Do Muslim Poor Self-Exclude Them from the Financial System for Reasons of Faith?

In a 2007 study “Islamic Microfinance Development: Challenges and Initiatives” undertaken by the Islamic Research and Training Institute, we observed that most of the member countries of the OIC with significant Muslim population had high and rising poverty levels. Just five of them – Indonesia, Bangladesh, Pakistan, Nigeria and Egypt accounted for over half a billion (528 million) of the world’s poor with incomes below $2 a day or national poverty line. Interestingly, these countries were also characterized by a high degree of financial exclusion among their population. In 31 out of the 44 Muslim countries (for which the estimate was available), over two-third were excluded from the formal financial system. Alarmingly, In 17 Muslim countries over  four-fifth of eighty percent of adult population had no access to the financial system. This naturally raised a question: did the Islamic faith with its prohibitions on interest-based transactions play a role? Were the poor Muslims in these countries self-excluding themselves from the financial system because of the incompatibility of their belief and culture with modern finance?

An article, “Islamic Microfinance: An Emerging Market Niche” published by CGAP next year as a focus note examined the demand for microfinance that was compliant with Islamic tenets or Islamic microfinance in countries with significant Muslim population. The paper observed, “Islamic microfinance has the potential to not only respond to unmet demand but also to combine the Islamic social principle of caring for the less fortunate with microfinance’s power to provide financial access to the poor.” More importantly, it stressed “unlocking this potential could be the key to providing financial access to millions of Muslim poor who currently reject microfinance products that do not comply with Islamic law.” The paper quoted a few other studies in support of its observation. In Algeria, over one-fifth of microenterprise owners did not apply for loans primarily because of religious  reasons (Frankfurt School of Finance and Management 2006). This percentage was reported to be 43-46 percent in Syria (IFC 2007); 25-32 percent in Jordan (USAID 2002, IFC/ FINCA 2006). In another study in Palestine, more than half of respondents responded they would prefer Islamic products even if they come at a higher price (PlaNet Finance 2007). This percentage was estimated to be around 40 percent of the poor in Yemen. The paper also argued that the reported survey response and verbal expression of a preference for Islamic products might simply have been due to an eagerness on the part of respondents to demonstrate piety. It suggested further research to ascertain the nature and extent of the demand and preference for Islamic products over conventional ones.

A more recent (2013) study by the World Bank “Islamic Finance and Financial Inclusion: Measuring Use of and Demand for Formal Financial Services among Muslim Adults” is perhaps the maiden attempt to investigate the issue in an extensive manner. The survey covered 66,484 adults from 64 countries, representing approximately 75 percent of the world’s adult Muslim population raising several relevant questions: (1) Are Muslims less likely than non-Muslims to use formal financial services in their current form? (2) Do unbanked Muslims differ from unbanked non-Muslims in their self-reported barriers to financial inclusion? (3) To what degree do these patterns vary across countries and individual level characteristics? In a limited sample of countries, the study also investigates: (4) How prevalent is awareness and use of Sharia-compliant financial products? (5) To what degree are Muslims willing to pay a premium for Sharia-compliant financial products and services? (Interestingly, according to a 2008 report by Price Waterhouse Coopers, non-Muslims far outnumbered Muslims as Islamic finance clients in Malaysia).

The study has some interesting takeaways. It finds that “Muslims are more likely than non-Muslims to report religion as a barrier to account ownership, however this result appears to be mainly driven by respondents in Sub Saharan Africa. Similar to non-Muslims, Muslims are more likely to cite cost, distance, and documentation as barriers to account ownership.” The study also does not find evidence that a respondent’s degree of religiosity plays a particularly important role in the financial behaviors of Muslims as compared to their non-Muslim counterparts, while noting some major limitations in the data used on “religiosity” as a key variable.

The study finds “very little use of Islamic banking products (just 2 percent among respondents)” and at the same time, evidence of a strong hypothetical preference for Sharia-compliant products despite higher costs (45 percent of respondents). However, 37 percent of respondents prefer a conventional product or have no preference which suggests that demand for Sharia-compliant products is not immune to cost concerns.

The findings of the above studies are hardly counter-intuitive. Low use of Islamic banking products is possible for a variety of reasons, including lack of awareness (which the study notes), or lack of trust in the authenticity of available Islamic banking products and factors relating to efficiency in service delivery. However, Shariah-compliance does matter for Muslims. Perhaps, it matters more for poor Muslims. Lack of Shariah-compliance is likely to exacerbate the problem of financial exclusion among Muslims and consequently, lead to greater levels of impoverishment.


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