Community Development Financial Institutions: Lessons in Social Banking for the Islamic Financial Industry

Abstract

New forms of financial intermediaries have emerged since the 1990s to provide social and community finance to socially vulnerable groups and reinforce social cohesion. These financial institutions take different forms and structures and have spread largely in Europe and the United States and are also expanding worldwide. They have been classified under the label “social banking” such that they are said to “take a positive interest in the social outcomes and effects of their activities” while at the same time are driven by financial returns [Mayo and Guene 2001: 1]. One such provider of community development finance is Community Development Financial Institutions (CDFIs). This paper focuses on these financial intermediaries which have evolved as the financing of economic development has followed the new thinking on development that is people-centred and focuses on local capacity building by empowering the poor, encouraging local sustainable enterprises, and overcoming financial and social exclusion. By so doing, these financial institutions help in improving individual lives and enable more individuals to be involved in the dynamics of economic development. This micro-economic development paradigm has also been promoted by the World Bank under the umbrella term “Community Based Development” or “Community Driven Development”, where projects run include the beneficiaries in their design, decision making and management of investment funds [Mansuri and Rao 2003]. Overall, these measures are expected to deliver better social, economic and environmental progress and assist in alleviating poverty in underdeveloped areas. In this paper a link between CDFIs and Islamic banking and finance is established, particularly in view of the high importance attributed to social development and human well-being within the Islamic worldview. Indeed, the concept of community development is well reflected in the Islamic economics literature and in the establishment of distinctively Islamic pro-development modes of financing. However, despite this emphasis, the real life experiences of Islamic banking indicate the lesser concern placed on community development. In this respect Asutay [2007] states that neither the growth in the operations of Islamic financial institutions nor the expansion in the modes of financing have had significant impact on the lives of Muslim individuals. Similarly, El-Gamal [2006: xii] criticises the current state of Islamic finance for failing to internalise the social dimension and social justice into its operational functions. In an attempt to align the practice of Islamic finance with the socially responsible objectives of Islamic economics, this paper seeks to draw lessons in social banking from the community development finance movement for the Islamic financial industry. Based on the content analysis of published materials of some CDFIs located primarily in the UK and the USA, this paper examines the community development initiatives of these institutions and learns lessons from their experiences