In the early 2000s, the Kuwait Fund for Arab Economic Development featured a memorable ad campaign about its self-proclaimed mission to "help people help themselves". A baritone voice would render the old Chinese saying "Give a man a fish, and you feed him for a day. Teach him how to fish, and you feed him for a lifetime," against the backdrop of a poor man hauling his net for a catch and then sorting the fish. The fund, set up in the early 1960s as Kuwait was transforming into an oil-powered economy, was created so it could share its wealth with its less fortunate neighbours and friends through grants and loans to development institutions. So it wasn't entirely out of place when the state's central bank governor Dr Mohammad al Hashel denounced Islamic banks as being elitist at a recent conference in Bahrain . "It seems that Islamic banks are content with serving the 'the high-end' customers while a vast majority, particularly at the lower rung of the income ladder, remain grossly under-served, if not completely ignored," he said in his keynote address at the World Islamic Banking Conference in Manama last month. The underserved population that Dr Al Hashel was referring to are the estimated 650 million Muslims which, as of 2008, were living on less than $2 a day, according to the Islamic Development Bank . More than three quarters of people living in Muslim majority countries do not use formal financial services, says a report titled 'Islamic vs Conventional Microfinance Institutions: Performance analysis in MENA countries'. Issues of a lack of penetration by banks aside, some Muslims are reluctant to use financial services that are not sharia-compliant, adds the report prepared by Tunisia's Sousse University in May 2013 . In 1983, motivated to empower the rural poor following a crippling famine that had struck Bangladesh nearly a decade previously, Dr Muhammad Yunus started Grameen Bank to provide microcredit for those in need. The initiative, which spread to other countries and won Dr Yunus and the bank the Nobel Peace Prize in 2006, came under severe criticism because of the high interest rates it charged its poor clientele. It was even deemed "un-Islamic" by one of the country's imams. Islamic finance, with its prohibition on riba or interest, can be a viable, less exploitative option argue sharia scholars. "We need to fix the meaning of 'KYC'," said Mufti Aziz ur Rahman, who is a sharia manager at Dubai -based Islamic financial services provider Mawarid Group . "Either we have to ensure it means 'know your customer', giving him freedom from poverty, giving him support, taking him out from his problems, or it means 'kill your customer', exploiting him, charging a high rate of profit as an excuse for high risk. "But I think there is no risk in microfinance, compared with high-level customers," he added. Microfinance institutions, by virtue of the fact they deal with clients considered non-creditworthy by mainstream banks, impose high interest rates on what they perceive to be a high-risk segment. If the amount lent is small, then repayment with a high interest would not be a substantial amount, they argue, especially when the repayment frequency is greater than for mainstream banks. The "moral bankruptcy" of conventional banks following the financial crisis is another reason for Islamic microfinance to play a greater role in enriching the lives of the poor, says Omar Shaikh , an executive board member of the Islamic Finance Council UK . "What is fascinating is that microfinance can play a role in addressing these issues when people, regardless of religion, are looking for a more socially-responsible form of banking and finance," he said at a panel discussion on microfinance at the Bahrain conference. "If we integrate Islamic banking by giving depositors a choice to lend their money to microfinance institutions, then they can earn not only financial returns but also social returns." Despite such lofty ideals and pregnant promises, Islamic microfinance has been a woeful under-performer. A mere 380,000 people are currently being serviced by the Islamic microfinance sector in 19 Muslim countries, accounting for just half of one per cent of the total microfinance outreach, according to a World Bank -affiliated research organisation, the Consultative Group to Assist the Poor (CGAP), in a study conducted in 2007. Islamic finance methodologies such as profit and loss sharing with associated high levels of transparency do not lend themselves easily to microfinance, which typically involves lots of small transactions with high administrative costs, says Dr Ajaz Ahmed Khan , who is microfinance advisor at lendwithcare, an arm of relief agency CARE International . "Low institutional technical capacity, established policies and procedures of Islamic microfinance organisations and the guidance given to them by national regulators and international bodies such as CGAP are other challenges and there is some debate as to what is actually sharia-compliant," he added. A major drawback could be Islamic finance's principle of not offering loans, which is considered haramor sinful. Instead, Islamic microfinance institutions, like their larger counterparts, buy an asset on behalf of a client, sell it at a profit and the client then repays the bank the total value of the asset in installments. Microfinance experts such as Dr Khan say that collective buying of assets by an Islamic microfinance institution, such as procurement of rickshaws in the Indian subcontinent, could actually enable better discounts in the pricing of the products. However, sceptics say that buying and selling of an asset at profit to a client is another form of interest and that not granting loans takes away from the spirit of entrepreneurship. "They [Islamic banks] are exactly the same as conventional banks. They never go into those risk-sharing investments," says Dr Saqer al Khalifa , a Bahrain -based political economist. Islamic finance in general has little appetite for risk, choosing to park investments in real estate, or sectors that provide guaranteed returns, adds Dr al Khalifa . "If it's a finance that doesn't ask for anything in return except the money lent without any interest, then it's Islamic, and that's not a problem," he says. "Even for the poor paying anything more than what they took a loan for is not fair. Time and ideas are worth something when starting a business. So partnership [between entrepreneurs an microfinance institutions] is the way forward." For partnerships to work, there needs to be more funds. At present however, only three per cent of commercial banks offer Islamic microfinance products worldwide, with an overwhelming 77 per cent offered by rural banks (defined as a financial institution which helps developing countries to finance their needs, specifically agricultural projects), according to CGAP's 2013 report 'Trends in sharia-compliant financial inclusion'. "I think the greatest obstacle to the development of Islamic microfinance is the lack of financial support given to Islamic microfinance organisations," says Dr Khan. "If you look at the Gulf Co-operation Council (GCC), there are some 500 to 800 Islamic finance institutions and very few cater to lower income segments. "Their products are not conducive to providing small loans." The potential for capital-flushed Gulf-based funds and Islamic banks to enter this arena is still huge but they are largely absent from this sector. "The only factor that is holding back Gulf-based Islamic finance institutions from undertaking microfinance initiatives in poorer Muslim countries is their will to do so," says Dr Khan. Along with other European-born Muslims, Dr Khan is developing a fund titled 'Ethical Microfinance' to encourage Gulf-based funds and Islamic banks to fund Islamic microfinance ventures in poorer Muslim communities. "This will be a fund, where GCC banks can deposit their zakat funds and we will offer due diligence on Islamic microfinance intitutions and we will invest these funds to increase their outreach in 2014." The attitude of Islamic banks when it comes to viewing low income clients as high-risk groups has to change, added Dr Khan. "The experience of microfinance over the last 30 to 40 years has demonstrated that the poorest in society are in fact the least risky. They are precisely the ones who very rarely default on loans and the microfinance sector in general has enjoyed repayments rates of more than 95 - even 99 per cent is not unusual." According to Aziz ur Rahman, zakat or almsgiving is not sufficient to help the fakirr the poor and must be reserved only for the utterly destitute. People who are able to work but lack capital must be helped with funding to earn a living, he added. That is perhaps a leaf that Gulf Islamic banks can take from Kuwait's book, drafted through the Kuwait Fund since the 1960s.
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