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C n Isl mic Fin nc spur Inclusiv Growth &

Sust in bl D v lopm nt?
ABAYOMI ALAWODE | MAY 30, 2013
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Islamic nance can connect millions around the globe to the economy (Credit: The Reboot, Flickr)

In the wake of the global nancial and economic crisis, the need for a new development model
which is more sustainable and also fosters inclusive growth has become more apparent. Could
Islamic nance be the answer? Islamic nance promotes risk-sharing, connection to the real
economy and emphasizes nancial inclusion and social welfare.  Can these dimensions contribute
to inclusive growth and sustainable development?

Islamic nance is based on two intrinsic features: risk-sharing and the link between nancial
transactions and the real economy. Because all nancial contracts are backed by real sector assets
and risk-sharing among partners, including nancing institutions, Islamic nancial instruments have

 relatively more stability than conventional instruments and tend to be more exible against
unanticipated shocks. This critical link brings prudence to the system, promotes equity relative to
 debt, broadens nancial participation, and minimizes overall vulnerability.



Another dimension of Islamic nance is the promotion of economic welfare and social justice guided
 4
by the objectives of Shariah. Overall, Islamic nancial instruments emphasize morality and ethics in
business, respect for property rights and contractual obligations, and pursuit of good governance,
speci cally though prohibition of riba (interest) and of gharar (ambiguous contracts), and other
social redistributive and philanthropic tools such as zakat (obligatory alms), waqf (endowment) and
sadaqah (charity).

Whether Islamic nance is a catalyst for inclusive growth and sustainable development is not as
straightforward as one may hope. While the inherent features of Islamic nance confer several
advantages, the full potential of a complete Islamic economy has yet to be realized. The size of the
Shariah-compliant  assets is tiny relative to overall nancial assets.

In addition to the main challenge of achieving balanced growth in practice, there are several other
areas of Islamic nance which need signi cant improvements, including regulatory oversight, tax
treatment, insolvency frameworks, standardization, risk-management practices, and the level of
awareness.  Realizing the potential of Islamic nance will also require capacity building for
regulators, policy makers and market professionals.

Despite these limitations, Islamic nance has tremendous potential to serve as a tool for nancial
inclusion through leveraging the entrepreneurial potential of micro, small and medium enterprises
(MSMEs) across sectors and bringing the nancially underserved into the economic mainstream.
Presently, a predominantly debt-based system poses formidable constraints to MSMEs. Islamic
nance could also increasingly provide long-term funding for infrastructure and other development
projects critical for sustainable growth, as well as meaningfully contribute to nancial stability.  

FINANCIAL INCLUSION, FINANCIAL SECTOR, THE WORLD REGION

Authors
Ab omi Al wod
Head of Islamic Finance, Finance, Competitiveness & Innovation

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S IFTIKHAR ALI
JUNE 02, 2013

Islamic nance must spend time on research as special projects at universties to take a dispassionate view of
the real practices to identify areas where tranparency must be felt by the reseachers All islamic rms by law
must be required to spend a percentage of realized pro ts otherwise for distribution to shareholders for
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Zia Morales
Zia Morales
MAY 31, 2013

Hi Dorina: Islamic Finance is an area of focus for the World Bank, and we've held several seminars around the
topic--including the 'Is Islamic Finance a Catalyst for Inclusive Growth & Sustainable Development" last April
18, and the Regional Islamic Finance Forum in Cairo last November 20. Any future Islamic Finance events will
be highlighted on our events page, as...

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Dorina Georgieva
MAY 30, 2013

Thank you very much for this article. Islamic Finance is fascinating subject and has certainly great potential. In
addition to the areas for impovement that you point, I believe there is also a need of more educational
programs. On that note, are there any lectures and seminars on Islamic Finance at the WBG? It would be
wonderful if some experieneced...

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Johan Aslim
JUNE 24, 2013

Very nice and nuance article. Very much inline with the Halal Monk's conversation on this subject with expert
Ajaz Khan: http://www.halalmonk.com/ajaz-ahmed-khan-sharia-compliant- nance

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