Potential of INBMFIs

2.2.2 Potential of INBMFIs

A number of factors make the INBMFIs potentially beneficial for the development of sound, efficient and accessible Islamic financial sectors. These factors are:

i) Historically, the NBMFI segment’s share of total financial sector activities has grown along with financial development as banking loses its relative significance. Because of the special status of investment accounts, licensing requirements for Islamic banks are very strict. Against this

background, the geographic coverage of the INBMFIs is much wider due to the highly specialized nature of services and, hence, the relatively easier licensing requirements. As such, INBMFIs constitute true backup institutions for the IFSI, with the potential of becoming the vehicle for spreading Islamic finance to most jurisdictions. Putting the next ten years into perspective, it may be envisaged that the assets of the INBMFI segment will make up around 8–10% of the total IFSI assets.

ii) When compared to the conversion of conventional banks into Islamic banks, or even to the development of Islamic banks, the conversion of conventional NBMFIs into INBMFIs, and their subsequent development, is relatively easy. Moreover, due to the differences in the licensing and regulatory requirements, as well as the asset–liability structures, of the institutions, the development as well as transformation of INBMFIs is expected to take a different form and to be relatively less challenging as compared to the Islamic banking industry. Transformation of conventional NBMFIs involves, among others, elimination of the undesirable elements (such as riba and gharar) from their transactions. In this process, the functions performed by the INBMFIs are similar to those of their conventional counterparts, although the operations would be within the bounds prescribed by the Shari’ah. This method of creating IIFS would keep the same institutional format but would change the juristic basis used. Depending on the specific cases, this can be done at different levels of difficulty – sometimes by minor adjustments, while in other cases with extensive modifications.

iii) Adaptability is expected to be relatively easier for transactions that do not have prohibited elements. For example, venture capital providers would easily qualify as Islamic institutions. Conventional leasing companies, mortgage finance institutions, finance companies, saving associations, microfinance institutions, etc., converted into IIFS are examples of cases where the institutional structure of the conventional NBMFIs is retained, but the contracts used are adapted to be compatible with Shari’ah.

iv) The establishment of unique INBMFIs replicating, for example, Tabung

Haji, Modarabah Companies, Qard Hassan Funds, Awqaf Foundations and pawning institutions is also expected to be easier if encouraged by the public sector. These institutions have unique features serving different purposes in the economy. Development of social-oriented financial institutions – for example, by pooling obligatory charities (zakah) and voluntary charities (sadaqah and interest-free loans) in an Islamic financial system – will fall in this category.

v) INBMFIs allow functional specialization of financial services. In their

diversity, these functions range from providing risk capital to offering social services. Islamic banks are often called for to cater to these specific

needs. However, banks are neither suitable to offer venture capital-type financing, nor can they offer social services. The INBMFI framework allows the establishment of institutions catering to such diverse needs of the society. Socio-economic justice and equitable distribution of income are among the paramount goals of an Islamic economy, and these goals must be reflected in an Islamic financial system. There are various institutions and structures Islam has installed through which income and wealth can be redistributed to fulfil the basic needs for all in society. Among others, zakah, awqaf and qard hassan have played an important role in the past in increasing the welfare of society and mitigating poverty. These charitable acts have wide economic implications. The social objectives of the Islamic financial system can be fulfilled if these important traditional Islamic institutions are integrated into the contemporary financial sector. Although, in the conventional sense, such institutions are not a part of the financial sector, it cannot be ignored that they have a large potential for economic development, being part of the Islamic financial sector.