One of the featured sessions at the Global Islamic Economy Summit from 5-6 October will be on the role of Islamic finance in financial inclusion. This is an interesting subject because it has primarily been seen only from the perspective that Islamic finance is able to promote inclusiveness by offering a Shari’ah-compliant offering to people whose exclusion is driven by their reluctance or unwillingness to engage with the conventional financial sector.
While this represents an important segment of the market for Islamic finance, this mindset limits its potential greatly to just those Muslims located in jurisdictions friendly to Islamic finance (which is mostly banking) and within those countries to the Muslims who have access (both the physical and financial means to access finance). It also, as the form versus substance debate has illustrated over the years, been limited within this population to those who view the contractual form and the presence of favorable fatawa which is a subset of a subset, a niche within a niche.
This is the debate which has divided people (practitioners as well as customers) all while 72 per cent of the Muslim population remains unbanked. An infographic from the World Bank in 2013 highlighted the size of the unbanked population estimating it at 2.5 billion people (34 per cent of the global population). That means that while Muslims make up 22 per cent of the world’s population, they account for 46 per cent–nearly half—of the world’s unbanked.
Given the take-up of Islamic financial products by Muslims who otherwise have access to them, just building upon the existing Islamic finance system will not only not be fast enough to broaden financial inclusion, it will likely leave a substantial share still outside of the formal financial system (Islamic or conventional). The focus on building a better model for financial inclusion will have to take other paths than just deciding how to make Islamic finance less form-based and more focused on substance. Relative to the size of the entirely excluded populations, the population to be gained by revisiting the form vs. substance debate is tiny.
There are many small-scale experiments in Islamic finance and some larger areas that should be the focus for developing greater financial inclusion to eliminate the markedly higher rate of financial exclusion among Muslims globally. One way is to move for Islamic finance activities to the base of the pyramid population the way that conventional microfinance has in many countries. Bangladesh, which is home to the Grameen Bank, has also seen significant Islamic microfinance activity.
One example of this activity is from Islami Bank Bangladesh Ltd which operates a Rural Development Scheme (RDS) that uses the bank’s existing branch network as a hub from which to offer financing specifically tailored to the needs of the rural poor where agriculture is a particularly significant source of employment. It uses a group-based model commonly associated with Grameen Bank but within the context of a Shari’ah-compliant financing model.
Similar Shari’ah-compliant models of traditional financial services have been used to meet the needs of the poor like the USAID-supported and World Council on Credit Unions (WOCCU) operated Islamic Investment and Finance Cooperatives. These are still operating and in late-2014, the program called Financial Access for Investing in the Development of Afghanistan (FAIDA) announced a doubling in the number of profitable IIFCs, now at 22 member-owned institutions across Afghanistan.
Other types of microfinance institutions operated on Shari’ah-compliant basis specifically target the harder-to-reach, lower-income Muslim population that many Islamic banks operate. Besides the ones mentioned above, there are musharaka-based products from Bank Al Baraka in Algeria, Salam-based products from Wasil Foundation in Pakistan, a unique qard-based approach by Akhuwat in Pakistan and broad-based efforts from the microfinance unit of the Bank of Khartoum.
The value of these microfinance initiatives is that they have moved in the opposite direction of mainstream Islamic finance. Rather than being more complex and geared towards greater convergence with conventional finance they have moved away to try unique business models and products. Where they have found overlaps with conventional structures it has been for very good reasons. For example, when a microfinance institution works with low-income customers who are not financially literate, many of them may be vulnerable to inappropriately being sold products that do not meet their needs (sometimes in the name of more ‘authentic’ products).
For many of the poor, a simple murabaha financing to allow them to pay over time for an asset that they can use to generate income may be fairer, easier to understand and more in line with their needs than a venture capital-like musharaka or mudaraba product. The quest for greater financial inclusion among Muslims will recognize and embrace the differences in situation, needs and financial literacy and support whichever product meets that need.
An even more important factor to help boost financial inclusion among Muslims may be payment technology and low-cost support for simple financial transactions. Even in the United States, a large share of the population (double digits at least) are excluded by the high cost of financial services for basic transactions like cashing checks or sending and receiving payments. If these costs are burdensome for the average person living on a low income in a developed country like the U.S., it is likely to be even more a factor for financial exclusion in countries where the average income is much lower.
Remittances are an even higher cost transaction that would benefit even more people if done in a cost-effective way. The high costs for people receiving assistance from relatives abroad through remittances are money that could be used for more productive purposes. Mobile payments and transfer services could (particularly if they are vetted for Shari’ah compliance) help dramatically widen the number of potential customers for Islamic finance.
From the perspective of financially excluded people, the debate is not whether they accept a form-based approach to Islamic finance or would rather hold out for a substance-based approach. Instead it is whether they have access to any financial services at all. It is time to move forward and find ways to expand Islamic finance to look at supporting efforts along the spectrum of financial services to ensure that they are available to and have appropriate safeguards for their future.
Originally published on www.cpifinancial.net