Understanding Demand for Sharia-Compliant Loans
The evidence on demand for sharia-compliant financial services is mixed. On the one hand, IFC-funded studies showed relatively high demand, while results from Findex showed that financial exclusion due to religious reasons was minimal (Demirguc-Kunt, Klapper, and Randall 2013). One of the reasons behind these contradictory messages could be the survey instruments themselves: perhaps the issue is not so much what people want but how they were asked. For example, if you ask participants why they do not use borrowing or savings products, their responses may include “they are too expensive” or “they are too far away” even if the real reason is something more nuanced, such as intra-household bargaining issues. Similarly, if you ask Muslims if they prefer an interest-bearing loan or a noninterest-bearing loan, it might not be surprising that they would choose the noninterest-bearing loan, perhaps because they want to demonstrate piety, or maybe because they assume it means a no-cost loan.
CGAP teamed up with Yale University to address this potential survey question bias and to gain more insight into the real nature of demand for sharia-compliant financial services in Jordan. We implemented a randomized experiment with Tamweelcom, a financial institution in Jordan that was launching a sharia-compliant product. The experiment marketed loans to several thousand individuals but varied the type of loan offered to clients. The experiment probed three distinct questions: What is the demand for sharia-compliant products as compared to conventional products; how does sharia authentication affect demand for sharia-compliant products; and what is the price elasticity for demand of sharia-compliant products?
Some clients were offered a conventional loan, others were offered a sharia-compliant loan, while others had a choice of either a conventional or a sharia-compliant product. Given the choice, which one would consumers actually choose? And which features in these products would most likely influence that choice? Would it be, for example, the perceived authenticity of the sharia-compliance? Or, would it be the price of the product?
This is the first study of its kind that tests actual loan take-up, as measured by applications for a loan, of a sharia-compliant product with consumers. The results are important because they go beyond the typical survey questionnaire problems that have thus far prevented practitioners from understanding the “demand conundrum” or the persistent mismatch between results of surveys that show high demand for sharia-compliant products but limited take-up when and where these products are on offer (El-Zoghbi 2013).
This Brief explores the findings and their implications from the study in Jordan. While the results are only valid for the Jordanian market, if similar studies were done elsewhere, we may begin to see a clearer picture of demand for sharia-compliant services.