of Credit Unions, Islamic Finance in Afghanistan, 2012
Lease of a fixed asset to
expand operations or
to start a new income
generating activity
(Ijara)
Working capital
financing to support
the use of the fixed
assets (Murabaha)
Financing
for small
businesses
and
farmers
30
āHybridā Islamic financing in Afghanistan (Helmand)
31. Inclusive Growth
and Equity
ļ Need for more fixed
income products with
clear use of proceeds
ļ Need for greater
liquidity
ļ Need for more
āimpact investingā
opportunities
ļ Need for greater
liquidity
āSocially Responsibleā Sukuk
Low Income Housing Projects
āGreenā Development
Health and Education
Infrastructure
proceeds
Possible Support Providers/
Guarantors:
Sovereigns
States/Local
State-owned entities
Private Foundations
Supra-nationals
Source: Michael Bennett, āSocially Responsibleā Sukuk: A Possible Bridge Product between Islamic and Conventional Finance,
World Bank, December 2012
Conventional SRI Islamic Finance
31
Sukuk for āsocially responsibleā and āimpactā investments
Compare to 8 MDGs, 21 targets
The proposed post-2015 development agenda is significantly more ambitious than the MDGs, a set of development goals aimed ensuring at the most basic services for the worldās poor. The post-2015 agenda embraces concepts of environmental, social and economic sustainability. It encourages every country to eradicate poverty, promote sustainability, and protect the natural resource base of social and economic development