Reflections on Financial Inclusion of the Marginalised (May 2023)

Extracts from a panel contribution on Islamic Finance in South Asian Countries at the Institute of Ismaili Studies. In addition to Professor Iqbal Asaria, a second contributor was Professor Abdullah Saeed.

When I was at the World Bank NGO committee, this is going back nearly 35 years, technology was not as ubiquitous as it is today. We noticed that in some countries of South Asia, the proportion of people without a bank account was exceeding 70%. Which means that whatever finance you bring, they’re only able to serve hardly 30% of the people. The rest were left to money lenders, loan sharks and so on. And as Professor Abdullah Saeed will know, this is the breeding ground for RibaRiba is not between equal bodied partners; Riba is essentially between partners who have an asymmetry of power. So we were always concerned in that forum on how we can first create financial inclusion. Because once there is financial inclusion, then you can talk about what kind of finance you want to bring.

I think that our work at the point slowly and eventually led other advocates to Millennium Development Goals (MDGs) and Sustainable Development Goals (SDGs) for development. One of the key SDGs is course financial inclusion. In that period, we also had the emergence of institutions like the Grameen Bank. I remember clearly that I met Professor Yunus at a seminar of the Third World Network in Penang in Malaysia. And the young idealistic man I was at that time, I said to him, ‘Professor Yunus, why are you charging 30%  this is definitely Riba, there is no other alternative to this description. So he said, ‘ young man, sit down here’. So I sat down and he explained to me the cost of delivery of the loans or financing he was doing came to close to 25 to 26% – just the cost. And he said, ‘So I am keeping 3 to 4%. Do you think that is Riba, young man?’.  I was puzzled. I said, ‘I don’t know. I don’t think so’.

The movement which he started, of getting unbanked people into a financial  inclusion mode in Bangladesh  took the world by a storm.  There wasn’t any other model of this nature at that time. And in fact, a few years later, when the World Bank and the other development institutions started to do the analysis, they found that because of the efforts of people like Grameen, BRAC, and others in the microfinance institutions in Bangladesh, the rate of growth in Bangladesh was probably between 1 and 2% greater than in India and Pakistan. Then we didn’t have this kind of movement showing that financial inclusion actually led to quite a dramatic improvement in standards.

Unfortunately, for Professor Yunus, he was a bit ahead of his time. His model relied exclusively on empowering women. He was lending to groups of women, with group collateral  and village meetings and all kinds of other facilities. And this alienated a large sector of the conservative Muslim male society in Bangladesh. And I think to this day, you will see there is a disconnect between Professor Yunus and the Islamic banks or Islamic finance institutions because they feel he is empowering women and making trouble for the society as a whole. But people who can see through these things, recognise it as really  a very innovative move. These women, mostly rural, had no access to any other finance, apart from loan sharks or worse bonded labour. This was mirrored by the zamindari system in  Pakistan.

Obviously as technology advanced, so to Grameen’s delivery mechanisms became much more robust. I haven’t been to Bangladesh, but a friend was telling me that if you go to Bangladesh today, and if you want to buy a SIM temporarily for your visit, the best one would be Grameen SIM.  So I assume that they have progressed to providing their own SIMs and mobile technology to their own members. And they’re obviously marketing it wider. Islamic banks in Bangladesh have done a little bit of  Islamic microfinance as well but not to the extent of Professor Yunus.

The other lesson I learnt from Bangladesh, which is quite significant and important for us, is that two or three times there has been massive flooding there. And every time obviously, all the loans or the borrowers have been wiped out, because of the flooding. They had borrowed funds for farming or animals or whatever it was. So they had to be re-financed. And luckily for Yunus at that time, the World Bank was quite excited. IDA especially was quite excited by his ideas, and they refinanced him to the tune of $40 million to $50 million to launch it back again.

This led me to think of something in which I had specialised, and that was  insurance. Can we have a micro insurance platform to supplement the finance platform so that in case of this kind of trouble we can rely on the microinsurance to refinance. Obviously, I don’t think the big donors will always come to your rescue. And a similar thing, as we know now has happened with the flooding in Pakistan. Many, many institutions which have microfinance operations have had large number of their borrowers defaulting. Not because of  any fault of theirs but just because of natural causes. There is still no significant microinsurance availability in that country.

So, from this Bangladesh experience, we have two or three lessons. One is that financial inclusion is  very possible with imagination. And in fact, all the assumptions which we as bankers had,  that the poor people will run away with the money are misplaced. The truth is that poor people never default. The default rate of Grameen Bank is close to 1 or 2%, while the NPLs of banks in Pakistan are 10%,  and could go up to 40%. So we are really looking at a very loyal, very enthusiastic community which values what they are getting.

The second lesson we should learn is that technology used appropriately and properly can assist in financial inclusion. Up to 80% of the people in that region have access to mobile phones, but only 30% have bank accounts. So, you can see the disparity. So it is not rocket science to see that you can bridge this gap by using mobile phones.

The best example of using this technology which people cite is M-Pesa in Kenya – pesa in Swahili means money, so mobile money. I was in a rural area of Kenya and I see an old woman sitting with a really old 2G Nokia – not 3G or smartphone. Suddenly, she gets a message from her son, ‘ I’ve sent X amount to your account’.  So she takes the phone,  goes to the shop and settles her weekly grocery bill; then goes to another place to settle another bill. I am amazed that this barely literate old woman is able to really conduct decent operations without any sophistication. And obviously, that model has been taken by many other countries across the world, and one can just see what is possible. We these things are happening and will happen, but is there any specific Islamic finance angle in these countries. In Bangladesh, as I said, there is a huge mountain to climb, because that mistrust which happened in empowering women, so in other countries, we have to a bit more culturally sensitive.

The other point which I want to make is that the legal systems in India, Pakistan, Bangladesh, Sri Lanka are based on English common law. It is a substance-based system. It doesn’t care about the form.  Lord Eddie George, the late governor of the Bank of England himself told me that ‘as long as you fulfil the substance, I don’t care what you call it.’ So I said fine, we will do that. And we launched the products in the UK. Similarly, in India, it was possible to see a way through English common law. Pakistan and Bangladesh have more sympathy with Islamic finance ideas so it should be more than possible, but obviously there are other factors which impact on this.  

Moving out from outside the region, something I have found very innovative is the point that in countries like Malaysia, paying zakat it is like paying tax. Therefore giving zakat to approved institutions gives you relief from your tax bill.  So effectively, you’re not paying tax twice. This obviously encourages certain sectors of society to give zakat to approved institutions. We can clearly put these two things together for a country like Pakistan, where we have some significant Islamic microfinance institutions like Akhuwat with probably 2 million plus customers. I was talking to Dr Amjad Saqib after the floods, who said  a significant of its lending was likely to default. My colleagues are now encouraging them to look at a micro-Takaful financing plan as a supplement to his micro-financing.

Now here is the advantage of Islamic financé, because obviously these people who are on the breadline, they cannot on top of loan repayments give an insurance premium or contribution for their borrowing. Can we use Zakat for funding the Islamic insurance contributions? It seems that in some schools of thought especially the Shafi school of thought, it is possible. The Hanafi school is a little bit more reserved, but I think with a push and shove, some of the scholars are beginning to warm up to that. Now you can see that people who want to pay Zakat will feel more encouraged if they can put it into contributions for micro takaful. This will make the Islamic microfinance lending much more robust and solid. Therefore, we will have something which is uniquely Islamic, because no other non-Muslim country has Zakat, and the Muslims will be encouraged.

And I think if we start from financial inclusion, then we can go to other banking products. What is happening at the moment in these countries is reverse engineering of conventional finance into Islamic finance. Reverse engineering doesn’t change the formula, it just changes the name. And so the outcome is not going to be that different. And now we have gone into a huge debate on maqasid al shariah. I don’t think you can deliver it through conventional finance because that’s not their objective. Our objective is different.

 We start from the ground up. With microfinance, micro takaful, use of zakat, and waqfs, we can work to make these financings continuous and immune, as much as possible, from shocks like floods and droughts and so on. This will also make a greater proportion of our societies financially included. The next step will be to see what sort of advanced financial products we’ll need, which will also be in line with Islamic tenants.

One of the institution which attracts me greatly is Tabung Haji, the pilgrimage organization of Malaysia which started  in the late 60s or early 70s, when  Professor Ungku Aziz went to the Prime Minister and said, ‘look, most of our country is rural. Most of the people’s wish is to go for Hajj. So they begin to save whatever little bit they have under their pillows and matrices. But every so often, some emergency comes up or some relative comes with some challenging issues, so they give the savings then they start again’. So he proposed forming an institution called the Tabung Haji or pilgrim organisation, in which they could deposit the savings to be used to fund fertilisers, seeds, other inputs for their farming and the profits to be ploughed back into the fund. He calculated that this will allow them to go to Hajj at least eight years earlier than otherwise. The results were very good and people managed to go to Hajj up-to 12 years earlier. So it was really quite a good institution.

The other benefit of this was that when Bank Islam Malaysia was was formed, on day one they had 2.3 million customers from Tabung Haji. I don’t know any bank, especially Islamic bank, which has two million customers on day one. So this is what I will call grounds up Islamic finance. And obviously Bank Islam Malaysia was then able to provide them with ATMs and other facilities in Hajj. Those of you who have been to Hajj or Umra will notice that the Malaysian pilgrims are exceptionally well taken care for.

So there are a large number of things that need to be done. We cannot really concentrate on the wealthy middle class in Islamic finance. They are able to look after themselves. We  have to look at mass inclusion and keeping the portfolios stable by using things such as waqf, and thinking of institutions which will grow up from the bottom.

In this space we have to avoid one thing. Those of you who are familiar with microfinance in India, will know that institutions started to hype microfinance numbers, and raising capital and so on this hype. They actually made the whole enterprise really very, very risky and dodgy.

Bangladesh has stayed its course. Islamic banks in Bangladesh are now also in microfinance. Pakistan hasn’t done microfinance through Islamic finance, though a bit through Islamic banking. But microfinance is growing. And obviously, these countries are now not only rural, but are urbanising. So we need to think of new challenges.

So in summary, my take on this is that we need to view the role of Islamic finance in these South Asian societies in a completely different way from merely establishing Islamic banks. We need to come up with completely new models with the objective of  financial inclusion, and maybe gender parity. As you know, in most of these societies, property is really skewed towards males. This is part of the British heritage. And so as soon as you start to play with that, you will get a backlash, but we have to face it. And it is for the Islamic scholars to say that women have a right to their own wealth.

I remember I was teaching in Dubai for the Cass Business School – as it was known at that time – and I had four Saudi ladies in the course. I asked them what they would on their return. They didn’t know, so I suggested there was one thing they could do.  Nobody, no Islamic scholar wherever,  will be able to deprive you of your share in this wealth, whatever is your share. So why don’t you establish a proper investment management company for women and their wealth only. Use it for education of your children, or whatever.  I think they are still struggling to get a license, but once they get it, it will be quite challenging because the numbers are staggering. It is billions and billions of dollars, which is inherited by women in a place like Saudi Arabia

 So my take on this is that focusing on traditional Islamic banking based on reverse engineering world of conventional finance is all well and good but it’s not going to take us far.  My pet phrase is ‘ can you become obese on Halal junk food? If so, is it halal or not? So we have a challenge. Our people are hungry for financial inclusion and inshallah with us all putting our efforts and brains together, we can manage it.

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