Islamic Microfinance And Clients: See What I Do, Not What I Say

A few years ago, while listening to a focus group of Muslim microfinance clients in Gaza, I heard something seemingly contradictory. On the one hand, most of these clients insisted that they wanted Sharia-compliant financial services—products that were consistent with their religious beliefs. Yet, by their own admission, all were using conventional products from mainstream microfinance institutions.

And that wasn’t for lack of availability. In fact, when offered Sharia-compliant products, many of these clients tried them once but then went back to their tried and tested conventional products. Others shunned the Islamic offerings altogether.

Why this disconnect between what people say and what they do? I guess there’s nothing really different from anything else in our lives. I aspire to go to the gym daily but am lucky if I make it a couple of times a week. Confronted with the realities of our daily lives, we aspire to be one thing but often choose something else out of necessity or some other constraint. 

A woman smiles with flowers and a book. A woman smiles with flowers and a book.
Photo Credit: Huma Akram

The Demand Conundrum

In Gaza, I got my first glimpse of what might be called “the demand conundrum.” Put simply, there are no easy answers to why microfinance clients might choose Sharia-compliant products—or, indeed, why microfinance providers should offer them.

That doesn’t mean such products can’t be successful. Sharia-compliant microfinance providers in Indonesia, the world’s most populous Muslim country, boast the third largest clientele among their Islamic industry peers worldwide.

Yet when researchers looked at the reasons for this success, they found that “there is no indication that the establishment of Islamic banks in Indonesia was preceded by broad popular demand for Sharia-based Islamic financial services.” (See CGAP’s Focus Note, “Trends in Sharia-Compliant Financial Inclusion,” for more on this 2005 study by Hans Dieter.)

This demand conundrum is one of the reasons why the Sharia-compliant microfinance industry remains relatively small and has yet to take off like its conventional sister.

‘Irrational’ Clients?

Of course there is a whole subfield of economics that focuses on why rational behavior isn’t always the driving force of decision-making. Studies of Sharia-compliant microfinance services, though, have rarely considered this dimension. Instead, they mostly have been based on surveys in which respondents are asked their preferences, or rankings of why they may choose one thing over another. 

But what people project to the world is often very different than what they do in private. To really understand demand for Sharia-compliant services, we need to go beyond this simple survey-based approach.  We need to get at the underlying issues that drive people’s behavior. 

One way to get at this is by designing behavioral research experiments. A 2011 field experiment in Egypt did just that. Researchers El Gamal, El Komi, Karlan, and Osman offered prospective clients a choice between a rotating savings and credit association (ROSCA) considered Sharia-compliant and a more traditional Grameen-style rotating solidary group.

Interestingly, take-up and repayment rates of the Islamic ROSCA were higher than that of the traditional Grameen-style group—preliminary evidence that the demand conundrum may have less to do with “irrational” clients and more to do with a limited product offering.

Supplying Choices  

So what can microfinance providers—and those who support them—do with this information?

Understanding how Muslim clients make financial decisions is the first step. But it doesn’t stop there. Providers must also take this information and design products that actually meet Muslim clients’ demand. 

So far, religious Muslims have been given a very narrow set of options: Ranging from expensive to inconvenient—or both. In fact, Sharia-compliant products often mimic conventional microfinance, leaving clients with little incentive to choose them.

Attracting more clients—with a value proposition that meets both their financial and religious needs—will help Islamic microfinance providers lower their costs and continue to innovate new, scalable products. Getting there will take a better understanding of what Muslim microfinance clients actually want.

Mayada El-Zoghbi will be participating in a live web chat on this topic on 23 April. Send us your questions and comments.


------ The author is CGAP's regional manager of MENA region, and leads the work on Islamic finance.


18 April 2013 Submitted by Daniel Rozas (not verified)

Mayada -- these are interesting points. It's especially surprising given that, according to Findex data, most of the MENA countries have high rates of formal saving and high semi-formal lending (private lenders, employers and store credit) when compared to other countries at similar levels of development. In Planet Rating's MIMOSA model, this combination of factors is usually associated with higher formal borrowing levels as well, but on that metric, MENA countries report exceptionally low levels. In the report (…, see p. 16), we took this gap to mean that perhaps there's an absence of appropriate credit products -- possibly Sharia compliant ones -- but seems like that's not necessarily the case. Am very curious how best to interpret this apparent gap.


18 April 2013 Submitted by Farhat Shah (not verified)

Mayada, Here in Pakistan Farz Foundation has experienced entirely opposite response. When we started to market our asset based Murabaha, clients refused to accept the product and insist to get hard cash. After three months we could able to convince only one client, but when we completed our pilot with 150 clients, the whole market was asking us to provide them productive assets. 100% recoveries with 80% sustainability of the clients was our gain.

29 May 2013 Submitted by Mayada (not verified)

This is very interesting to hear. Can you expand on what you mean by the "whole market"? How many clients does Farz Foundation have? How would you explain the small take-up of Sharia-compliant products to date?

20 April 2013 Submitted by Imran Nafeer (not verified)

Its correct Islamic Microfinance needs to include innovative products and it has to look at avenues that to improve efficiency and clients benifits.

I do have experience in implementing Islamic Microfinance since 2006 and I have faced similar situation at the begining. However, was able to overcome such challenges with innovative products and delivery,

One most important thing, lack of undestanding on Islamic Finance by the clients creates many issues, you have to adress that as wel. I do speak to clients in center meetings on regular basis and I notice this. Therefore, islamic finance literacy is vital.

Im imran nafeer from Sri Lanka.

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