IslamicFinance.de

To close the severe gaps in financial inclusion in the Middle East and North Africa, more and more governments are starting to develop national financial inclusion strategies driven by evidence-based studies. So far, demand studies on Islamic finance have produced mixed results. To examine the distinction between preference and actual choice, CGAP, Yale University and Tamweelcom took a novel approach to the study of demand for Islamic and conventional loans in Jordan. According to the experiment, more people opt for the Islamic microloan than the conventional one when offered both (17% versus 2%). Sharia certification appears to have no significant impact on loan take-up at all. The study found that in Jordan people who are more religious are willing to pay a higher price for an Islamic microloan.

For the majority of the 1.4 billion of the world’s poor agriculture is the main source of income and employment. Many farmers live in areas lacking access to basic financial services, leaving them vulnerable to shocks and prone to low-risk, low-return investments. Improving access to financial services can help farmers make profitable investments that increase their yields. At a macro level, higher yields increase the total global supply of food. At a micro level, higher yields increase household income and food security for the world’s 1.5 billion living in smallholder households.

CGAP recently published new guidelines for funders of financial inclusion which encourage funders to take a market systems approach. Market systems approaches have been applied in other sectors, notably agriculture and enterprise development, for many years and lessons and operational tools have been developed based on these experiences. In financial inclusion, experiences with market systems approaches are still rare and there is a limited body of accessible knowledge on how to operationalize a market systems approach in financial inclusion. To fill this gap, CGAP plans to develop a series of case studies that illustrate the practice of market systems development and highlight implications for funders’ strategies and operations.

In Iraq, authorities continue to battle ISIS while advancing important political reforms. And microfinance – in the broad sense of providing credit, savings, payments, and insurance to low-income households and small businesses – is one intervention poised to promote local economic activity and help manage economic shocks. The 2014 Findex survey found that only 11% of the adult population has an account at a formal financial institution. It also revealed a significant gap between Iraqi citizens who borrowed formally (4%) and those who did so informally (65%), hinting for a much higher demand than that currently served by the financial sector. This is notably because Iraq’s financial system remains seriously underdeveloped, as highlighted in the World Bank’s 2011 Financial Sector Review.

For over 6 million Pakistani smallholders with 10 acres of land or less, financing options are very limited and prevent them from building assets over time. Thus, farmers tend to do what has been done for centuries: use Artees, middlemen who have long responded to their agricultural and personal financial needs. Artees directly provide farmers with seeds and fertilizers, and collect the equivalent amount in crops at harvest time. According to some estimats, Artees finance at least 50% of smallholders in Pakistan. Since 2009, farmers in Punjab have had another financing option called Salam, which seeks to give them a bigger role in the decision-making. It is offered by Wasil Foundation.

It is a common perception that the Arab world lags behind when it comes to financial inclusion. According to the 2014 Findex figures and excluding Gulf countries, the region indeed reports the highest percentage of financially excluded adults, with 80% of the population or about 200 million not having access to an account, and 95% not having access to credit. Yet, this has not always been the case. However, limited advocacy efforts concerted from within the industry as well as a lack of champions within public authorities both played a contributing factor here. Microfinance professionals can attest that 2010 marked the beginning of a new era, with positive signs of long-lasting, albeit arduous, change.

The success of the microcredit years showed us that it is not poverty that generates financial exclusion but rather the opposite: financial exclusion generates poverty. Unfortunately, microcredit alone was not enough to solve the problem. Although it was demonstrated that access to, and the use of, savings accounts, credit, insurance, etc. had a positive impact on opportunities for the poorest, no single financial service was sufficient to trigger major progress. In the current conversation around financial inclusion, emphasis is now placed on the fact that it is not enough to offer one or another service; we need them all, and all at the same time.

For financial service providers trying to garner new clients in the developing world, illiteracy awareness is extremely important. Many countries around the developing world still have high rates of illiteracy, and most financial services are not designed well for illiterate users. This means that tens of millions of people around the world cannot be effectively reached with financial services. The Helix Institute is working with financial service providers to help them earn new clients and increase profits. Part of this equation is understanding how products and services can better serve those who cannot read.

The 2014 Financial Inclusion Insights (FII) survey estimates that 93% of Pakistani adults are financially excluded as only 7% of the respondents reported to having a bank account, while registered accounts with other financial institutions were negligibly low. A more promising statistic is that of mobile phone ownership, as the FII survey finds that 54% of Pakistani adults own a mobile phone. This high proliferation of mobile phones is considered by many to be an opportunity for the financially excluded to attain financial inclusion through Mobile banking. However, various products such as loans, insurance, and interest on savings are not offered by mobile money companies yet.

Financial inclusion is one of many the areas that caught the new public authorities’ attention in Tunisia. A decree-law was passed in November 2011 that authorized the establishment of credit institutions dedicated to low-income people. It also created a modern regulatory agency, the microfinance supervisory authority. Beyond micro-lending, the Ministry of Finance now aims at modernizing the entire financial sector in Tunisia by 2020. Such a plan is timely and provides hope for further financial deepening. In this regard, a recent snapshot on financial inclusion completed by CGAP and the World Bank provides insights.

Financial inclusion in Pakistan has improved slowly but steadily since 2008 according to most sources. This observation is based upon one topline indicator - percentage of the adult population that is financially included - which is calculated by three different institutions in Pakistan. Depending on what data set you look at, the topline financial inclusion figure for Pakistan in 2014-2015 can be 7% (Financial Inclusion Insights 2014), 13% (Global Findex 2014) or 23% (Access to Finance 2015). Different definitions cause the topline number to vary. The inclusion indexes however do not answer why some remain outside the formal financial sector.

In Turkey almost all businesses are micro, small or medium-sized enterprises (MSME), and only 0.1 percent of businesses are large firms. MSME lending constitutes a significant share of banks’ lending – it was 26% of the total banks’ portfolio in 2013, including 7% extended to microenterprises, despite the naturally much smaller average loan amounts. There are several barriers preventing Turkish banks from increasing their lending to microenterprises, despite an interest in reaching further down market. One such barrier is the high level of informality and semi-formality in the micro-segment of the Turkish MSME sector. Turkey has no dedicated microfinance sector of a significant scale.

Turkey is one of the largest upper middle-income countries with a vast potential to expand financial inclusion. A closer look at the data reveals that the progress regarding account ownership among women has been paralleled by an equally steep (and frankly, perplexing) decrease of account ownership among men (from 82% to 69%). Similarly, while borrowing from a financial institution has more than quadrupled and is more than six times higher for women than it was in 2011 (albeit starting from an extremely low level of 2.4%). What can be said with some confidence, however, is that there is room for improvement, as the overall account ownership remained unchanged.

Despite a robust mobile money market, six years after the launch of the first branchless banking product, the number of active, registered mobile money accounts in Pakistan stands at only 0.4% of the population. The percentage of users of mobile money products, however, is 7%, which means that the majority of the customers prefer to transact over-the-counter via an agent. However, true financial inclusion only results when customers open their own mobile money accounts. It is only then that customers can avail of more advanced financial products such as insurance, savings, and credit. Hence, mobile money accounts are an important indicator for financial inclusion.

Although microfinance client numbers have roughly quadrupled in the last half-decade, they still represent the proverbial drop in the bucket of potential clients. Some 650 million Muslims hover at or below the poverty line today. There are five takeaways from CGAP's most recent research on the subject, "Understanding the Costs and Sustainability of Sharia-Compliant Microfinance Products". First, some "Islamic" products are tough to scale. Second, comparing Islamic products to conventional microfinance doesn’t always work. Third, sustainability is possible, but it will take significant investment. Fourth, we need more time to understand how these products are working - and who is using them. Fifth, in the meantime, Islamic financial service providers are here to stay.

Bangladesh has long been a success story for women’s financial inclusion. But in terms of digital finance, the story is very different. Despite being identified as a “mobile money sprinter” by the GSMA, only 18% of digital finance users in Bangladesh are women, with even fewer holding registered accounts. This is perplexing, given the rapid growth of digital financial services now reaching more than 21 million registered account holders. There are a number of potential reasons, including the fact that women are less likely to have an official identification. Besides, English-language phone menus may have a disproportionate impact on women. Nevertheless, there are resources and market players available to bridge this gender gap.

At the Sanabel conference in Dubai in October, it was impossible to ignore reminders of the crises enveloping the Arab World. While there are signs of some progress at the political levels, the reality on the ground in many countries remains stark. After the Sanabel conference, many donors and investors focusing on financial inclusion in the region gathered to discuss how they should respond or adapt their approaches. Over the next few weeks, several contributors will share additional insights into how they are coping and what lessons they have learned. In addition, there are several resources already available on this topic of post-crisis microfinance.

According to the Crowdfunding Research Centre, global crowdfunding activity is doubling every 60 days, and represents another potentially significant shift in that way entrepreneurs and start-ups access capital and credit in the developing world. A crowdfunding report speculates that the potential market size for crowdfunding in the emerging markets could reach $96 billion by the year 2025. The continued permeation of internet connectivity in emerging markets paired with further evolution of crowdfunding platforms holds tremendous potential for access to finance for the base of the pyramid.

The global population of 2 billion Muslims remains largely unprotected against risk. There is a growing need to design insurance products that meet the needs of these excluded adults to provide better risk protection. Takaful is one possible solution for people who would not otherwise use conventional insurance products. The greatest potential for Takaful may be in countries with predominantly Muslim populations. However, these countries also tend to be ones with some of the lowest levels of financial literacy. This situation creates a significant challenge for supervisors. With the help of an enabling regulatory environment, Takaful can deliver on the promise of necessary products at the right price.

The Middle East and North Africa is in dire need of entrepreneurial growth and opportunities. However, research from the Wamda Research Lab highlights substantial challenges preventing companies from receiving the funding they need to grow. In the recent report, Enhancing Access: Assessing the Funding Landscape for MENA’s Startups, a sample of 254 companies analyzed that have received equity investment as well as 65 institutions providing funding to entrepreneurs in the region. To capitalize on the region's burgeoning startup community, the supporting ecosystem will need to understand the most appropriate sizes, types and frequency of funding that its most promising companies need.