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Tuesday, 19 November 2013

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. 

Though the 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. 

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.

(Zawya / 18 Nov 2013)
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