Do Muslim Poor Self-Exclude Them from the Financial System for Reasons of Faith?
In a 2007 study â€œIslamic Microfinance Development: Challenges and Initiativesâ€ 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 risingÂ poverty levels. JustÂ five of themÂ â€“ Indonesia, Bangladesh, Pakistan, Nigeria and Egypt accounted for overÂ half a billion (528 million) of the worldâ€™s poor with incomes below $2 a day orÂ 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 overÂ Â four-fifth of eighty percent ofÂ adult population hadÂ no access to the financial system. This naturally raised a question: didÂ 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, â€œIslamic Microfinance:Â An Emerging Market Nicheâ€ published by CGAP next year as a focus note examined theÂ demand for microfinance that wasÂ compliant with Islamic tenets or Islamic microfinance in countries with significant Muslim population. The paper observed,Â â€œIslamic microfinance has the potential to not only respondÂ to unmet demand but also to combine the IslamicÂ social principle of caring for the less fortunate withÂ microfinanceâ€™s power to provide financial access toÂ the poor.â€ More importantly, it stressed â€œunlocking this potential could be the keyÂ to providing financial access to millions of MuslimÂ poor who currently reject microfinance products thatÂ do not comply with Islamic law.â€ The paperÂ quoted a few other studiesÂ in support of its observation. In Algeria, over one-fifthÂ of microenterprise owners didÂ not apply for loansÂ primarily because of religious Â reasons (FrankfurtÂ School of Finance and Management 2006). This percentage was reported to be 43-46 percent in Syria (IFCÂ 2007); 25-32 percent in Jordan (USAID 2002, IFC/ FINCA 2006). In another study in Palestine,Â more than half of respondents responded they wouldÂ prefer IslamicÂ products even if they come at a higherÂ price (PlaNet Finance 2007). This percentage was estimated to be aroundÂ 40 percent of the poor in Yemen. The paper also arguedÂ that the reportedÂ surveyÂ response andÂ verbal expression of a preference forÂ Islamic products might simply have been due to an eagerness on the part of respondents to demonstrate piety. It suggested further research to ascertain theÂ nature and extent of the demand and preference for Islamic products over conventional ones.
A more recent (2013) study by the World Bank â€œIslamic Finance and Financial Inclusion: Measuring Use of and Demand for Formal Financial Services among Muslim Adultsâ€ 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 worldâ€™s adultÂ 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,Â according to a 2008 report by Price Waterhouse Coopers, non-Muslims far outnumbered Muslims asÂ Islamic finance clients in Malaysia).
The study has some interesting takeaways.Â ItÂ finds that â€œMuslims 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.â€ The study also does not find evidence that a respondentâ€™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 majorÂ limitations in the data used on â€œreligiosityâ€ as a key variable.
The study finds â€œvery little useÂ of Islamic banking products (just 2 percent among respondents)â€ and at the same time, evidence of a strong hypothetical preference forÂ Sharia-compliant products despite higher costs (45 percent of respondents). However, 37 percent of respondents prefer a conventional product or have noÂ preference which suggests that demand for Sharia-compliant products is not immune to costÂ 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 bankingÂ 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 amongÂ Muslims and consequently, lead to greater levels of impoverishment.