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Submitted by Amin on

Dear Commenter,

I am grateful for your comments and interest in this topic. There is a growing body of literature on the theoretical issues relating to Islamic Finance. Its role in today’s financial industry and relationship with “conventional” finance has been widely written about and debated. These are subjects that are beyond the scope of this small and brief post. I would refer you to the works of Professor Abbas Mirakhor and Zamir Iqbal, among a host of others, where you will find a more detailed discussion on the issues that you have raised and many more. As to the specific points in the blog, several facts are undisputable.

First, based on Global Findex, at least 51 million adults in majority Muslim countries are voluntarily excluding themselves from participating in formal financial institutions because of religious considerations. Second, more than half of the Muslim population around the globe is living in poverty. Third, and again based on Global Findex, the less educated, the poorer, and the rural segments of a society are more likely to be ‘unbanked’ – meaning no relationship of any sort with any formal financial institution - than the more educated, the richer, and the urban population.

Putting these three facts together, one can safely claim that the majority of the voluntarily unbanked Muslims belong to the less educated, poorer, and rural population of their societies. The literature is also clear on the many benefits of financial services such as saving, insurance, and credit in reducing poverty and increasing shared prosperity. Given the specific circumstances, the only way to extend financial services to the voluntarily unbanked Muslim poor is through Islamic financial products. Acknowledging this market, the number and customer base of Islamic microfinance institutions have grown considerably in the past decade.

However, the demand for such products still surpasses the supply and there is more room for growth. So, from a purely practical point-of-view, we have two options: a) leave the observant poor, along with non-poor Muslims, without access to financial services; or b) provide them with financial services through Sharia-compliant mechanisms. I would think that many people in the development community would align with the latter.

Additionally, in the past decade Islamic finance has made a real and meaningful entry into the global financial industry and it has proven to be both resilient and more ethical. As a result, large conventional financial institutions such as J.P. Morgan and Citibank have started to also provide sharia-compliant financial products not only to Muslims but also to non-Muslims around the world. In short, the empirical evidence and the literature on Islamic finance and microfinance suggest that Islamic Finance is becoming more and more relevant and efficient in today’s global economy both at macro and micro levels. As a result, I am not sure if your observation is accurate, but I still acknowledge the problems facing Islamic Finance, two of which I mention in the blog: lack of global standardization/certification and also low levels of information/education. In regards to your comparison between the Chinese and Muslims: I would like to remind you that for observant Muslims (many of whom are in fact living in China) some of the practices in conventional finance are seen as serious religious sins while for the majority of Chinese such a limitation does not exist. Therefore, ignoring this important factor could be seen as rendering the comparison irrelevant because even if we assume, moving forward, conventional finance is the more efficient and practical (which is still a topic to be debated), at least 51 million Muslims would still decide to avoid it altogether because of their religious convictions. I am also confused by your comment on inclusion vs. exclusion. As development practitioners we must be aware and in fact value the widely different ways things are done in different societies and cultures.

I apologize that this response has gotten way too long. There is still more to say on this topic and I would be more than happy to continue the discussion. But again, on the theoretical front, I strongly suggest reading through the works of Mirakhor and Iqbal who provide strong cases (such as socio-economic equity and justice, social responsibility, sustainability and stability) for the benefits and advantages of Islamic finance vis-à-vis conventional finance.