To some, Sharia-compliant financial services offer a promising path towards expanding financial inclusion among Muslim adults. To others, these services – which avoid charging interest and seek to conform to Islamic principles of profit- and loss-sharing – do not address the root causes of financial exclusion. But most agree that there is a dearth of empirical research that measures the degree to which Muslims are using Sharia-compliant financial products, their demand for it, and the extent to which they refrain from using conventional financial systems. Without data and related analysis, policymakers and private sector leaders are often speculative in framing the role of Islamic finance within the financial inclusion agenda.
In an effort to add some empirical rigor to ongoing debates surrounding Islamic finance, Leora Klapper and Douglas Randall recently presented a new Working Paper  and Findex Note  (prepared jointly with Asli Demirguc-Kunt). The researchers used Global Findex  data to explore differences in the usage of formal financial services between Muslims and non-Muslims and, using a separate database for five countries in the Middle East and North Africa Region (MENA), investigate usage of and preference for Sharia-compliant banking products.
However, separating out religious identification from other individual and country characteristics can be tricky. Indeed, many participants in discussions about Islamic finance skip this step entirely and simply compare levels of financial inclusion between Muslim-majority and non-Muslim-majority countries. The authors sought to avoid this common mistake by examining variation between Muslims and non-Muslims within countries, using Findex data for countries where more than one percent of the adult population identify themselves as Muslims. In a sample covering 64 countries — and approximately 75 percent of the world’s adult Muslim population— the authors found that Muslims are significantly less likely than non-Muslims to report owning an account at a formal financial institution, after controlling for other individual and country characteristics. Yet just seven percent of unbanked Muslims cite religion as a barrier to account ownership (the same percentage as non-Muslims). Indeed, Muslims are most likely to cite cost, distance, and documentation as barriers to account ownership. These findings suggest that constraints may be supply-driven – possibly by discrimination or the relative scarcity of financial services in predominantly Muslim areas – though the authors cannot explicitly test this hypothesis.
In contrast to account ownership, the authors found no significant difference in formal borrowing behaviors between Muslims and non-Muslims. This is a bit of a head-scratcher given that the asset finance focus of Islamic finance seems to imply that there is a greater need for Sharia-compliant products in this area. Of course, it’s possible that the absence of a gap in borrowing behavior is the result of widespread availability and use of Sharia-compliant products, however given what we know about the relatively small size of the Islamic finance industry, it seems more plausible that a vast majority of financially included Muslims use conventional banking products and services. The finding also raises the question of whether a gap exists between Muslims and non-Muslims in the ownership of formal accounts but not in formal credit products due to divergent “urgencies of need,” with respect to savings and payments versus borrowing. The degree to which Muslims’ attitudes towards conventional products, and the associated use of interest, vary by financial necessity is an intriguing question for future research.
In a deep-dive extension in five MENA countries (Algeria, Egypt, Morocco, Tunisia, and Yemen) the authors find that use of Islamic banking services is extremely low, consistent with supply-side data. And while a plurality of respondents do report a preference for Islamic banking despite significantly higher costs, an almost equally large share of adults prefer the cheaper, conventional loan, or do not have a preference between the two. This suggests that there is likely to be demand for both conventional and Islamic banking services, and that preferences for Sharia-compliant products are influenced by price.
The potential of Sharia-compliant financial services to increase financial inclusion will continue to be a hotly debated topic well into the future. It is vital that researchers – through data collection and analysis - begin to play a more active role in these ongoing discussions.