IFSB Seminar Discusses Financial Inclusion and Islamic Finance

Jakarta, 9 April 2015

The Islamic Financial Services Board (IFSB) successfully organised a 'Seminar on Enhancing Financial Inclusion through Islamic Finance' on 31 March 2015 in Jakarta, Indonesia. This Seminar is organised in conjunction with the IFSB Annual Meetings and Side Events 2015, and hosted by the Bank Indonesia.

The one-day Seminar aimed to explore the role of Islamic finance in supporting financial inclusion, the building blocks necessary for the development and promotion of access to finance to the uncovered population and key success factors and challenges in promoting financial inclusion for greater shared prosperity, financial stability and economic growth.

Over 180 delegates from 25 jurisdictions among the IFSB member and non-member organsiations - representatives from market players, regulatory bodies, international agencies - Shar?`ah scholars as well as academia and other interested parties from the public attended this Seminar.

H.E. Agus D.W. Martowardojo, Governor, Bank Indonesia, in his Keynote Address highlighted the importance of providing greater financial access to the underserved segments of the population in order to offer equitable opportunities in the society and fostering sustained economic development. In order to achieve this objective, he noted that "Islamic finance has a great concern over having a better outreach in delivering financial services". He emphasised that "Islamic finance with a wider application of equity-based financing and micro-finance products can facilitate greater outreach to medium, small and micro enterprises to promote entrepreneurship and value-creating activities". Similarly, other steps can be formulated such as integrating the commercial sector with the Islamic social sector to come up with financial services that are reachable by the micro entrepreneurs and low income society in general. He lauded the role of the IFSB in promoting financial inclusion and suggested the preparation of a new standard on the microfinance activities, which can support operational prudence practiced by the market players.

H.E. Dr. Muliaman D. Hadad, Chairman, Indonesia Financial Services Authority (OJK), in his Keynote Address, outlined the importance of financial inclusion and the role of policy makers in escalating this as a matter of national importance. He explained that the first step to achieving this objective is to study the voluntary or involuntary nature of financial exclusion. Similarly, a study is needed on whether consumers make choices based on proximity and convenience or based on religion. Quoting various studies, he noted that voluntary exclusion due to religious reasons is particularly high in certain Muslim countries. He delineated that "fundamentally, Islam approaches inclusivity with either the principles of risk sharing or the principles of redistribution". In order to better apply the risk sharing principle and deploy a more accurate risk pricing mechanism, he highlighted the need of proper alternative benchmarks. On the redistribution side, he asked for a comprehensive introspection into the operation of Zakat and Sadaqah in order to ensure a sustainable approach which requires an infrastructure to identify the needy, and a more tailored solution, rather than the traditional bullet payment. He also proposed the establishment of dedicated Qard al-Hasan funds to address financing needs of specific target group and as a means to support social infrastructure financing. He noted that "without prioritisation and dedicated commitments from all stakeholders, we run the risk of perpetuating these imbalances on the global scale".

Earlier, in his Opening Remarks, Mr. Jaseem Ahmed, Secretary-General of the IFSB explained various initiatives being undertaken at the global level to enhance financial inclusion. Citing some recent developments by the G-20 and various standard-setting bodies, he outlined the milieu in which financial inclusion increasingly comes into discussions on the evolution of the international financial system. He noted that religious-based voluntary exclusion is a common reason in many OIC countries, which makes "financial inclusion a key challenge in the Middle East and North Africa (MENA), South Asia and Sub-Saharan Africa (SSA)". He updated the participants on various initiatives of the IFSB to provide guidance on financial inclusion, which include, ongoing joint project with the International Association of Insurance Supervisors (IAIS) on Issues Paper on Microtak?ful; policy guidance in the IFSB publications and Islamic Financial Services Industry Stability Reports; and participants in global dialogue with key partners and stakeholders. He mentioned that the IFSB's new Strategic Performance Plan 2016-2018 will include the work on financial inclusion as one of its objectives, which will be achieved through enhancing the existing partnerships with various international bodies and providing guidance on the approach to balance the regulatory perimeter in Islamic finance with financial innovation.

Dr. Halim Alamsyah, Deputy Governor of Bank Indonesia, in his Welcoming Remarks observed that financial inclusion, as a concept, has opened a number of alternatives for many countries in fighting not only the exclusion from financial access to low income population but also in enhancing social welfare. While observing that many of OIC member countries are facing common challenges in opening wider financial access to the low income society, he highlighted the relevance and timeliness of the Seminar.

The first session of the Seminar, themed, Promoting Financial Inclusion through Islamic Finance: Core Issues was chaired by Dr. Alfred Hannig, Executive Director, Alliance for Financial Inclusion (AFI). The speakers for this session were Dr. E. Mulya Siregar, Deputy Commissioner of Banking Supervision Indonesia Financial Services Authority (OJK); Dr. Pungki P. Wibowo, Head of Electronification and Financial Inclusion Programme, Bank Indonesia Transformation Office and Dr. Abdul Ghafar Ismail, Manager, Research Division, IRTI - Islamic Development Bank Group. The speakers provided their thoughts on the role of technology in expanding financial inclusion and the need for balancing it with appropriate policy tools. One of the major issues facing various jurisdiction is the absence of clear policies and strategies toward financial inclusion. They noted that a top-down strategy could be more effective whereby national financial inclusion programmes are synchronised with global and regional initiatives, with components on its promotion through Islamic finance. Among the major challenges identified by the speakers are developing the regulatory environment, products development and educational aspects. The session addressed specific steps taken by the G20 to enhance financial inclusion and called for more reliance on Islamic finance to build domestic savings and to stimulate business activities in various jurisdictions.

Enhancing the Capacity of Islamic Microfinance, Islamic SMEs and MicroTak?ful to Alleviate Poverty and Contribute towards Sustainable Economic Growth was the theme of the second session. The chairperson for this session was Mr Peter Casey, Consultant to the IFSB, with distinguished speakers including Mr. Saeed Ahmad, Deputy Governor, State Bank of Pakistan; Mr Dumoly Freddy Pardede, Deputy Commissioner for Non-Bank Financial Institutions Supervision, OJK and Professor Mohammad Kabir Hassan, University of New Orleans. The session stressed that, providing access to finance to low income level consumers will reduce social instability since financial inclusion can play a vital role in developing the financial sector. The speakers identified a range of issues facing microfinance and microTak?ful institutions, which included, inter alia: insignificant industry size, absence of regulatory support, lack of financial education and product limitations. The speakers agreed that, the untapped consumers represent a great opportunity for promoting products for micro and SME finance as well as microTak?ful and saving products in these jurisdictions. It was agreed that efforts to promote financial inclusion have succeeded in those jurisdictions where policies included a well-coordinated framework that ensured active participation by the governments, policy makers, regulatory authorities, market players and the local community.

The final session of the Seminar, a panel discussion on Policies and Strategies for Enhancing Financial Inclusion: Regulation, Stability and Innovation, was chaired by Mr. Dante O. Portula, Senior Advisor for Regional Policy - Asia, Regulatory Framework Promotion of Pro-poor Insurance Markets in Asia (RFPI Asia) (GIZ), and the speakers were Dr. Irfan Syauqi Beik, Director, Center of Islamic Business and Economic Studies, Bogor Agricultural University; Mr. Wan Mohd Nazri bin Wan Osman, Director, Islamic Banking & Takaful Department, Bank Negara Malaysia and Mr. Mohamed Azmeer, Chief Executive Officer, Amana Bank, Sri Lanka. The speakers agreed that there is a need for alternative solutions to drive down the cost of offering products to the underserved segments of population, which is reaching, in certain cases, to excessive and unjust proportions. It was noted that concerted efforts are needed to tap alternative sources of fund for microfinance providers - both in Muslim majority and minority jurisdictions - which can be facilitated by creating a flagship product. Such product should focus on reducing time to market, enhance cost efficiency and promote standardisation, while following Shar?`ah-compliant principles. The speakers also proposed for standardisation of governance and operations principles for Islamic microfinance institutions. A speaker outlined the importance of having a "special rating" for Islamic microfinance institutions that can assist Islamic banks to choose their linkage partner. The speakers also stressed the need for laying out a 'financial inclusion road map', which can help the integration of Islamic financial inclusion programs between the government, Islamic banking and financial institutions, and other strategic stakeholders such as Zakat and Awqaf institutions, and private donors.

The Seminar was followed by the IFSB's 8^th Public Lecture on Financial Policy and Stability on 1 April 2015. The Public Lecture entitled Development of Entrepreneurship through Islamic Finance was delivered by Professor M. Kabir Hassan of University of New Orleans, United States.

For more information of these events, please visit www.ifsb.org.

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About the Islamic Financial Services Board (IFSB)
The IFSB is an international standard-setting organisation that promotes and enhances the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets and insurance sectors. The IFSB also conducts research and coordinates initiatives on industry-related issues, as well as organises roundtables, seminars and conferences for regulators and industry stakeholders. Towards this end, the IFSB works closely with relevant international, regional and national organisations, research/educational institutions and market players.

The IFSB comprises members representing regulatory and supervisory authorities, international inter-governmental organisations and market players, professional firms and industry associations.

For more information about the IFSB, please visit www.ifsb.org.

© Press Release 2015