Islamic Finance: From Niche to Mainstream – By Gbenle Habeeb

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Debt and financial crises are twin endemic phenomena most prevalent in today’s global financial system. UNICEF reports that over half a million children under the age of five die each year around the world as a result of debt crises and their recent data estimates that 5.2 million children died in 2019. Perhaps the debt most countries in Africa are plunged into today could have been used to provide better health care facilities to prevent the high infant mortality rate in the region.

Amidst these issues, the last decade has witnessed a great deal of interest in an alternative financial service that proves to be more sustainable, resilient, and connects to the real economy. This paradigm shift has positioned Islamic finance from a niche proposition into the global landscape as it has shown more resilience than its conventional counterpart in recent years. The growth from just three (3) Islamic Financial Institutions (IFIs) in 1975 to 1,549 IFIs (including windows) in 2019, only underscores its growing acceptance. But why has Islamic finance been garnering more acceptance globally?

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It appears that the aftermath of the global financial crisis (GFC) spurred the adoption of Islamic financial instruments and positioned it on a global footing. This is because the GFC led to a lack of trust in financial markets – where people had lost their wealth and been rendered homeless, following the collapse of big investment banks in Lehman brothers while Merrill Lynch was only rescued by a Bank of America acquisition at the peak of the crisis. The crisis was exacerbated by unfettered financial engineering and greed using derivative products and the reckless speculation that went with it. The aftermath of pre-GFC financial gymnastics propelled the need for more responsible financing, which is enshrined in the principles of Islamic finance.

Islamic finance through its social financing trio of zakat, sadaqah, and waqf is beginning to garner more acceptance in social welfare and the emancipation of the poor which is in congruence with the UN Sustainable Development Goals (SDGs) to end poverty, protect the planet and ensure that all people enjoy peace and prosperity by 2030. Zakat, an Islamic social financing tool and one of the largest forms of wealth transfer from the rich to the poor, mandates eligible Muslims to pay 2.5% of their wealth and has been deemed a reliable tool to solving SDGs 1 (no poverty), SDG 2 (zero hunger), and SDG 10 (reducing inequalities).

To deliver the SDGs, the UN estimates that between US$5-US$7 trillion per annum needs to be mobilized by 2030. According to the World Bank and the Islamic Research and Training Institute (IRTI), estimated global zakat funds reach US$550bn to US$600bn per year. These figures are only an affirmation of the potential impact of Islamic social financing instruments. Just recently, the UN and Islamic Development Bank (IsDB) partnered to leverage Islamic social financing to support efforts to recover and rebuild from the COVID-19 pandemic.

There is no doubt the COVID-19 crisis has reversed many years of economic progress. However, to avoid falling into more misery in the process of building back, the world needs to embrace a more sustainable and resilient financial system that prioritizes the interest of humanity, and if the solutions lie with the Islamic finance models, it needs to be seen beyond being a niche.

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