What used to be unthinkable 30 years ago became reality now with sukuks (i.e. the Islamic equivalents of bonds) being listed on major stock exchanges such as Nasdaq. Many of the advisors are international banks such as HSBC, LBBW or JPMorgan. The industry was worth $2.5 trillion in 2018 and is estimated to grow further.[1] Two areas where Islamic finance fits in well within a globally integrated economy, tackling developmental issues and Islamic fintech, will be presented. The article will be concluded by looking at Islamic Finance in the Kingdom of Saudi Arabia.

In order to do this Islamic Finance will briefly defined. According to the Shariah law, which is derived from the Quran and the prophets and sayings of the prophet Mohammad interest is prohibited in all transactions. Moreover, speculation and uncertainty are to be avoided. Investments in industries like arms, alcohol, prostitution and pornography are forbidden. Some older modes of finance are rooted in Islamic ethics and include zakat (almsgiving), endowment funds (waqf), charity payments, and qard hasan (interest-free loans).

Thinking about responsibilities of Islamic financial institutions a structure that should be stakeholder centered, ethical and social is the ideal. The rise of the Islamic financial industry goes hand in hand with the increased popularity of ethical investing and the need for reliable ESG (environmental, social and governance) measurements and indices.[2] Both of them were among the fastest growing financial sectors and are inspired by the UN SDGs (social and development goals), leading to a need that these two sectors cooperate with one another has been voiced.5 One of the major players in this arena is the Islamic Development Bank, which uses Shariah-compliant modes of financing in order to spur development and growth in less developed Muslim countries. Other goals in this realm are expanding the general access to finance, further developing the financial sector and building resilience of it in less developed countries.[3]

With regards to access to finance it is worth noting that according to the World Bank only 14% of the Muslims in this world use banks. Many of the others refuse the use of conventional finance due to religious reasons. Therefore, enabling those remaining 86% of Muslims to get access to finance would close this gap. Indeed, Islamic finance how it has been implemented in the form of Islamic banks has been ridiculed as just mimicking conventional banks, instead of focusing on the goals of the Shariah, which is to increase human wellbeing. In this way Islamic finance could close the financing gap for the reaching of the SDGs and inspire a more accountable and ethical financial system.[4]

Because Islamic finance places a focus on the real economy and tangible assets, it could help form means for poorer countries to grow more. A popular instrument for this has been microfinance to small enterprises. This is coupled with profit- and loss-sharing arrangements which makes the provision of financial means to productive firms attractive, leading to higher outputs and job generation. Not only does Islamic finance help these enterprises but it also encourages a stable financial system. After the global financial crisis in 2008 Islamic banks were far less impacted by it due to their avoidance of leverage and speculation (factors which led some other banks go bust).

Another area that has the potential of being globally integrated is Islamic fintech. Popularized in big cities like London has been Wahed invest, an online robo-investment advisory that is Shariah-compliant.8 This convergence between Islamic Finance and Fintech gives consumers a different option to explore and widens the range of services that can be used. Although this is less well known of in Europe, many individuals and firms in GCC countries for instance, would like to invest their money or finance their goals in a Shariah-compliant manner in accordance with their faith.9

As previously mentioned, there is a gap between Muslims using financial institutions and non-Muslims and Islamic fintech could also help in closing this gap. Because many of these individuals are poor and come from less developed countries like Afghanistan or Iraq, the transaction costs for conventional banks to offer them accounts is uneconomical. However, the phone penetration in these countries is still quite high, paving the way to access these customers through digital means. For instance, they can open a digital wallet and thus get access to money transfers, micro credits and the payment of their bills.

Thus overall, development finance and Islamic fintech have a great potential to be part of our globally integrated economy. Speaking to HRH Prince Turki bin Faisal he told us about the experience of the Kingdom of Saudi Arabia with Islamic Finance. He highlighted the big role zakat payments, which are compulsory for corporations but voluntary for individuals (of which the majority still pays them) helped in the reduction of poverty. The proceeds are being used to support disadvantaged people like orphans or single parents. 

Historically, they played a big role in this country and will do so in the future. Another instrument that is popular here are waqf. Munirah Al Saleh also highlighted the importance of waqf nowadays. In the past they were used to support religious infrastructure and the supply of public goods like schools and hospitals. Now, everything can be endowed to a waqf (pl. awqaf) (the family house, money or anything else that might be profitable). Awqaf are being used for a myriad of social purposes and are usually private. Nevertheless, Saudi Arabia launched its first waqf investment fund for public offering in 2018, helping these funds to diversify the endowment portfolio and efficient management.10 Therefore, these publicly traded funds might in the future become a more important instrument that could be popular over the world, not only in the Muslim world. Also the option of digitally enabled waqf (e-waqf) like it is being used in Malaysia for instance could be further explored.

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Cosima Stitzl is an Islamic Finance and Management student at Durham University Business School in the United Kingdom. Originally, she is from Germany but after working in Qatar she became very fond of the region, leading to the study of the Arabic language and Islamic political economies in the Middle East. Her research interests are ethical investments and development finance.

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