Four Initiatives Islamic Finance Must Undertake to Keep Itself Relevant in Changing Times

Part 4 of 6: Supporting Community-Based Finance

Click here to see Part 1 of 6: Climate of Change — Four Initiatives Islamic Finance Must Undertake

Click here to see Part 2 of 6: Launching a Gold-Based Currency

Click here to see Part 3 of 6: Environmental Shariah Standards

Exxon is bigger than Thailand, Conoco Phillips is worth more than Pakistan, and Walmart’s revenues now put it ahead of 157 of the world’s 182 countries. Large companies grow larger as milquetoast public policy gives free rein to corporations with questionable environmental standards.

Governments, regulators, and scholars must support localized, small-scale, community-level finance. At the outset, this means developing Shariah standards for products that promote these efforts: microfinance, small-scale Musharakah and Mudarabah investment companies, Waqf-based finance, community land trusts, and the like. At the governmental level, supporting such efforts means providing a favorable legal, tax, and regulatory environment with incentives and disincentives that protect these efforts from large, institutional interference. And for their part, more Islamic banks — and this is certainly an instance where bigger is better — should introduce products that more effectively cater to the small and medium end of the financing value chain.

Case in point: when a Walmart or Carrefour superstore moves into a neighborhood, small and medium businesses in the area suffer. In fact, real estate prices actually drop because consumer demand is expected to decline as the larger business hollows out the spending power of the residents who have now lost their jobs. As our present scholarship stands, there is nothing wrong with providing Islamic finance to a Walmart or a Carrefour; it might even be heralded as a breakthrough. But a more thoughtful reading of it shows that putting a retail giant in the middle of a small economy has far reaching deleterious effects.

Similar other examples abound. This is the kind of thinking that governments, regulators, and scholars must now begin to make if we are to reverse some of the damage wrought by a blind growth economy.

For their part, activists, practitioners, and academics already advocating community-based finance should begin working with governments, regulators, and scholars to develop Shariah standards. As a starting point, Ethica proposes convening a meeting between a delegation of those already active in community-based finance and members of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI), the leading standard-setting body in the world and the de facto standard in ninety percent of the world’s Islamic finance jurisdictions.

Next Week

Part 5 of 6: Regulating Shariah Standards

Click here to see Part 1 of 6: Climate of Change — Four Initiatives Islamic Finance Must Undertake

Click here to see Part 2 of 6: Launching a Gold-Based Currency

Click here to see Part 3 of 6: Environmental Shariah Standards

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