Islamic finance-an entrepreneurship perspective consultancy
In recent years Islamic finance has enjoyed rapid growth, but several challenges remain. Data show that there is significant unmet demand for shari’ah-compliant financial services, particularly among micro, small and medium-sized enterprises (MSMEs).
Moreover the risks of concentrating in real estate, corporate and government finance have been highlighted by the recent financial crisis, given their higher level of systematic risk compared to other segments like MSMEs. Finally, current shari’ah compliant product offerings to MSMEs are highly concentrated in leasing and asset resale contracts with limited use of the more legitimate profit and loss sharing contracts.
Successfully scaling up Islamic finance in the MSME market, particularly using profit and loss sharing contracts, requires resolving the problems of identifying good borrowers (information asymmetry) and ensuring repayment (moral hazard) with new technologies that are appropriate to the characteristics of this market. Namely they must have low transaction costs, few information requirements and be highly scalable to make a large portfolio of smaller financing sizes profitable.
The Entrepreneurial Finance Lab Research Initiative at Harvard’s Center for International Development has been piloting new screening tools that offer to resolve these problems, and are ideal complements to profit and loss sharing contracts. Adapting and implementing these tools offers a significant profit opportunity to Islamic finance institutions as well as an opportunity to accelerate entrepreneurship and economic growth in their countries of operation.
ISLAMIC FINANCE – GROWTH
Islamic finance is a booming industry. Despite the financial crisis which has plagued the economies of both industrialized and developing nations, the Islamic finance industry has been flourishing and has enjoyed a 29 percent growth in assets in 2009 and an 8.85% growth rate in 2010.
These assets are currently estimated to be worth $895 billion (The Banker 2010). Moreover the Global Head Islamic Finance of Thomson Reuters predicts that Islamic finance industry will be valued at $2 trillion in the next 5 years (MENA News Headlines 2010).
Over the course of 2010, 20 new banks offering shari’ah compliant financial products have entered the market. Moreover, an additional seven conventional banks began offering services via shari’ah compliant windows. Figure 1 depicts the level and relative growth of the number of institutions offering Islamic financial products (The Banker2010) and shows that this growth has continued in spite of the financial crisis.