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


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

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.

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




MENA Region (%)

Rest of the World


Have an account at a formal financial institution *




Do not have an account due to…




religious reasons *




distance *




account too expensive *




lack of documentation *




lack of trust *




lack of money *




family member already having one *




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 Finance and Financial Inclusion: A Case for Poverty Reduction in the Middle East and North Africa?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, Account Penetration Rates, and Islamic Financial Institutions (IFIs) in MENA, 2011

Click to enlarge

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.)


Amin Mohseni-Cheraghlou

Assistant professor of economics

August 23, 2013

The biggest problem in MENA is the willingness of its people, both elite and subaltern, to accept history's judgment and fully join the modern western world.

China's success is based on their recognition of the power and benefit of the western economic system. Islamic finance is an anathema to this; it will always be a step child to real finance based on the time value of money.

August 23, 2013

Yes, but at the same time Islamic banking has never dwelved in the excesses of Western Banks resulting in profits benefitting private shareholders, while excesses are socialized by government bail outs financed by tax payers. Islamic Banking might have its drawbacks but the inability to turn every debt into a securitized instrument that it then sells on also ensures that the Islamic Bank assumes a much greater responsibility of its lending risks. Not a bad thing in my view.

August 26, 2013

Excellent point which calls for the reform of western finance. My point still stands that separating Islamists from the rest of the world is the last thing needed given current events. Inclusion rather than exclusion would be a better path for everyone in the world. Furthermore, as shale oil and other alternative energies ramp up the only source of Islamist wealth will begin to dry up.

August 30, 2013

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.

October 18, 2013

Great overview - thank you, Amin. As a Middle Easterner, and former microfinance specialist in Egypt, I would like to suggest a couple other points. First, not everyone in MENA is Muslim, and if they are, there is a varying degree of religiosity that would lead to requirements to utilize islamic Finance resources. I question the nature of the relgiosity question itself, by the surveyers, and am curious about the methodology. In my research, I found that while many people wanted to "save face" when asked if they would prefer Islamic Finance over Western alternatives, in practice they did not really care. Moreover, tweaks to the application of Islamic Financing in some circumstances often were "under the table" ways of effectively turning an Islamic Finance product into a Western one, without the name association. Would be curious to hear more on this.

Many thanks.