‘Islamic banking likely to supersede microfinancing’

KUWAIT CITY, April 15: In association with the Institut Francais, the AK College of Business Economics hosted a lecture by Professor Christophe Villa on the proposed relation between Islamic identity and microfinancing.

The lecture, entitled “MicroFinance and Islamic Banking”, posited that the traditional models of micro-financing can soon be superseded by Islamic models. This is due to the human factor that (religious/Islamic) identity plays in modern financial contracts, which is not accounted for in traditional banking models.

Villa, a Visiting Lecturer of Business and Economics at Audencia Business School in France, defined microfinance in the framework of fighting poverty. Thus, according to this, Villa suggested that the traditional model of financing does not work, for a variety of reasons.

Costs

Villa suggested that due to the high transaction costs of providing financial services to the poor, as well as information asymmetry, adverse selection and moral hazard, the traditional model of microfinance is not viable for fighting poverty.

However, by including a measur- able human factor, such as identity, — in this case Islamic identity — the equation changes. Contrary to traditional banking schemes, the Islamic banking scheme does attempt to focus on decreasing effort (and in turn cost of effort) in a bid for better yield.

“Rather, the Islamic entrepreneur identifies with the Muslim identity of the Islamic bank, and as such acts for the interest of the bank,” stated Villa. That is, due to the identity factor, effort goes up, and in turn yield goes up. The more the entrepreneur deviates from this model the more it loses utility.

Villa went on to point out that during Ramadan and when Islamopolitical groups win majority seats, Islamic financing goes up.

Tendency

Further, he stated that next to a growing tendency towards Islamic banking from Islamic communities, which had been presented with the option of both traditional and Islamic banking, other communities have not yet been exposed to the Islamic model. As such, he suggested that Islamic banking may prove to be a serious contender in the future.

Villa received his PhD from the University of Rennes in 1997. He is the head of the Finance Department and holds the chair banques populaire in microfinance at Audencia Business School.