By Mushtak Parker
LONDON — The Islamic Development Bank (IDB) is exploring social and financial inclusion opportunities in the UK including the provision of community-based microfinance, SMEs (small-and-medium-sized enterprises) financing and technical assistance programs.
An IDB delegation, led by its President Dr. Ahmed Mohammed Ali, participated in a roundtable here Monday with financial institutions, law firms, corporates and community organizations and leaders.
Dr. Ali said that in addition to the direct assistance to microfinance institutions, initial discussions have taken place with the UK’s Department for International Development (DFID), World Bank and CGAP to start some pilot projects in various common member countries and eventually develop a global Islamic microfinance facility.
In the UK, there are several initiatives aimed at helping small business start-ups and young entrepreneurs and to promote financial inclusion. These include Community Development Financing Institutions (CDFI), the Enterprise Capital Fund, and regional ones such as Bolton Business Ventures.
On Monday, Lord Young, the former Conservative cabinet minister, announced the launch of a GBP85 million initiative to help young people in the above respect. The reality is that the UK is facing a multi-billion pound funding gap for small businesses.
One microfinance initiative that is seeking to cooperate with the IDB is GLEOne London, whose CEO Nicholas Nicolaou, revealed that the entity is working on a program to assist Muslim immigrants starting up small businesses and becoming entrepreneurs.
In fact, City law firm Norton Rose; Gatehouse Bank, one of the five UK-authorized Islamic banks; and international auditing firm and consultancy KPMG have been cooperating with GLEOne London to develop an Islamic microfinance product based on the Mudaraba (trust funding) concept.
According to Farmida Bi, Partner at Norton Rose, the product is ready to roll out and addresses the various tax and legal issues especially under the Consumer Credit Act, which protects the rights of customers.
Dr. Ali reiterated IDB’s support for various microfinance initiatives. He stressed that the Islamic banking industry registered a year-on-year growth of 35 percent in 2010 to 2011. Within OIC countries for instance, Islamic financial institutions are becoming major economic players in an increasing number of these countries.
In Indonesia, for instance, a recent Central Bank of Indonesia report has indicated that the industry is growing very fast at a rate of 35 to 40 percent per annum and is expected to capture up to 20 percent market share of the total banking industry in the next few years.
“If this trend continues the Islamic financial industry will become a major industry with an important role to play in global finance. London being the gateway for Islamic banking in Europe, needs to be prepared for this tremendous growth of this industry,” he said.
Dr. Ali also held talks with the Lord Mayor of the City of London, Alderman Ian Luder; the Sheriff of the City of London, Alderman Alan Yarrow; the British Consul General in Jeddah, Mohamed Shokat, and Richard Thomas, CEO, Gatehouse Bank, at Mansion House, the official residence of the Lord Mayor.
The IDB president’s visit was at the invitation of the Lord Mayor who earlier this year visited the bank’s headquarters in Jeddah.
Dr. Ali also met Andrew Mitchell, UK Secretary of State for International Development, to review progress on the implementation of the Memorandum of Understanding (MoU) signed by the two parties in Jeddah in March whereby the UK and the IDB agreed to cooperate in co-financing projects in IDB member countries aimed at generating youth employment and reducing poverty.
Alderman Luder stressed the close and historical relations between the City of London and the IDB and the GCC countries, in particular, Saudi Arabia. The City of London, as a premier international financial center, has much to offer not only in innovation, but also in education and training and also in the growing phenomenon of Islamic finance.
Dr Ali emphasized that the visit was a testament to the IDB’s partnership with the UK and specially with the City of London. “We have worked together to further some areas of our common interest. This visit also provides IDB with the opportunity to support the development of Muslim communities in the UK,” he said.
IDB’s Medium Term Note Program amounting to $6.5 billion for sukuk issuance is registered with the Financial Services Authority in UK and is listed on the London Stock Exchange.Under this program, IDB has made several issuances in US dollars, as well as pound sterling denominated private sukuk issuances have been made.
As far as the money market placements are concerned, the IDB has over the years increased its exposure to the UK’s financial institutions and IDB stands ready to do more in this regard when appropriate opportunities are identified.
The IDB is working with such recognized institutions as the Prince of Wales’ Prince’s Charities and has contributed just under $1 million to help young people in the inner cities to start up projects or small businesses.
The IDB has also been providing assistance for economic and social empowerment to UK citizens as part of IDB’s special assistance program for cooperation with Muslim communities in non-member countries. To date IDB has approved a total of 19 projects for the UK and further projects are being planned. These projects are mainly in the field of education, social welfare and research.
In the wake of the global financial crisis, economic recession and the impact of the eurozone debt crisis, the issue of embedded inclusiveness especially of the financial services industry is increasingly important. Not surprisingly, the IDB President appealed to the financial institutions to help in this respect.
“Achieving sound and sustainable socio-economic development is not simply a financing issue. It is a much broader endeavor,” said Dr. Ali, adding: “It is not within the bandwidth capacity of a single institution or even a single country. It requires strong commitment to reform the socio-economic system and its institutions. All stakeholders, including the government, private sector, civil society and donor community, have to play an active role and align their priorities and activities to achieve this common goal. Due to the strong banking traditions in the UK, it can contribute significantly to this endeavor.”
This, he added, is a once-in-a-lifetime opportunity and called upon all the Institutions to pull together and work towards building “an equitable, just and stable financial system which is capable of providing sustainable growth with employment creation for our own future. IDB would be happy to cooperate with initiatives in this regard.”
A key delivery vehicle for inclusiveness which the IDB has been promoting is through SME financing and microfinance programs aimed at generating employment, especially youth employment, and economic growth.
Due to the recent changes in the MENA region as a result of the Arab Spring, there has been a demand for funding of SMEs. In this context, the Bank has launched the IDB Youth Employment Support (YES) Program for which the IDB’s Board of Executive Directors approved $250 million to help empower Financial Institutions, Employers, Education and Vocational training organizations in the Arab Region to reduce youth unemployment.
Dr. Ali revealed that the targeted countries include Tunisia, Egypt and Morocco and that the first disbursements have started with Tunisia. However, he pointed out that it is up to the receiving countries to come up with project proposals to access the funding.
Furthermore, the Islamic Solidarity Fund for Development has allocated $500 million for Islamic microfinance and a similar amount for vocational literacy programs (VOLIP). The IDB Islamic Microfinance Development Program was established to strengthen the Islamic microfinance institutions and develop the overall enabling environment for them.
According to the IDB, the French Development Agency (AFD) and the Consultative Group to Assist the Poor (CGAP) are also collaborating with the IDB in the development of Islamic microfinance.