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Islamic Finance and Financial Inclusion: A Case for Poverty Reduction in the Middle East and North Africa?

Amin Mohseni-Cheraghlou's picture

The Middle East and North Africa (MENA) region is home to about 70 million of the world’s poor (living on less than two dollars per day) and 20 million of the world’s extremely poor (living on less than US$1.25 per day). According to a recent Gallup survey, 95 percent of the adults residing in MENA define themselves as religiously observant. The combination of these two facts has produced a growing interest in Islamic finance as a possible tool for reducing poverty through financial inclusion among the region’s religiously conscious Muslim population (see Mohieldin et al. 2011).

Uneven access to financial services and instruments that are compliant with Shari’ah, or Islamic law, could be one of the contributing reasons for the low number of bank accounts in the MENA region. A mere 18 percent of adults (above the age of 15) have accounts in formal financial institutions, the lowest in the world (Figure 1). There is ample evidence that, if done correctly, increasing access to and the use of various financial services can help both reduce poverty and its severity (for example see Burgess and Pande 2005 and Beck, Demirgüç-Kunt and Levine 2007 among many). With no access to financial services, many of the poor in MENA will continue to be trapped in poverty with little to no chance of escaping it in the foreseeable future.

 Figure 1. Bank Account Penetration Rates

Source: The Global Financial Inclusion Database (the Global Findex)

The main issue here is that many Muslim-headed households and micro, small, and medium enterprises (MSMEs) may voluntarily exclude themselves from formal financial markets because of religious requirements. The Islamic legal system has guidelines and regulations pertaining to the financial transactions of Muslim believers. One such tenet is the prohibition of pre-defined interest-bearing loans and other financial services. Another important tenet is "loss-sharing profit-sharing" which requires financial providers to share in the losses (and profits) of the business activities for which they provide financial services. The majority of conventional financial services do not meet these two main requirements, and are therefore not relevant to religiously minded Muslim individuals and firms in need of financing in the MENA region and other parts of the world. While roughly four percent of respondents without a formal bank account in non-MENA countries cite religious reasons for their lack of an account, this figure is about 12 percent for the MENA region (Table 1).

Table 1. MENA Countries vs. the Rest of the World

Source: Calculations based on the Global Financial Inclusion Database (the Global Findex).
*: The means t-test between the MENA and Non-MENA countries is significant at less than 1% level.

MENA countries, however, are far from uniform in terms of religiously motivated financial exclusion. For example, while 27 percent of adults in Tunisia and Morocco point to religious reason for not having an account at a formal financial institution, only three percent of respondents in Kuwait and UAE offer similar reasons (Table 2). To some degree, this could be traced back to the level at which Islamic financial institutions (IFIs) are present in a given country. While IFIs are practically absent in Tunisia and Morocco, they enjoy a widespread presence in many Persian Gulf economies, providing ample Shari’ah compliant financial alternatives for the religiously-minded population of these countries (Table 2).

Islamic microfinance instruments (such as Qard-Hassan and Murabaha) could be particularly attractive tools for reaching and providing vital credit to the region’s poor, who represent about 17 percent of the total population of the various MENA countries. Global surveys conducted by the Consultative Group to Assist the Poor (CGAP) in 2007 and 2012 provide some initial insights into the rapidly growing Islamic microfinance industry. Based on the 2007 CGAP survey, it was estimated that less than 130 Islamic microfinance institutions were serving 500,000 customers (CGAP 2008). In five years, these figures have more than doubled. By 2012, there were 256 Islamic microfinance institutions with 1.3 million active clients (CGAP 2013).

Apart from its strategic value in bringing the poorer segments of the population into the financial fold, the signs point to even more growth for an industry that could play an important role for the region as a whole. According to the 2011 Global Findex, more than 19 million adults in MENA avoided interactions with formal financial institutions for religious reasons. The presence of this relatively large population that has opted out of currently available financial services provides a great business opportunity for IFIs. However, several obstacles have hindered the growth of this industry, the most important of which has been the lack of transparency and the absence of a broadly accepted standardized process for assessing the compliancy of financial institutions with Shari’ah guidelines. This has made it difficult for many individuals to distinguish between financial institutions that are genuinely operating based on Shari’ah specifications and those institutions that are not. Another main difficulty has been the lack of available information and training on Islamic finance. For example, only about 48 percent of adults in Algeria, Egypt, Morocco, Tunisia, and Yemen have heard about Islamic banks (Demirguc-Kunt, Klapper, and Randall 2013). Finally and partly because of the lack of a standardized process, information and training, it is usually the case that Islamic financial products are more expensive than their conventional counterparts, reducing their competitiveness among faithful Muslims despite their clear religious appeal.

The World Bank is well-positioned to initiate and lead the efforts in addressing these and many other challenges hindering the growth and efficiency of the Islamic Banking and Finance Industry. With the signing of Memorandum of Understandings with the Islamic Development Bank (IDB) and the International Centre for Education in Islamic Finance (INCEIF), the Bank has established formal relations with two of the world’s leading institutions in Islamic Finance. This is in addition to increasing collaboration with various central banks and stock exchanges of the Persian Gulf countries, Turkey, and Malaysia. The Bank will be able to act as a key conduit for knowledge and expertise in Islamic finance and, backed by its decades-long history in development, will be able to assist in the design of relevant Islamic financial services and instruments that will have the greatest impact on poverty.

Table 2. Religiosity, Financial Inclusion, and Islamic Financial Institutions (IFIs) in MENA, 2011

Source: Author’s calculation based on Islamic Development Bank, BankScope, Gallup Survey 2010, and World Development Indicators 2012.

Note: The “religiosity index” captures the percentage of adults in a given country who responded affirmatively to the question "is religion an important part of your daily life?" in a 2010 Gallup survey.

(Author’s Note: This work is part of the analysis for the forthcoming 2014 Global Financial Development Report on Financial Inclusion, which covers this topic and other related subjects in more details.)


Submitted by Mohamed Mahraoui on

Hi Amin,
Thank you for this intersting article. According to what we know and see in MENA region, it seems that religious resaons are not the key factor to explain why people avoid financial intermidiation. The financial exclusion is due to lack of public awarness, the high level of illiterateness and the underdevelopment of financail services (you mentionned that the bank account penetration rate is only 18%). Moreover, in certain MENA countries where Islamic Finance is developped, we notice that this is because of non-muslim people's dealings and in certain way the competiteveness of IFIs. The same observation is true is the East of Asia.

Submitted by B. Yerram Raju on

Analysis on the basis of existing data bases is excellent. If it could be supported by some more interviews to ascertain how many would like to access financial services and how many financial institutions in the region would like to provide the services to such clientele 1. with a directive from the regulators and 2. on their free volition on the other, it would have added strength. Experience in India shows that the eight-year old drive on financial inclusion is still in the beginning in spite of over-drive from the regulator and the government.

Submitted by Ahmed Abdelwahab on

Dear sir,
I agree with some of what you publised, but in my point of view the problem of Islamic finance whatever its size (micro,small, meduim)or whatever the providers is both suppliers and clients does not understand well what is Islamic finance and that is way the number of conversional clients is much bigger than number of clients usingIslamic products.
According to misunderstanding about clients needs from providers of Islamic products, they offer products in a way that doest not meet cloients needs, so both side needs to understand what is Islamic finance.

Ahmed Abdelwahab,

Submitted by peter van dijk on

And so the World Bank promotes that a particular religion will help in promoting sustained financial inclusion and, even more so, it states that it is an expert on how religion can reduce poverty. Utterly outrageous and another nail at its coffin.

Submitted by abdel on

Why not?
If Islamic finance could suggest some financial tools which contribute to the poverty alleviation, we must encourage such initiatives...

Submitted by Peter van Dijk on

Mr Abdel, "why not" you ask. Well the "world bank" declares itself to be a banking and development expert for the entire world. Declaring that one particular religion has a specific cure for building an inclusive financial system to help reduce poverty thus already for this reason seem extremely dangerous. Furthermore, it ignores the entire system (of the 3 Ibrahimic religions) in which the "Riba" provision was pronounced by the prophet (MPBUH). And finally it ignores the lack of evidence and an increasing list of cases of failure and corruption within Islamic financial institutions.

The promotion of Islamic Finance without proper religious understanding and without factual evidence is thus dangerous. Already articles are published of the political use of this "micro-finance trend" by organisations such as the Islamic Development Bank and the Qatar Fund.

Finally Mr Abdel, we all know that poverty is highest and most widespread in relative terms in countries where Islam has a strong influence on politics, economy, the legal system, the entire lives of their citizens. So reasons plenty to state that the WB is acting in a very imprudent and opportunistic manner.

Dear Peter,

I apologize for the delayed response. There are two issues at hand here. First is the theoretical discussion on Islamic finance and its potentials to increase financial inclusion and shared prosperity in predominantly Muslim countries. Second is the conditions in the OIC countries and practical issues related to the implementation of Islamic finance. In regards to the first, there are many works pointing to the potentials of Islamic finance in boosting financial stability and inclusive growth and reducing poverty. In regards to the second issue, you are correct that most of the OIC countries are suffering from corruption and poverty levels that are often higher in comparison to other parts of the world. But, as you know that has nothing to do with the socio-economic teachings of Islam (including Islamic finance) and in fact they are in clear contradiction with them. This space is not the appropriate venue to delve into these often politically charged discussions and I would be more than happy to engage in such discussions privately. 

However, at the end of the day, the solid fact remains that more than 50 million adults in OIC countries are avoiding conventional financial institutions because of religious reasons and most of these people are residing in poorer OIC countries. OIC countries can either ignore this gap or try to address it by providing Shari’ah compliant financial services for this population. It seems to me that the latter option is more preferable IF it could be done in a genuine, responsible and efficient manner. I agree that this is a big “IF” and the practical details are extremely important, but at the same time one should not throw the baby out with the bath water. If the theory of Islamic Finance is offering promises for boosting inclusive growth and reducing poverty, I think we should focus our energy on how to actually materialize that promise in the field in the best possible manner rather than disqualifying it because of current unfortunate conditions in most of the OIC countries.



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