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World Bank Day: More engagements to come with Islamic finance

Faaza Fakhrunnas and Yunice Karina Tumewang (The Jakarta Post)
Yogyakarta
Mon, March 26, 2018

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World Bank Day: More engagements to come with Islamic finance The World Bank will celebrate its 74th anniversary in July, this year. (Shutterstock/File)

T

he World Bank will celebrate its 74th anniversary in July, this year. It is therefore high time to remind the main goal of its establishment as appears on its motto ‘Working for a World Free of Poverty’.

Since its establishment on July 1944, more than a half century ago, this motto is translated into a single mission of ending extreme poverty. Then, for the first time in the history of the World Bank Group in October, 2014, the re-appointed President Jim Yong Kim declared that they have set a twin goal by having an additional aim to reduce global inequality (World Bank, 2014).

As a result, income inequality today has become a much discussed subject around the globe which is in line with the recent survey conducted by a Pew Research Center, which found that more than 60 percent of respondents worldwide regard the gap between rich and poor as a major concern. Even some researchers found that inequality is worse than what we think with two main reasons. First, inequality impedes growth. Every a percentage point increase in the income share of the top 20 percent is associated with 0.08 percentage point lower GDP growth in the following five years.

In contrast, the same percentage increase in the income share of the bottom 20 percent is related to 0.38 percentage point higher growth (IMF, 2015). Second, it hampers poverty reduction. The Asian Development Bank (2012) says that “if inequality had remained stable in the Asian economies where it increased, the same growth in 1990–2010 would have taken about 240 million more people out of poverty.

Considering this additional goal, there has been a shift in the approach World Bank needs to take. It moves from the traditional ‘trickle down’ to ‘shared prosperity’.

Trickle down was first coined by American humorist Will Rogers, who mocked President Herbert Hoover’s efforts to recover their economy after Great Depression, saying that “money was all appropriated for the top in the hopes it would trickle down to the needy.” It, then, becomes such economic dogma within two generations which assumes that any undifferentiated growth permeates and fortifies the soil, then everything starts to bloom even for the poor.

However in fact, this assumption went wrong. Mehrun Etebari revealed that the data from the past 50 years strongly refutes any arguments that cutting taxes for the richest Americans (in order to maximize their wealth) will improve the economic standing of the lower and middle classes or the nation as a whole.

 

Additionally, we can take a look at China, country which maintained one of the highest rates of growth, yet at the same time one of the highest wealth disparities on the planet. It suggests that economic benefit or growth does not trickle down.

Having this fact, we need to find an alternative approach that is more suitable to face the big challenge of our time which is in form of income inequality. As President Kim mentioned in his recent speech, “The World Bank Group’s approach to addressing this problem (read: inequality) is embodied in a term that suggests a solution: boosting shared prosperity”. The main distinction with the traditional approach is, instead of looking at GDP growth, shared prosperity is directly looking at the income of the less well-off people. It promotes an equal opportunity to improve living standards of all citizens not just few as what depicted in the study by Oxfam (2014), nearly 50 percent of the world’s wealth is owned by only 1 percent of world population.

 

In achieving the shared prosperity, the efforts might differ among countries, but still share something in common which is stimulating financial inclusion. For country like Indonesia, the most populous Muslim country with the largest number of Islamic financial institutions, Islamic Finance is appropriate to be utilized as the catalyst for shared prosperity.

As what formulated in the masterplan for Indonesian Islamic Financial Architecture (2016) the Islamic finance should go beyond its banking sector and maximize the other huge potency of non-banking institution that is unique and built from the bottom such as Baitul Mal wat Tamwil (BMT).

With the large number of more than 5,000 BMTs in Indonesia, it could cover the limitation of Islamic banking to reach the grass root of society since financing the informal sector (small traders) is usually associated with high level of cost as well as risk. Moreover until now, BMTs are not tied with any regulation from government, which makes them free to innovate their products. They could integrate social products such as Zakat, Infaq, Shodaqoh and Wakaf in providing financing to poor informal sector entrepreneurs. Ultimately, the agenda of World Bank to move toward shared prosperity could be done through inclusive Islamic Finance particularly in Indonesia.

As part of its work on Islamic finance, the World Bank, in partnership with the government of Turkey, established the Global Islamic Finance Development Center in 2013 as a knowledge hub for developing Islamic finance globally, conducting research and training, and providing technical assistance and advisory services to World Bank Group client countries interested in developing Islamic financial institutions and markets.

Also, in July 2015, the World Bank and the General Council for Islamic Banks and Financial Institutions (CIBAFI), the global umbrella of Islamic financial institutions, signed a Memorandum of Understanding (MoU) to help foster the development of Islamic finance globally and expand its use as an effective tool for financing development worldwide, including in non-Muslim countries.

Following that, the Islamic Financial Services Board (IFSB) and the World Bank’s Treasury and Finance & Markets Global Practice Group have hosted a High-Level Seminar on Islamic Finance with the theme, “Islamic Finance and the Sustainable Development Goals” on Oct. 6,  2016 in Washington, D.C., US.

In addition to that, several meetings and conferences have been successfully organized by the World Bank discussing recent issues on Islamic Finance. Annual Symposium on Islamic Finance which firstly held in Istanbul on 2015, which then followed by Morocco in 2016. And recently December 2017 in Malaysia. Another conference jointly held by Securities Commission Malaysia (SC) and World Bank Group at the SC’s headquarters, Kuala Lumpur on May 2017 with theme “Islamic Finance and Public-Private Partnerships for Infrastructure Development”.

Further, in recent operations in Egypt and Turkey, for example, the Bank Group helped governments to design Sharia-compliant financing frameworks to expand financing for small and medium scale enterprises. All of these engagements have witnessed many progress and innovations in Islamic Finance such as the launch of Green sukuk, the use of Islamic Endowment funds for long-term investments, leveraging Islamic Financial Technology (FinTech) and waqf (Islamic endowment funds) to provide alternative financing for micro small medium enterprises. Hopefully these engagements can be more and more massive ahead in order to create an enabling environment for a world without poverty.

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Faaza Fakhrunnas is a lecturer at the Indonesia Islamic University (UII), Yogyakarta,  and Yunice Karina Tumewang is a researcher at the same university.

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