Islamic Finance and Banking ala M-Pesa

Dr. Hanaan Balala

Abstract
In my previous writing I have noted and I here reiterate the potential viability of
Grameen bank like projects in Islamic jurisdiction towards socio-economic welfare
and development. I recognize that their application and benefit may be context
specific but it would be fallacious to dismiss the Grameen model simply because the
interest charged may be classified as riba. Being Kenyan and having experienced
the micro-financing success and socio-economic contribution of M-Pesa to the
consumers and development of the nation, I was then drawn to enquire into
whether the M-Pesa model can be emulated by Islamic finance jurisdictions to
serve principles of Islam and the objectives of the Sharia that inspired the likes of
Mit Ghamr in the 1960’s before the advent of the modern Islamic Banking industry.
What follows is a synthesis of my views in this regard.

I. Introduction
Contracts in Islamic commercial law are of two types: unilateral contracts which
are gratuitous in nature; and commutative contracts which are non-gratuitous
and bear the right to make an increased return. It is accepted fact that contracts
of loan, (Qardh) are gratuitous contracts per Islamic commercial law in the sense
that they are extended without the lender requiring an increased return or
benefit yet a benefit or increase may be extended, equally gratuitously, in return
by the borrower to the lender. Such gratuitous extension, either way, must arise
uninstigated by the other and without a feeling of obligation. The lender is not
obliged to lend and the debtor not obliged to be gratuitous in his repayment; a
restatement of an oft-ignored fact.1

1 M. Yusuf Saleem, An Introduction to the Theoretical Foundations of Islamic

Transactions, Ilmiah publishers, 2009. See also, Razali Nawawi, Islamic Law on
Commercial Transactions, CERT publications 2009
In my previous writing “Re-examining Riba” I distinguish clearly between a ‘good
loan’ of inter-personal or non-commercial nature (Qardh hassan) that is quite
rightly required to be free of the demand for interest; and commercial credit
transactions (Dayn), be it trade credit, business loans extended or commercial
debts of various kinds, each essentially being simply a variation of the underlying
concept of commercial credit. I deduce that Riba is all unlawful gain and bay is all
lawful endeavour including commerce and all mutual exchanges with an
intention of making a profit. Bay is not limited to sale. Included in this deduction
the Riba prohibition in the Quran prohibits interest on inter-personal or non-
commercial loans. Such loans are gratuitous loans denoted as Qardh in the Quran
and sayings of Muhammad (Hadith) and the lenders of such gratuitous loans are
duly put on notice of this nature whilst assured that their recompense is the
spiritual reward they gain for the charity of extending such “good loans” (Qardh-
hassan) wanting to do good for the sake of Allah.2

By definition, bank loans are commercial credit transactions and thus falls under
the concepts of Dayn and Bay’ (lawful commercial transactions) as a bank is a
commercial enterprise seeking to make a profit/return. It is no stroke of insight
to appreciate that a Bank, whether it bears the label Islam or Islamic, is not a
gratuitous lending house and the loans it extends, whatever the nature, are
commercial loans by very fact that a commercial entity is extending the loan with
an interest, pardon the pun, in making a return on its money extended. Such
loans thus fall under the term Dayn, and not Qardh. My conclusion is especially
strengthened by Al-Baqara: 282 wherein Dayn is subject to the same rules as
commutative contracts falling under Bay’ and therefore I am able to link the two
concepts pertaining to commercial banking transactions.

This means, a bank as a commercial entity seeking to make a profit from its
money lending business cannot be required to lend gratuitously in disregard of
the risk it undertakes in so doing and the various costs it bears in making its
financial services available. If we have made allowance for the operation cost of

2 Saleh, N., Unlawful Gain and legitimate Proft in Islamic Law (Cambridge University
Press, Cambridge). See also, Thomas, A., (ed.) Interest in Islamic Economics:
Understanding Riba (Routledge, London 2006).
all sorts of Islamic finance-related institutions, including Zakat, Bait-ul-mal and
Awqaf, that are essentially for purposes of social welfare, what more for a bank
that is essentially commercial and rent/profit seeking in its activities?

Islamic Banking and Finance is not a gratuitous industry and, in its current
formation, is certainly not a social welfare industry. It is a rent-seeking profit
making entity like any other commercial bank with neither an interest in
gratuitous loans, forgive the pun, nor an obligation towards socio-economic
development. Regardless of the theory touted, the practice of the industry bears
witness to this fact.3

Consumers’ pockets are not deep and they often do not resort to or simply
cannot afford financing their projects or business ventures through commercial
banking establishments, Islamic or otherwise. Those who require such financing
must be rich enough to afford the multi-tier transactions and the legal,
regulatory and structuring costs ensuing from the synthesizing of conventional
finance products by Islamic banks to suit their needs. This cost, passed on to the
customer, is accepted as the ‘price’ one must bear to make Islamic finance a
viable and available option in a mostly conventional finance dominated market. 4

That said, and in the face of otherwise strict prohibition against interest based
lending5, I became curious about the available options for personal/consumer
borrowing? In my previous writing I have noted and I here re-iterate the
potential viability of Grameen bank like projects in Islamic jurisdiction towards
socio-economic welfare and development. I recognize that their application and
benefit may be context specific but it would be fallacious to dismiss the Grameen
model simply because the interest charged may be classified as riba. As noted
above, such interest can, in any case, be synthesized as operational coasts (a fact

3 Saleem, M., Islamic Banking – a $300Billion Deception (New York 2005). See also,
Tarek Al-Diwany, The Problem with Interest, Kreatoc Ltd, 2003.
4 Thomas, A., (ed.) Interest in Islamic Economics: Understanding Riba (Routledge,
London 2006). See also, Usmani, M.T., An Introduction to Islamic Finance (Kluwer Law
International, The Hague 2002).
5 Rodney Wilson, Economics, Ethics and Religion: Jewish, Christian and Muslim
Economic Thought, Palgrave, 2007.
of notorious application by the Islamic finance industry). However, being Kenyan
and having experienced the micro-financing success and socio-economic
contribution of M-Pesa to the consumers and development of the nation, I was
then drawn to enquire into whether the M-Pesa model can be emulated by
Islamic finance (IF) jurisdictions to serve principles of Islam and the objectives of
the Sharia that inspired the likes of Mit Ghamr in the 1960’s before the advent of
the modern Islamic Banking industry. What follows is a synthesis of my views in
this regard.

II. Brief Background of Islamic Finance: Origins and Ideals

The origins of Islamic banking is two fold; in part a response to the socio-
economic developmental needs of the Muslim countries it was piloted in and in
part a political ploy at identity distinction. It is the socio-economic dimensions of
Islamic banking I am concerned with and will thus briefly state its origins in such
before expounding on how these origins can be re-claimed and applied for the
benefit of the wider population in the countries it is practiced. 6

The tale began, as told, by Islamic banking experiments in 1950s Pakistan based
on Islamic principles but inextricably driven by the patent socio-economic needs
of the country. Of course, given the rift with and from Hindu India, the political
identity dimension is immediately obvious. Ahmed Al-Najjar’s experiment in
Egypt through the socio-economic Mit Ghamr scheme in 1963 followed suit. Al-
Najjar is likely to have been influenced not only by the socio-economic thoughts
he encountered in his years of study in Germany but also by the social ideals of
the Muslim Brotherhood in Egypt at the time. The Tabung Haji scheme in
Malaysia in the 1960s addressed, and still fulfils, socio-economic needs of the
people albeit on a specific religious aspect that requires substantial undertaking
by its participants. These examples are rudimentary but real and in their own
way, each attributing a success of real value and contributing proportions to the
populations amongst which they took root in.7

6 For a general introduction see: Vogel, F. and Hayes, S., Islamic Law and Finance:
Religion, Risk and Return (Brill-Leiden, Boston 2006).
7 El-Gamal, Islamic Finance: Law, Economics and Practice, Cambridge University Press,
2006.
Today, as in the last decade, the ideal that sparked Islamic banking seems to have
been ‘lost in translation’ along the way of becoming capitalised Islamic Banks in
Kuwait, Dubai and Saudi Arabia in the 1970s and everywhere they exist today.
Even the success of Malaysia’s Islamic banking hinges not so much on its socio-
economic dimension but its liberality in synthesizing conventional modes of
financing into equivalent ‘Islamic’ counterparts and the governments’ support,
variously, in facilitating its success.

Running away with the ideal, not only did the micro-finance element get lost, but
the socio-economic development-oriented essence got thrown out with the bath
water. Many today criticize Islamic banks for failing to deliver economic and
social development to Muslim populations that remain among the poorest and
least educated in the world. As predicted by its early pioneers, the Islamic
banking industry today has been taken over by foreign banks that have been able
to capture a significant market share in an industry built upon synthesizing loans
and bonds from sales and leases.8

The purpose of this chapter is not however to lament the woes of an industry
gone awry from trading its ideals for capitalist returns and political identity
distinction in an increasingly seamless globe. In light of the foregone, this
chapter aims to explore the potential transposition of the hugely successful
Kenyan M-Pesa system of micro-finance in developing countries that are also
Islamic banking jurisdictions.

III. M-Pesa Explained: A Glocal Success Open to Emulation

M-Pesa is a mobile service, which allows users to store money on their mobile
phones and through this offers an array of banking and financial services. If you
want to pay a utilities bill or send money to a friend, you simply send the amount
by text and the recipient converts it into cash at their local M-Pesa office. It is

8 El-Gamal, Islamic Finance: Law, Economics, and Practice, Cambridge University

Press, 2006, 163-164.
cheap, easy to use and, for millions of Kenyans unable to access a bank account
or afford the hefty charges of using one, nothing short of revolutionary. 9
Yet M-Pesa was not conceived as a standardized mobile-money service. Instead,
it evolved organically on the streets of Kenyan cities and villages. It was initially
a microfinance project funded jointly by Vodafone and the British Government.
M-pesa subscribers immediately started using the service to transfer money
between themselves, filling a newly obvious gap in the Kenyan financial services
sector and birthing the success it is today. Consequently, M-Pesa has
dramatically changed both the global mobile-money market and daily Kenyan
life whether it be in making the streets safer, empowering women or spurring
economic development, from deepening the credit market to making long-
distance money transfers cheaper and easier. As Mrs. Mwangi-Thuo remarks,
“It’s just touched the very soul of the country,”. 10 “It’s humbling. I have relatives
who say, ‘I don’t know what I would have done without this.” This expresses the
patent nation-wide socio-economic impact M-Pesa has had; providing grass-root
value and tangible contribution.

Within a year of its launch, M-Pesa (the “M” stands for mobile and the word
“pesa” is Swahili for money) had 1 million subscribers. In five years, it had grown
in operation to more than 37,000 agents and was being used by more than one-
third of the country’s population.

How Does M-Pesa Work?

In a nutshell, one registers to join Mpesa at any Mpesa agent. Registration is free.
Once registered, a person can “load” money onto their phone at any agent by just
handing over cash, which is then credited onto your phone. Of course, a relative,
friend, or employer can credit money onto your mobile account for you – just as
they could with a bank account.

9 http://www.guardian.co.uk/technology/2011/jul/24/mobile-phones-africa-
microfinance-farming
10 Betty Mwangi-Thuo is the chief officer for new products at Safaricom, Kenya.
She oversees the firm’s value added service department, as well as all of its
projects that intersect with the GSM Association. She is responsible for the M-
PESA mobile financial service.
What Does M-Pesa Comprise? M-PESA comprises four core services:
i) paying bills;
ii) purchasing airtime;
iii) transferring money to other MPesa users and non-users alike; and
iv) depositing and withdrawing money.

It is notable that Safaricom 11 didn’t invent mobile banking, which existed

previously in countries like Norway and Japan, yet the scale and effect it has in
Kenya is seismic and nothing short of revolutionary in comparison.

Why Does M-Pesa Work?

For clarity and ease of extending the example of M-Pesa, I am setting out the
features of M-Pesa and the reasons why it is hugely successful in bite size sub-
headings that may be useful reference points even for those familiar with M-
Pesa.

✓ Large Unbanked Population: It is fact that the banks in Kenya were just
not interested in the unbanked people because they could not afford their
fees or rates and otherwise fell ‘below’ the class that used bank accounts
and related services. Mpesa came in and gave these very same
disenfranchised people (with a palpable need for banking and finance) a
great service. In economic terms, M-Pesa caters to a hethertofore
‘missing-market’.

✓ Price Matters: Registration is free and M-Pesa users pay a small fee for
the services provided. Comparable to the cost and risks users bore prior
to the availability of M-Pesa in transferring and remitting money outside
the conventional banking system, the fee charged by Safaricom is
reasonable as demonstrated by its ready usership and loyal customer
base even in the face of cheaper rising competitors.

11 Incorporated in 1997 as a subsidiary of state telecom agency, Telkom Kenya.

 ✓ Easy Usability: The M-Pesa service works on (basically) any phone thus
enabling anyone with a basic GSM mobile phone to register and use the
array of services it makes available.

✓ Access and Accessibility: “One of our core successes was the

commitment of management,” Mwangi-Thuo says. “We had to be ready to
put in the money and resources necessary for a good distribution network
so that people would not have to travel far again to access their money.
That would have defeated the whole purpose.12”

✓ Trust: Having thousands of MPesa agents would have meant nothing if

users had not trusted Safaricom with their money. Safaricom has always
been a Kenyan product. It is owned by Kenyans. Safaricom has always
positioned itself around finding solutions for Kenyans, and Kenyans like
that. Kenyans are proud of it and trust it.13

✓ Safety and Simplicity: Not only has Safaricom invested in M-Pesa to

ensure its safety and reliability so as to earn the trust and loyalty of its
customer base, the system is also simple enough that people are confident
that when they send money to their parents and grandparents they will
get the money. This confidence in the system is key.

✓ Regulatory Support: M-Pesa’s success is partly due to the supportive

regulation it received from the Central Bank of Kenya, which proved
exceedingly open to ‘innovation first, regulation later’ allowing M-Pesa to
develop outside the traditional financial-services industry. The uncertain
position of M-Pesa in relation to the established banking system worried
the original M-Pesa team greatly, and the Central Bank could have
inhibited the project from inception; but it didn’t.

12 Betty Mwangi-Thuo, General Manager of Financial Services, Safaricom, Kenya.

13 An Interview with Betty Mwangi-Thuo: “An African Success Story: Its not about the
Phones” http://www.ericsson.com/res/thecompany/docs/publications/business-
review/2012/issue2/an_african_success_story_explained.pdf
 ✓ Consolidated Market: Whilst somewhat oligopolistic, competition exists
that in fact offer cheaper rates for their services than Safaricom’s M-Pesa.
Nonetheless, the fact that Safaricom dominates the market has facilitated
a consolidated market, which makes life easier for consumers.

✓ Multiple Usability: Whether its B-B, B-C or C-C (B and C standing for
Business and Consumer, respectively), M-Pesa ticks the box. Businesses
can make mass payments allowing, for instance, builders to send money
to their workers via their mobile M-Pesa accounts or on a bigger scale
allowing companies to pay workers by uploading CVS files. On the
interpersonal front, sending remittances across the country, paying your
bill at the local store or simply transferring money to a loved one has
never been easier and of course infinitely safer than having bundles of
cash.

Socio-Economic Impact of MPESA

To the ordinary Kenyan, the value created by MPesa is unparalleled. In 2011 a

study found that M-PESA has contributed to improving the outcomes of
individual Kenyans by facilitating more frequent money transfers and
remittances, increasing access to funds, and indirectly promoting savings and
banking patterns among users. In fact, after discovering the multiple benefits of
M-Pesa, many users considered accessing more financial services including a
bank account. They saw the benefits of combining a bank account for their
savings and M-Pesa for keeping small amounts and transactions. Many formal
banks offer this option in the admirably supportive Kenyan banking system. The
Central Bank of Kenya, particularly, has played a supportive role of facilitating
the taking root and growth of MPesa. It could be argued that this was a wise
decision taken in view of the long-term fact that improved socio-economic
conditions of people, whatever the location, gender or designation feeds into the
nation’s socio-economic growth and gross domestic product (GDP). Such vision
recognized that Socio-economic development and GDP growth engendered by
MPesa would feed into the central banking system; as reality now attests. 14 In
2011 M-PESA won the AfricaCom Changing Lives Award for having “significantly
impacted African telecommunications in the community and contributed to
economic and social development.”15

In my research I was also interested in its impact on women and especially

marginalized Kenyans without access to the conventional banking system.
A study by Plyler et al (2010) focuses on economic effects at the community
level. The survey was conducted in two districts (Murang’a and Kitui) with a
large percentage of the population in rural areas and a town centre and also in
Kibera, the slum close to Nairobi. In summary, their findings show that women
rank number one in improved money security and that by using M-Pesa, they
could accumulate cash and keep it secure from pickpockets as well as from their
husbands. This gain by women in the privacy and control on their expenses has
been pivotal towards their overall empowerment.16

M-Pesa empowers rural women by making it easier for them to solicit funds
from their husbands and other contacts in the city. The mobile phone, in
conjunction with M-Pesa, is a powerful tool for mobilizing remittances. Before
these technologies were introduced, rural women had to travel to the city or post
office by bus to get money. They then had to travel back to the village. This
process could take over a week. Now they can simply use a mobile phone to
request a remittance and receive it at a nearby agent, making it easier for rural
women to solicit funds from their husbands in the city. It is also easier for them
to solicit cash from other contacts when their husbands refuse to make the
14 Isaac Mbiti and David N. Weil, “Mobile Banking: The Impact of M-Pesa in Kenya”,
NBER Working Paper No. 17129 June 2011, http://www.nber.org/papers/w17129

Shared Value initiative, “M-PESA: Financial Services for the Underbanked”

http://www.sharedvalue.org/sites/default/files/resource-
files/SharedValueinAction_MPESA_12-2013.pdf

Robert Cull, “M-PESA: Mobile Payments, Improved Lives for Kenyans” Research at the
World bank, May 2010, http://go.worldbank.org/0SE6OB70I0
15 http://sharedvalue.org/sites/default/files/resource-files/SharedValueinAction_MPESA_12-
2013.pdf
16 Plyler, M. G. et al. 2010. “Community-Level Economic Effects of M-PESA in Kenya: Initial
Findings”. Iris Center, University of Maryland, USA.
transfers. This has increased the financial autonomy of the women and has made
them less dependent on their husbands for their livelihoods. In one study for
instance, reports that women are saving using M-Pesa and are able to pay for the
quantity of fish they take rather than buying on credit.

Many women now have the ability to save their money in a safe place. In the
study, the women stated that they were much less likely to use their money
when they saved it via M-Pesa as opposed to when they kept their money in their
homes. They also have the ability to save for more costly activities and
purchases, help their families or expand their business and more importantly,
send their children to school.

Transportation expenses have drastically decreased. This includes the costs of

transporting the money since they would have to stop working for a period of
time to physically take the money to the recepients. They can now use this extra
money and time in their business or occupations and make a greater profit.

The positive impact of M-Pesa on the women of the Luo fishing community, for
instance, is obvious and as White concludes: “The study could also be expanded
to research the impact of M-Pesa in industries other than fishing.” 17 Indeed, on
many of these points the benefits indicated could well apply to young
entrepreneurs or college students, soliciting, remitting or managing finances
towards their particular needs. A budding entrepreneur or student can request
and receive funding directly, and can remit it directly without having a bank
account, depending on a third party nor suffer being duped or disappointed by
the person collecting or transferring it on his behalf.

White also examines the case of a college-educated woman, very involved in her
community. M-Pesa allows her to have better gains through her ability to receive
payment from other MPesa users. As she does not have to travel to remit or
transfer money, Mpesa also allows her more “free time and since she was well

17 White, D. 2012. “The Social and Economic Impact of MPESA on the Lives of
Women in the Fishing Industry on Lake Victoria”, Independent Study Project
(ISP) Collection. Paper 1246.http://digitalcollections.sit.edu/isp_collection/1246
educated and fluent in Kiswahili, Dholuo, and English, she was able to attend
different conferences, meetings, and trainings in the area. Not only can she profit
and perhaps make a profit by attending these events, but she is also able to use
the knowledge she gains there in her own community. The use of M-Pesa thus
makes women generally and rural women specifically more independent (81%
of interviewees); and they no longer have to rely on others for money or banking
related matters.

What’s the Secret to M-Pesa’s Success?

M-pesa’s success lies in Safaricom’s:

Relationship with its Customers: a two-way relationship that allowed, and

continues to allow, a strong incumbent to innovate like a scrappy startup. The
service’s success has depended on subscribers continuously providing feedback
to Safaricom. And because Safaricom listens and implements the feedback it
receives, it has been able to climb several steps up the user-experience ladder.

Consumer Education Against Fraud: To back this up, Mwangi-Thuo cites

consumer education against fraud as one of her highest priorities, as well as the
importance of simple, consistent advertising. All this attention to customers
has paid off with good buzz, great loyalty and a service that became an integral
part of the Kenyan society.

Return on Investment: It was also key that Safaricom did not expect an
immediate return on its investment. The operator saw mobile money as a pure
value-added service, a way to cement its bond with its customers.

Peer-to-Peer Component
Kenya has long had urban communities that largely support rural communities,
so people have always been sending money home, but as more and more
services became available on the platform, people wanted to use MPesa to pay
their water, electricity and TV bills, for example. Once again, Safaricom listened,
rolling out payment agreements with utility companies, supermarkets and other
retailers. Employers are also able to pay salaries through M-Pesa.

It is no false claim to state that there is, globally, no mobile-money success story
quite like M-Pesa. The concept has led operators, banks, and credit-card
companies on a far-reaching search for the right formula for mobile wallets,
mobile payments and so on. Today, M-Pesa is integrated with more than 25
banks, both local and international, that operate in Kenya, and which allows
banked subscribers to use M-Pesa to access the funds in their bank accounts. 18

IV. Islamic Finance ala M-Pesa

Islamic Finance is, at least in principle, about meeting the socio-economic needs
of its communities and people as per the Maqasid al-Sharia. The summary of M-
Pesa I set out above is thus to demonstrate first hand how an organic home
grown micro-financial project with the socio-economic needs of the people at the
heart of its aims is a real possibility even without Islamic garb or terminology. A
key feature of MPESA for purposes of Islamic Finance is that it is a non-credit
based system of financing with services that create real and tangible value to its
users. Each MPESA account, is based on actual cash and every transaction or
transfer paid for by the available cash in the account, very much like a debit card
system but on a mobile phone linked account. Thus, the money in store or
circulation via MPESA is backed by actual money available; it neither builds a
credit bubble nor contributes to an inflationary or false value evoking system of
finance. An MPesa system is ideal for Islamic banking as its theory eschews debt
based financing. In so highlighting, I am of the view that an urgent re-turn of
approach by the IBF industry is required with the purpose of creating products
or financial services that serve people. The industry has rushed towards
global/macro success whilst not being mindful of its local/micro responsibilities.
Bearing in mind that the brand being sold or touted is Islam, its products and
financial services must have real tangible effect to the man on the street; the
hawker, teacher, bus driver, every blue-collar person that serves the society, man

18 The Economist, “Why does Kenya lead the world in mobile money?” May 27th
2013,http://www.economist.com/blogs/economist-explains/2013/05/economist-
explains-18#sthash.6oGfJV3g.dpuf
or woman. This should be the focus of Islamic finance and in so doing create a
symbiotic relationship that will feed the success of its product spread much like
with M-Pesa in Kenya. After all, Islam is no ‘Big-Business in Dubai, KL, Doha or
Jeddah’ philosophy. It is for every man, women and child and likewise must cater
to everyone, rich or poor, man or woman, young or old, as does Islam. When we
have homeless people, destitute women, uneducated youth and idle adults
without jobs in Islamic nations, the global extent of Islamic Finance’s success is
worth little. With this in mind, I have deliberately broken down the elements of
M-Pesa set out above into discernible micro-finance and socio-economic aspects
that any jurisdiction would benefit focusing on or attaining.

The specificity of the product spread and financial services created will differ in
each jurisdiction according to its needs. I am not herein advocating that Islamic
banking jurisdictions should replicate M-Pesa’s form in their countries, though
some may and others already have (Bangladesh) with varying success. I am not
rallying Islamic banking jurisdictions to jump on the mobile-banking band
wagon; I am simply setting out an example of a home grown organically
developed financial service and product spread of tangible micro-economic
impact as an example the effect of which can be emulated towards socio-
economic benefit. In other words, it is the substance and socio-economic effect of
M-Pesa that I am putting forward for emulation. Such a project, as detailed in the
preceding section, requires a multi-tiered, multi-party collaboration and effort
along with investment commitment that is willing to wait for a return on its
investment whilst the value takes root among the people. Yet the heart and focus
of the project is socio-economic benefit of all and one that makes a real monetary
and developmental difference to the nation even whilst earning the commercial
entity substantial profit and global success.

V. Living up to Islam in Islamic Banking

Islamic Banking is a nascent industry. Having only taken off in the past couple of
decades, it is hardly surprising that the future of Islamic finance appeared bright:
novelty, both of the products and mode of investment, for Muslims and non-
Muslims alike, strong state-support and sovereign-fund backing resulting in
lower risk of investments and the undoubted need for liquidity and development
finance in Muslim populated jurisdictions created an appetite for Islamic finance
products. The story is less glamorous today. Following the 2008/2009 global
financial crisis, scores of investors left cities like Doha and Dubai and the Islamic
finance industry slowed down. Even the residual success buoyed by the exposure
of the inadequacies of the global financial system is fragile. Given the fast
declining scope for further growth as a result of current financial market
conditions, tighter regulatory controls resulting from increased awareness about
sharia arbitrage practices and the diminishing difference between conventional
banking and Islamic finance, an enquiry into change in mode and scope of Islamic
finance has been triggered. Inefficiencies arising from an industry built on
arbitrage that have resulted in an increase in transactional costs and a rise in
legal and juristic fees has now been exposed by a financial crisis of global scale
that has called for tighter regulatory control and monitoring. The effect of the
recent global market conditions had created an interest in synthesising
conventional financial products in line with the sharia which the Islamic finance
industry called ‘innovation’; the very innovation that was initially depicted as
‘prohibited’ and have now become unsustainable.

The novelty is wearing off and the masses have caught on the ruses employed or
the lacking substance behind the terms that they initially accepted in blind faith
of the label “Islamic”. The growing sentiment is that if the products are the same
under different labels, guises and structures, why should one opt for ‘Islamic
Finance’? why should one pay more for the label? This is a question the Industry
has to answer.

Whilst supporting the harmonization of Islamic finance with conventional

finance, my emphasis lies in the urging of a re-orientation of Islamic finance. The
essence of Islamic banking and finance, if it is to be sustainable and win the
hearts of the currently disenfranchised and disillusioned Muslims, should be
equitable outcomes through efficient processes that make a real contribution to
the lives of people. This should take priority over simply restructuring
conventional finance products and services that make no real difference to the
socio-economics of the nation nor contribute to the welfare of those who need it
most. Islamic finance cannot continue to make the profits it has enjoyed without
making a meaningful difference to the financial and developmental needs of
Muslims. It needs a new identity and the label ‘Islamic’, if it is to be retained,
must be earned through the economic substance it creates. While principles of
Islamic economics are totally compatible with making profit and creating wealth,
Islam stresses the requirements of equitable dealings, social justice and
efficiency of outcome. How then might Islamic finance go about achieving these
objectives? The most logical and simplest place to commence is a transactional
focus on substance with the complementary use of form for purposes of attaining
such substance, in all its structures and products.

Towards this return-to-substance approach, the example of M-Pesa and its

detailed breakdown herein is set out for emulation, inspiration or simply as
food-for-thought to developing Islamic banking jurisdictions. Making a socio-
economic difference through micro-financing projects of local proportions is not
mutually exclusive with global success, ‘big’ money and value based brand
setting. Undertaken with the proper intention, thorough research and the
implementation of customer feedback at each step, success is likely to follow
whilst having made a real difference where and with those it matters most.

The Future of Islamic Finance

To conclude, I would like to suggest a few areas of focus for the Islamic Finance
industry moving forward. I feel it imperative that women and the marginalized
feature higher up on the consumer list of Islamic Finance options and services, as
the Mpesa example in Kenya illustrates. The youth who are not independently
wealthy are also a key area of priority to develop financial solutions for. After all,
it is the youth of today, collectively, who form our future and thus the future of
Islamic finance. Providing them equitable financial solutions today will inspire
them to greater heights of equitable and efficient financial solutions for
tomorrow with multiplying social benefits under the banner of Islamic finance.
The interest free loans Britain plans to make available to university students is a
great example that Islamic Finance jurisdictions can emulate. Why are these two
areas of focus vitally important? Simply, because women in Muslim countries
often comprise more than half of the population. To financially enable a woman
is thus to better enable the household and to uplift the socio-economic condition
of the nation significantly. The youth, also often the majority in Muslim nations,
are both marginalized and financially dependent. To allow them a means to
independently educate themselves through financial solutions allows them not
only hope and a productive occupation with tangible socio-economic results, but
also greatly contributes to the future prospects of the economy (supply-side
economics).

Education, entrepreneurship and venture capitalism must take greater

prominence as avenues of investment all of which have a firm foundation in
principles of Islam. In economic terms, Islamic finance’s focus must shift from
demand side policies to supply side policies. These are basic concepts known to
anyone with fundamentals in economics. A discussion of supply side economics
in Islamic finance jurisdictions, however brief, is not the object of this paper.
Suffice it to say that supply side policies are investments made in the very fabric
and infrastructure of society that reap long term economic benefits with
multiplied effect. Part of this shift in focus, is retracting from being a macro fad
that is focused on global conglomerates, rich sovereign players or cash-flushed
consumers. It must start at the micro level and focus on winning the hearts and
minds of people, both Muslims and others alike, by serving all segments of
society.19

19 Michael Porter, “Creating Shared Value: The Path Forward” FSG CSV Leadership
Summit, Lecture Delivered on May 31, 2012,
http://www.isc.hbs.edu/Creating_Shared_Value.htm

Michael Porter, TED Talk “Why Business Can be Good at Solving Social Problems”
http://www.ted.com/talks/michael_porter_why_business_can_be_good_at_solving_socia
l_problems filmed on June 2013 at Ted Global Talks.