Trends in Sharia-compliant financial inclusion

Abstract

Sharia-compliant financial inclusion represents the confluence of two rapidly growing sectors: microfinance and Islamic finance. With an estimated 650 million Muslims living on less than $2 a day (Obaidullah and Tariqullay 2008), finding sustainable Islamic models can be the key to providing financial access to millions of Muslim poor who strive to avoid financial products that do not comply with Sharia (Islamic law). Consequently, Sharia-compliant financial inclusion has recently galvanized considerable interest among regulators, financial service providers, and other financial inclusion stakeholders. However, despite a four-fold increase in recent years in the number of poor clients using Sharia-compliant products (estimated at 1.28 million) and a doubling in the number of providers, the nascent sector continues to struggle to find sustainable business models with a broad array of products that can meet the diverse financial needs of religiously observant poor Muslims. A lesser known tenet is the encouragement of wealth creation through equity participation in business activities, which requires risk-sharing by financial service providers that do not guarantee returns. The authors conclude that despite impressive increases in the number of Islamic microfinance providers and clients, the sector is still largely dominated by a few providers in a few countries that rely primarily on only two products. The Islamic microfinance sector needs a concerted, evidence-based effort by all stakeholders to harness current momentum to promote greater diversity in service providers and sustainable products, better tailored to meet the needs of the religiously observant Muslim poor.