Islamic banking: Waiting to tap Arab world's unbanked

Islamic banking: Waiting to tap Arab world's unbanked

Islamic banking: Waiting to tap Arab world’s unbanked

A mere 2% of more than 5,000 Muslims surveyed in a poll use Islamic banking services.
The World Bank’s sample survey in Algeria, Egypt, Morocco, Tunisia and Yemen revealed that less than half the respondents (48%) had heard about Islamic banks, which highlights the efforts needed by the Islamic banking industry to penetrate the market.

“Across the five countries, 48% of respondents report having heard of Shariah-compliant products in their country that offered services to people like them,” the bank said in a survey on financial inclusion.

“This ranges from 35% in Algeria to 57% in Tunisia. However, just 2% of respondents report currently using a Shariah-compliant banking service. In no country does this value exceed 3%.”

Among those who separately report having an account at a formal financial institution or having borrowed from a formal financial institution in the past year, just 8% report currently using an Islamic banking service, the survey said.

Thoughthe survey is not comprehensive as it does not include key markets such as Malaysia, UAE and Bahrain where Islamic banking is much more established, it nevertheless presents a peek into the challenges facing the Islamic banking industry.

Some of the findings of the survey are quite eye-opening and point to new opportunities.

For example, in countries such as Morocco – considered one of the more secular MENA states – 54% of respondents said they would prefer a more expensive Islamic loan than from a conventional alone. Meanwhile, only 37% in conservative Yemen felt the same way.

Less than a quarter in each of the countries said they had no preference, which suggests that many respondents were making a conscious decision whether to choose an institution based on its conventional or Islamic banking credentials.

Islamic banking: Waiting to tap Arab world's unbanked

Islamic banking: Waiting to tap Arab world’s unbanked


For years, financial institutions have been trying to determine why Islamic banking in many Muslim countries have not taken off with the zeal and popularity that they had hoped.

Islamic banking assets have grown 150% over the past five years to reach USD 1.5 trillion, but they still represent a mere 1% of total global financial assets.
A wider survey by the World Bank of more than 65,000 adults spanning 64 economies (excluding countries where less than 1% or more than 99% of the sample self-identified as Muslim), finds that Muslims are significantly less likely than non-Muslims to own a formal account “or save at a formal financial institution after controlling for other individual- and country-level characteristics. But the analysis finds no evidence that Muslims are less likely than non-Muslims to report formal or informal borrowing.”

“We find that Muslims are more likely than non-Muslims to report religion as a barrier to account ownership, however this result appears to be mainly driven by respondents in Sub-Saharan Africa,” the report noted.
“Worldwide, just 7% of unbanked Muslims and unbanked non-Muslims cite religion as a barrier to account ownership.”

The survey notes that the development of Islamic institutions, their scope and the services and even the way there are regulated are so vastly different, that it provides a very inconsistent picture of the industry.

“The percentage of total banking assets in Islamic financial institutions ranges from less than 2% in Indonesia, Lebanon and Tunisia, but exceeds 30% in Kuwait and Yemen,” the survey noted.

“Furthermore, in many cases, Islamic banks cater largely to business and Shariah-compliant consumer products are less widely available. On the household and SME finance side, it is estimated that approximately 80% of Islamic microfinance clients live in only three countries: Indonesia, Bangladesh, and Sudan.”


Other sample surveys in the World Bank Financial Inclusion database also point to some interesting findings.

A sample survey of 12 high-income economies shows Muslims are significantly more likely than non-Muslims to borrow from formal financial institutions while Muslims are significantly less likely to do so in the four East Asian and Pacific countries.

“As compared to non-Muslims, Muslims are more likely to borrow from friends or family in high-income economies, East Asian and Pacific economies and Middle Eastern and North African economies. Muslims in our sample of 16 Eastern European and Central Asian economies are less likely than non-Muslims to report borrowing from friends and family,” the bank said.

The topic of Muslim behavior towards their financial needs is crucial to those who are keen to develop the sector in Islamic countries.

Key criticism of Islamic banking in countries where it is actively practiced shows that beyond the cover of Shariah compliance, they do not offer the breadth of service or cost-effective products to attract customers.
Until that’s fixed, the industry will remain on the periphery, despite a keen desire for many to use Islamic banking services.
© 2013

Is the rise of Islamic finance good news for the environment?

Economic and ethical focus of fast expanding Islamic banks could be good news for green investments

By Nilima Choudhury

The growing Islamic finance sector could spell good news for investments in clean energy according to experts RTCC has spoken to.

Islamic finance is growing 50% faster than the traditional banking sector, and it has huge growth potential, with assets expected to increase by 250% this year.

Its profile was boosted last week when UK Prime Minister David Cameron told the World Islamic Economic Forum he wanted the country to be the “first western sovereign to issue an Islamic bond”.

Is the rise of Islamic finance good news for the environment?

Is the rise of Islamic finance good news for the environment?

In an interview with RTCC, Professor Habib Ahmed, a World Bank author and Professor in Islamic law and finance at the University of Durham said the principles and values on which Islamic finance is based could contribute to sustainable economic development.

“There is an increasing demand from different stakeholders that Islamic finance should also reflect the ethical, social and environmental aspects in their financing,” he said.

“Many non-Muslims are attracted to Islamic finance because they find it sound from economic and ethical perspectives.”

This could be positive news for the clean energy sector that in 2012 suffered a 14% drop in investment as Europe curbed green subsidies and the USA’s attention was diverted from renewables to fracking.

Last month analysts at Bloomberg New Energy Finance reported that annual investment in renewables and energy-smart technologies will fall for the second consecutive year.

Emerging sector

There are already signs the clean-tech sector is starting to benefit from Islamic finance.

The Islamic Development Bank (IsDB) is already a major player in the clean energy sector investments of around $1 billion between 2010-2012.

The top five beneficiary countries of IsDB’s renewable energy sector financing were Morocco ($908 million), Pakistan ($896 million), Egypt ($886 million), Tunisia ($764 million) and Syria ($668 million).

Last month the IsDB agreed a $100 million investment with the Industrial Development Bank of Turkey for the development of renewable energy and energy efficiency projects.

On a wider scale, a report by Ernst & Young published in December 2012 valued Islamic assets at about $1.8 trillion in 2011, representing about 1% of the global financial market.

Green shoots

Some analysts believe Islamic finance will be good for the environment because it values more than just profits.

Western banks are required by law to provide the best return on investment for their clients regardless of where that investment goes.

But according to Asad Zaman from the International Institute of Islamic Economics in Pakistan, while green growth in the west is secondary to economic growth, this is not the case in Islamic financial circles.

“Natural resources are a sacred trust and protecting them for future generations a primary responsibility,” he said.

“Economic growth is not (directly) a goal at all, though it may be desirable as a means to (say) poverty alleviation.”

It’s a view shared by the heir to the British throne Prince Charles, who recently said Islamic banking could provide the answers where conventional banking could not, given Islam’s emphasis on a “moral economy”.

Where large Western banks have divested from oil and gas, it has generally taken place not because of ‘green’ reasons, but as a result of long term investment planning.

“Scottish Widows divested from these [fossil fuel] companies not on ethical grounds but because we think they’re not a very good investment decision. That view is shared very widely in the investment community,” said the bank’s head of sustainability Craig Mackenzie.

New investment model

The Islamic financial structure is so attractive that the UK Treasury is now investing about £200 million to work on the practicalities of issuing “sukuk”, or Islamic law compliant bonds in the country.

Sukuk bonds do not pay interest, but instead offers the investor a share of ownership in the project they are supporting.

In order to develop an environmentally friendly sector financed by Islamic banks, the Green Sukuk Working Group was launched last year by think tanks Climate Bonds Initiative, NGO Clean Energy Business Council of the Middle East and North Africa and the Gulf Bond & Sukuk Association.

“Interest in both Shari’ah compliant and ethical investing is on the rise. Green sukuks can support this trend by expanding the range of available financial instruments,” said the GBSA’s Michael Grifferty at the group’s launch.

“Green sukuks also support national development strategies by offering longer term finance for essential infrastructure.”

The group aims to develop best practices and promote the issuance of sukuks for the financing of climate change investments and projects, such as renewable energy projects.

Banks like UK-based Islamic investment bank Gatehouse Bank offer people the opportunity to invest in sustainable companies that offer technology, products and services throughout the water industry to help with water desalination, a burgeoning sector in the Middle East.

According to Professor Ahmed, the Islamic financial sector’s growth is likely to continue because it has proven to withstand events like the 2008 global financial crisis.

“After the crisis, Islamic finance came to light because it had features that would have lessened the intensity of the crisis,” he said.

Social responsibility

A paper published in July this year by the International Institute for Sustainable Development (IISD) argues that increasing levels of debt in the ‘West’ will make Islamic banking a safer bet for many investors.

“Islamic finance principles serve to insulate the Islamic financial system from excessive leverage, speculation and uncertainty, which in turn contributes toward promoting financial stability and long-term sustainability,” the authors say.

“As a result, the implementation of Islamic finance principles is anticipated to grow, not only in Muslim countries’ financial markets, but also in those markets concerned with socially responsible objectives and ethical financial solutions.”

Muhammad bin Ibrahim, the Central Bank of Malaysia’s deputy governor, argued earlier this month that it was an Islamic bank’s duty to “enhance the general welfare of society.”

“The teachings of Islam basically promote preservation of natural resources and the need to respect all living things. Failure to do so would be detrimental…where severe destruction of the land and sea would come upon those who mistreat the environment,” said Ibrahim.

There are, of course, plenty of examples of Islamic banks lending to oil and gas companies. Money based in Saudi Arabia and Qatar is, in all likelihood, derived from the extraction of fossil fuels.

But the rapid growth of a financial sector underpinned with strong ethical and environmental leanings indicates that the damage investments may do to the planet may come under increasing scrutiny.

Ahmed argues that currently there is little sign of a “green” culture in the Islamic financial sector, perhaps not a surprise given its relatively small size.

But he says there is a debate among bankers over what the sector’s role should be moving forward, and how it can be a force for the global good.

“As the industry moves forward it will be expected that they consider social and environmental issues as the values on which Islamic finance is based on [these] demands,” he said.