Islamic Finance and Financial Inclusion: Measuring Use of and Demand for Formal Financial Services among Muslim Adults

Non-Muslims can also use Islamic financial products and services. According to a 2008 report by PricewaterhouseCoopers Malaysia, the majority of Islamic finance customers in that country are non-Muslims.

This is discussed further in Section 3.

Classification adapted from Chiu, Newberger, and Paulson (2005).

Kuran (2005) notes that around ad 1000, there existed little difference between Christian Europe and territories under Muslim rule in attitudes toward interest.

Kuran (1997) writes that “Islamic economics emerged toward the end of India’s colonial period as part of a broad campaign to preserve the religious identity and traditional culture of the country’s sizable Muslim minority.”

In 2006, a Reserve Bank of India committee concluded that “Islamic banking did not fit into the country’s banking laws” (India Knowledge at Wharton, 2010)

Following the signing of the Comprehensive Peace Agreement in 2005, banks operating in South Sudan began to convert to conventional banking.

The Gallup World Poll has been used in previous academic studies. For example, Deaton (2008) uses Gallup World Poll questions on life and health satisfaction and looks at the relationships with national income, age, and life expectancy. Gallup World Poll questions are also used by Stevenson and Wolfers (2008) and Sacks, Stevenson, and Wolfers (2010) as part of their research to analyze relationships between subjective well-being and income; by Clausen, Kraay, and Nyiri (2011) to analyze the relationship between corruption and confidence in public institutions; by Demirguc-Kunt, Klapper, and Zingales (2012) to study changes in trust in banks over the financial crisis; and by Stevenson and Wolfers (2011) to examine trust in institutions over the business cycle.

In some economies, oversamples are collected in major cities or areas of special interest. In addition, in some large economies, such as China and the Russian Federation, sample sizes of at least 4,000 are collected.

Questionnaire translations and other survey-related materials are available at www.worldbank.org/globalfindex

Bahrain, China, Jordan, Kuwait, Oman, Qatar, Saudi Arabia, Syrian Arab Republic, and United Arab Emirates.

Countries where less than 1% of the sample self-identified as Muslim: Argentina, Armenia, Australia, Belarus, Bolivia, Botswana, Brazil, Cambodia, Chile, Colombia, Costa Rica, Croatia, Cyprus, Czech Republic, Dominican Republic, Ecuador, El Salvador, Estonia, Finland, Guatemala, Haiti, Honduras, Hong Kong SAR, China, Hungary, Ireland, Italy, Jamaica, Japan, Korea, Rep., Lao PDR, Latvia, Lesotho, Lithuania, Malta, Mexico, Moldova, Mongolia, Nicaragua, Panama, Paraguay, Peru, Poland, Portugal, Romania, Slovak Republic, Slovenia, Spain, Taiwan, China, Ukraine, United States, Uruguay, Venezuela, RB, and Vietnam. Counties where more than 99% of the sample self-identified as Muslim: Afghanistan, Algeria, Comoros, Djibouti, Iran, Islamic Rep., Mauritania, Morocco, Niger, Somalia, and Yemen, Rep.

More than 20% of the adult population is excluded from sampling in Madagascar and the Central African Republic. Key demographic covariates are missing in Congo, Rep., Gabon, Germany, Kenya, Liberia, United Kingdom, and Zimbabwe.

The survey question on religion is: “Could you tell me what your religion is?” The question is open-ended and coded by interviewers. The 17% value does not include countries where religious affiliation is not included in the survey and given that these are mostly Muslim-majority countries, this value is likely lower than the actual worldwide prevalence of Muslim self-identification.

The survey question on formal accounts is: “Do you, either by yourself or together with someone else, currently have an account at a bank, credit union, or another financial institution? An account can be used to save money, to make or receive payments, or to receive wages and remittances.” We also consider those who report having a debit card or those who report having saved at a microfinance institution to have a formal account.

The survey question on formal saving is: “In the past 12 months, have you saved or set aside any money?” Those who respond in the affirmative are then asked, “In the past 12 months have you saved or set aside money using an account at a bank, credit union, or microfinance institution?”

The survey question on formal borrowing is: “In the past 12 months, have you borrowed any money from a bank, credit union, or microfinance institution?”

The survey question on account barriers is: “Please tell me whether each of the following is a reason why you, personally, do not have an account at a bank, credit union, or other financial institution?” Respondents could choose from the following list of reasons (multiple responses were allowed): too far away, they are too expensive, I do not have the necessary documentation, I do not trust them, I do not have enough money to use an account, religious reasons, and someone else in the family already has an account.

For this reason, Algeria, Morocco, and Yemen are not included in the main analysis. Tunisia was not surveyed by Gallup in 2011.

The Islamic banking service awareness question is: “Have you heard about Islamic banks in [country] that offer services to people like you?” Iterations of this question were field tested using more specific terminology like Mudaraba and Muharaba, but feedback suggested that this terminology was confusing to respondents.

The Islamic banking service used question is: “Do you currently use an Islamic banking service?”

Due to the omission of the “No preference” option in the Egypt survey, we do not include data from Egypt in the analysis of this question. The omission was the result of a clerical error.

The hypothetical loan question is: “Let’s say you applied for a loan at two different institutions – an Islamic bank and a conventional bank. Both banks approve a one-year, $200 loan. The monthly installment/payment of the loan from the Islamic bank is $20, and the monthly installment/payment on the loan from the conventional bank is $19.15. Which bank would you choose to take a loan from?” (Values are given in USD equivalent for Yemen.)

Unfortunately, these data (from Beck, Demirguc-Kunt, and Merrouche 2013) are only available for 10 countries (all of which host both Islamic and conventional banks).

We also construct binary variables for different cut-offs (50%, 10%, etc.) related to the share of the population which self-reports as Muslim and find no significant results.

Indeed, in Islamic jurisprudence, there is a concept referred to as Iztirar which holds that if a person is going to face an unreasonable amount of hardship in following certain religious rules, he or she is not allowed to comply with that particular rule. So, for example, if a person is going to face extreme financial difficulties, he or she is allowed to borrow with interest if there is no other option available (but only to the level that would alleviate the extreme problem he or she is facing).