Recently TheCityUK published the latest edition of its report on Islamic Finance, summarising the state of the global market for the sector and detailing the UK’s role as the leading Western centre for Islamic finance.
According to data from ICD-Thomson Reuters, Islamic finance assets have grown steadily over the past several years, and are expected to register further rapid growth in the years ahead.
Islamic finance is, as our report notes, “a prime example of the ways in which finance meets the needs of individuals, businesses and governments”. It’s an area where the connection between the products on offer and the societal benefits is particularly clear. One of the most important of these benefits is the sector’s potential to increase financial inclusion. Globally, financial inclusion remains lower than many people realise: around 40% of adults worldwide still lack a bank account—arguably the most basic financial product—according to World Bank data. (Even in the UK, around 700,000 adults confirm that they lack access to a bank account; the number could be up to twice as high if non-respondents are included).
Financial inclusion is relatively low among the Muslim population as whole. Notwithstanding wide variation in financial-inclusion rates in different Muslim countries this is very likely to be due at least in part to the fact that many Muslim-majority countries are relatively low-income countries.
For example, it is clear from the chart above that the 57 countries that comprise the Organisation of Islamic Cooperation (OIC) include some extremely wealthy states like Qatar (with per-capita GDP of around $60,000—the fifth-highest in the world) and the UAE (around $37,000), but also a long tail of countries with per-capita income well below the global median of around $5,000. In turn, lower-income countries generally have less developed financial sectors and lower levels of financial inclusion than their wealthier counterparts. So the gap in financial-services provision in the Muslim world is likely to narrow to some extent simply as some of these countries become wealthier over time, and as both supply and demand for financial services increases.
However, some of the under-servicing by the financial services industry among Muslim populations “may be driven by the relatively limited penetration of Islamic finance among populations who, for religious reasons, may be unwilling to use conventional financial services”, as our report explains. Recent research from the Brookings Institution explores the relationship between Islamic finance and financial inclusion in the Muslim world in more detail, noting, for example, that non-religious as well as religious factors may be inhibiting take-up of conventional financial services. Given the economic diversity of “the Muslim world”, there can certainly be no one-size-fits-all approach. But as Islamic finance continues its development and expansion, the potential for the sector to help make a positive socio-economic contribution is clear.