Finance & Banking


During the last decade, Islamic finance has
raised its competitiveness and coverage visà-vis conventional finance, through Shari’acompliant product innovation to widen the scope of its offerings to previously unchartered
areas. An indirect target of this endeavour was
greenfield growth in Islamic financial services.
Many international reports had highlighted the
role that Islamic finance could play to enhance
financial inclusion in countries with dominant
Muslim populationNevertheless, according to
the Global Financial Inclusion Database (Global
Findex), only 6 per cent of the unbanked people
cited religious concerns as their main reason for
not having a bank account.

For some authors , these results would seem to be very encouraging to introduce Islamic finance in countries with dominant Muslim populations. However, it is necessary to make
sure that all the unbanked people with religious
concerns are interested in Islamic finance. It
goes without saying that being sensitive to
the Shari’a dimension and adhering to antiRiba practices does not automatically mean
the acceptance of the Islamic finance Model.
Then, investors shall measure the potential
demand for Islamic financial services to justify the launch of Islamic financial institutions. If
the potential is not sufficient, the project shall
be aborted, or the business model shall target
other segments of customers to be profitable
without focusing solely on unbanked people
with religious concerns.

From another perspective, other people
could find the results daunting and would not
justify the introduction of Islamic finance.
Nevertheless, a World Bank Survey
6 focused
only on people who do not have a bank account
and having a bank account does not mean that
the customer would necessarily have access
to all the other financial services especially
since, in many countries, having a bank account
is obligatory in order to receive a wage or to
create and run a business. Therefore, among
people who already have a bank account,
there are the self-excluded people in terms of
financing, savings and insurance for religious
concerns. From the perspective of Islamic
financial institutions (IFIs), this segment could
be very interesting.

Measuring the impact of the introduction
of Islamic finance is important when it
comes to financial inclusion and competition
with incumbents. The measured impact
can significantly define the strategies and
approaches to adopt Islamic finance.


Financial inclusion is the proportion of
individuals and firms that use financial services It covers:
Lack of access (i.e., people are not able to use financial services); and
Self-exclusion (i.e., people have access to financial services but choose not to use them generally because they do not need these services or they do not trust financial institutions or because it’s not in line with their religious beliefs).

The lack of access could be due to the
expensive cost of using financial services,
limited geographic coverage or low income.
Many solutions and products have been
developed around the world to lower the cost
of financial services. These include M-PESA ,WeChat Pay, and AliPay10 etc.

For the self-exclusion issue, Islamic finance
and financial literacy seem to be the main
solutions to include more people in the financial
system. Nevertheless, in some contexts, the
informal finance can be the main reason of
self-exclusion. Indeed, people would use cash
rather than financial services because of their
preference for more privacy and less control,
especially when it comes to taxes.


A typical approach to measuring financial
inclusion is based on account ownership data,
since in conventional banking, the first step to
access other financial services is to own a bank
account. Otherwise, the customer would be
excluded from the whole system.

Indeed, having a bank account improves the
possibility of access to credit, insurance services
and savings. Therefore, the main challenge in
terms of inclusion is to increase the proportion
of people that have a bank account.

Having no access to financial services is a
costly affair. Indeed, a person with no access to
a bank account would have to go to every retail
establishment and stand in line to pay his/her
bills and may even have to pay extra fees for
paying in cash.


The experience of mobile money accounts
in East African countries14 revolutionized
the concept of financial inclusion. Operators
such as M-PESA contributed in increasing the
consumption levels and lifted 194,000 Kenyan households out of poverty. It offered the
unbanked people the possibility to send money
back to their home villages faster, more cheaply
and more securely which increased the stability
of revenues especially when times get tough.


Having an account means having a credit
record, which makes it possible to get microor nano-loans when needed. Having access to
micro- or nano-loans can inspire companies to
find solutions for daily problems.


The mobile money account gives an
opportunity to unbanked people to get access
to insurance services. In Zimbabwe, based on
its Econet experience, farmers were offered
Index insurance for their crops that would pay
out automatically to a mobile phone account
without the need to put in a claim if the
rainfall index drops below a certain level (The
Economist, 2018). Such innovations can help
farmers in periods of drought and avoid deep
crisis effects.


Most analysts and researchers adopt the
approach of conventional finance regarding
financial inclusion and consider Islamic finance
as a complementary tool to attract self-excluded
people with religious concerns. Nevertheless,
the levels of financial inclusion in Islamic finance
are not organized in the same way. Indeed, four
profiles of people exist:


In countries willing to introduce Islamic finance, the main argument is that it will enhance financial
inclusion, bringing more funds to the banking system, which will constitute a real opportunity for
investors and the whole economy. Nevertheless, the impact can be different. Indeed, instead of
financial inclusion, introducing Islamic finance can create financial migration. Each impact (migration
or inclusion) has a suitable strategy to be adopted by investors and financial authorities.

It is worth noting that although Shari’a compliance is an important factor for moving to an IFI,
research16 showed that pricing and proximity of branches and quality of services are also critical to
the decision function. Thus, the proportion of people who are migrating to IFIs would depend on
factors other than Shari’a compliance.

To assess the impact of Islamic finance on financial inclusion, a series of questions need to be
answered. Some of these are as follows:
• What is the proportion of unbanked people with religious concerns?
• What is the proportion of unbanked people with religious concerns who accept Islamic finance principles?
• What is the proportion of unbanked people with religious concerns who accept Islamic finance principles and who may be interested in IFIs?
• What is the proportion of people having a conventional bank account and who refuse to subscribe to conventional financing and saving products on the basis of religious concerns?
• What is the proportion of people having a bank account, who would accept to open an Islamic bank account?
• What is the proportion of people having a conventional bank account who would refuse to subscribe to conventional financing products for religious reasons and would accept the Islamic financing model?
• What is the proportion of people having a conventional bank account who would accept the Islamic saving model?
• What is the proportion of people having a conventional bank account who subscribe to financing and saving products and would prefer to get Islamic products once they are available in the future?
• What is the proportion of people having a conventional bank account who subscribe to conventional financing and products and would like to convert all their financial commitments to Islamic ones?

Context 1

In this context, introducing Islamic finance will bring more people to the financial system to open
bank accounts and start subscribing to financial services. For such a context, introducing Islamic
finance seems to present a real opportunity to include more people and to attract more customers.
The appropriate strategy would be to recommend the introduction of Islamic finance to financial
authorities and investors.

Context 2

Introducing Islamic finance will bring more people to the financial system. Some will open bank
accounts, while others will convert their conventional bank accounts to Islamic ones to subscribe to
financing and saving products.
For such a context, introducing Islamic finance would represent an opportunity for banks which
would invest to grant Shari’a-compliant financing to people who are not interested in conventional
loans. The appropriate strategy in this context would be for financial authorities and existing banks
to target underserved people in terms of financing and saving products.

Context 3

Introducing Islamic finance would cause a soft financial migration. Indeed, those who do not
have conventional loans would subscribe to Islamic financing instruments and would convert their
deposit and saving accounts to Islamic ones. Generally, those who are not interested in financing or
saving products would not move their accounts to IFIs because they may not consider their existing
conventional accounts as being Shari’a non-compliant and do not have a real incentive to migrate.

Moreover, in this context, people who are already using conventional financial services would
prefer to deal with Islamic banks once available.

In this context, introducing Islamic finance would represent a threat and an opportunity at the
same time. It would represent a threat for conventional banks since an important proportion of their
customers would move to Islamic finance and concurrently an opportunity because they can attract
underserved customers.

Context 4

Introducing Islamic finance would cause a hard-financial migration. Even people who have
financial commitments would ask to convert them to Islamic ones.

For incumbents, introducing Islamic finance in this context becomes a necessity rather than a
choice because conventional banks are exposed to a significant migration threat.


Generally, researchers and analysts link the introduction of Islamic finance to financial inclusion.
Nevertheless, from the perspective of Islamic finance, the issue of financial inclusion needs to be
tackled in a different manner. Customers dealing with IFIs can be categorized into different profiles,
starting with people that are self-excluded for religious reasons and thus do not use conventional
finance products, and ending with people who use all conventional instruments but would prefer to
convert their commitments to Shari’a-compliant ones once available.

In practice, introducing Islamic finance is not limited to financial inclusion. It could cause a
financial migration from conventional to Islamic banks, but even this migration can take many forms
and depends on many factors that need to be analysed deeply and carefully. In real experiences,
people interested in Islamic financial products can have different profiles, and the proportion of
each profile can define whether Islamic finance enhances inclusion or creates migration.

Finally, Islamic finance has to contribute to the efforts of financial inclusion. Indeed, it has to
adopt the same mechanisms of conventional finance and adapt them to Shari’a principles. Moreover,
Islamic finance can use Islamic institutions such as waqf (Islamic endowments) or zakāh (Islamic
almsgiving) to have a wider impact on financial inclusion.

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