Speech by Mahmoud Mohieldin on “Adapting to the New Macro Environment for Islamic Finance”

Tuesday, April 5, 2016

In 2015 world leaders demonstrated unprecedented global collaboration and optimism – agreeing on a transformative global agenda for sustainable development. The 2030 Development Agenda and its 17 Sustainable Development Goals reflect the collective ambition to end poverty in all its forms, preserve our planet for future generations, and leave no-one behind.
It’s quite an ambitious task for the world to deliver on this new agenda, but just as much so for the Muslim world. For example, in 2012 the 57 members of the Organization of Islamic Cooperation (OIC) were home to one-third of the global population now living in extreme poverty (defined as those living on less than $1.90 a day). Thus, we simply cannot end extreme poverty if OIC countries do not.
Attaining other critical SDGs — such as SDG 7 on water and sanitation — will also require significant investments. For example, in 21 Muslim countries, fewer than half of the people have access to sanitation. And only a handful of Muslim countries are able to provide all their people with access to a safe water source. Infant mortality and maternal mortality is still unacceptably high.  In 21 countries, more than 4 infants out of every 100 die before the age of five — and in 13 countries over 4 out of every 1,000 women giving birth does not live to see her child grow up.
We know we can do better because we already have. Over the past two decades the number of people in extreme poverty has declined from 2 billion to 700 million. It is within our grasp to eliminate extreme poverty within a generation. We can improve access to safe water and sanitation because we know what combination of investments and regulation it requires to make progress. We can do all these things, and they will make all of us – in every country – stronger, more secure, and more prosperous.
Islamic finance has a role to play here. We can and must do better. Ending extreme poverty is a moral imperative for humanity. Islamic finance has many important advantages which can make a difference in helping countries achieve the Sustainable Development Goals. It can help improve the stability of the financial sector, with features such as its profit- and loss-sharing arrangements, and requirements for a link with the real economy through the creation of physical assets. Islamic finance can also be an answer to those who, for cultural or religious reasons, exclude themselves from the financial system.
While the Islamic finance industry has expanded rapidly over the past decade, growing at 10-12 percent annually, financial inclusion and financial depth in predominantly Muslim nations still lags behind the rest of world. Moreover, there is a difference in access to finance and financial depth between Muslim countries with Islamic Banking and those without it.
For example, in OIC countries with Islamic banking in 2014, 31 percent of the working age population has a bank account, while only 17 percent do in OIC countries without Islamic banking. In addition, financial depth, measured as private sector credit to GDP, stands at 39.5 percent of GDP in OIC countries with Islamic finance, and 34 percent in OIC countries without Islamic banking (in 2011-2014).
Of course, we cannot claim that the difference is entirely due to the presence of Islamic banking, but Islamic banking clearly plays a positive role in improving access to finance and creating financial depth in Muslim countries. We also know that both financial inclusion and financial depth are critical for economic growth and development.
While the impact of Islamic banking on financial inclusion and depth is a positive sign, we should not be satisfied just yet. As practitioners of Islamic finance, we have to go beyond the numbers game. We also have to focus on the quality of investments and ensure they have a positive impact on the economy and environmental sustainability.
Henceforth, we should focus on the areas that require our attention such that Islamic finance can play a pivotal role in the realization of the 2030 agenda. While there has been significant growth of Islamic finance assets, it is not without its own challenges. The areas that require attention include:

  • the need for stronger legal institutions that protect property rights and the honoring of contracts;
  • regulation of Islamic finance across countries with a focus on standardization of approaches;
  • adjustments in tax regulation to eliminate the debt bias in taxation — which simultaneously discriminates against the equity-based financing that Islamic finance provides;
  • incentives for academic institutions to deliver more relevant research and innovation in Islamic financial services and products;
  • and lastly, more active participation of national authorities in Sukuk markets to finance their public and private investments.

The World Bank Group (WBG) is involved in a number of practical solutions to these challenges, for instance:

  • We now have investment projects that rely on Islamic finance in the Middle East, North Africa, and South East Asia.
  • The World Bank Treasury has employed/applied a variety of Islamic Financial Instruments. Most recently, it issued two Sukuk that raised $700 million dollars, in support of the International Finance Facility for Immunization.
  • Our private-sector arm, the IFC, has set up a special purpose vehicle, the IFC Sukuk Company, which issued $100 million in trust certificates in 2015. The certificates were oversubscribed, revealing the high level of demand from both traditional Sukuk investors and conventional investors, including those with a socially responsible investment focus. It also highlights that it is possible to merge Islamic finance with conventional sustainable investment.
  • Our political risk insurance arm, MIGA, has provided a $427 million Shariah-compliant investment guarantee for an infrastructure project in Djibouti, and $450 million in political risk insurance for a telecommunications investment in Indonesia.

We are also very proud of our strong partnership with the Islamic Development Bank Group. The Islamic Development Bank (IDB) co-signed — along with the Multilateral Development Banks (MDBs) and the UN — an MoU on statistics to improve the collection of data.  We are now executing an ambitious joint program of work in areas that range from infrastructure to energy efficiency to water
And we are pleased that the IDB is now a full partner of the group of MDB Heads that meet regularly to collaborate on the world’s toughest challenges — like infrastructure, pandemics, or building stability and hope in nations in conflict. Just a week ago, the President of the IDB joined the United Nations Secretary General and the President of the World Bank Group on their trip through the countries most affected by the current refugee crisis in the Middle East. The partnership between the WBG and IDB also involves co-financing work to reach US$ 9 billion the next 3 years, financed significantly through Socially Responsible Investment (SRI).
One important new area of partnership with the IDB relates to our joint work in assisting countries in the Middle East, which are carrying most of the burden of the refugee crisis, and which now face significant budgetary pressures. We’ve worked together with the IDB and the United Nations to create a joint financing facility with other donors to assist those hardest-hit countries with concessional financing – and helping countries whose higher per-capita incomes would have previously made them ineligible for such assistance.
This joint facility will provide support for refugees, internally displaced persons and hosting communities. It is proposed that supporting donor countries provide grants that would be combined with lending from MDBs, bringing down the effective cost of finance to middle-income countries to concessional terms. And given the scope of the challenge and their provision of a global public good, the proposal aims to provide these countries with more concessional levels of financing to support refugees, internally displaced persons, and host communities.
Support for reconstruction and recovery efforts will also be provided by this new joint facility. It is proposed that guarantees will be leveraged from supporting countries to issue bonds that would provide large volumes of financing needed for reconstruction and economic recovery.
At the beginning of 2016, 125 million people devastated by conflicts and natural disasters are in need of assistance, with a vast majority (71%) residing in the Organisation of Islamic Cooperation (“OIC”) countries. 1.4 billion people live in fragile states and more than half of the world’s most fragile countries are OIC countries.
Given that the vast majority of conflict-affected populations are in Muslim countries, the role of Islamic finance is particularly important. Work is ongoing to address how waqf, zakat and a variety of Islamic financial instruments can be channeled effectively and efficiently to meet humanitarian needs. The potential certainly exists and that all will be discussed in the UN-sponsored World Humanitarian Summit next month.

There is now discussion about the issuance of an inaugural humanitarian sukuk program combined with cash waqf which could enable the use of sustainable humanitarian financing for protracted crisis situations. It leverages the current capital market instruments and architecture to reach non-traditional and emerging donors.
Another practical solution is provided by financial technology (Fintech) which is providing peer-to-peer alternatives and solutions to make financial services faster, less expensive, and easier to use for providing finance, payments, wealth management, money transfers or even new currency. Fintech can provide financially excluded people — including those in humanitarian crises — services through mobile phones and other means, to facilitate financial inclusion for traditionally underserved people, such as those affected by humanitarian crises. We know that 90 percent of Syrian refugees have access to smart phones, which can offer some opportunities. One interesting idea is an equity-based crowd-funding mobile app that can channel funds from investors to refugee entrepreneurs.
Forming stronger partnerships like the one between the WBG and the IDB is vital.  By using our combined strengths to bring resources to countries in need to address underlying causes of conflict and violence and mitigate its consequences, we are operating in a way which is consistent with the purpose of Islamic finance. It could ensure that the good progress made in the region on the MDGs is not lost, and can contribute to efforts to achieve the SDGs.

I see good potential for integrating Islamic finance into the global finance discussions and practice. Recent considerations by the G20 of asset-based and risk-sharing financial instruments is a step in the right direction. Developing the engagement of International Financial Institutions in Islamic finance — through policy advice, knowledge-sharing, and a variety of financial transactions — is another important milestone.
For all of this to be realized, Islamic finance needs to function within an enabling environment with a level playing field, an adequate regulatory framework, and effective partnerships. These are all areas in which the MDBs can play a role.
Islamic finance can deliver much-needed solutions to today’s challenges. It can also support efforts to meet the SDGs through the promotion of financial inclusion, and the enhancement of financial stability.  Islamic finance will allow us to maintain a strong link between financial development, inclusive growth, and sustainable development. It is proven pathway which can help us end extreme poverty in a single generation.

Thank you.