Africa has experienced laudable growth in the finance sector over the last few decades. Islamic finance has as well taken shape, and it is penetrating in various parts of the continent. 48% of Africans are Muslims, but still, the Islamic finance contributes very little towards the global financial market. Research shows that 40% of the Muslim population prefers Islamic Banking products over the regular products by the banks.
The big question then is, why is there a low adoption whereas Islamic banking is better when it comes consumer protection than conventional banking. The following are the reasons why the current financial industry underserves Muslims in Africa.
Business Risk and Liability. Conventional banks believe that when extending a loan to a customer, there is a risk of default. To avoid losing the money such banks require the customer to provide an asset as collateral. The bank can then sell this asset if the customer fails to pay back the loan on time.
Islamic banking does not require collateral when one is getting a loan. In fact, Sharia laws view the financial institution demanding collateral as an economic parasite and a sinner. Many banks cannot offer such loans because default cases are very rampant in normal banking.
Moral and Social Values. Most of the modern financial institutions were founded for the sole purpose of making money. Most are copycats of the established banks and MFIs, and they do not offer anything that can distinguish them from the rest. As a result, there has been cutthroat competition, and some have closed shops when they could not keep up. However, Islamic banking has a different approach.
The Sharia laws require financial institutions to provide special services to the poor and those in need. This may not be attractive to those who aim at maximising profits in the name of offering solutions.
Ethical Standards. The modern financial system is backed up by greed, and people want to make a quick buck.Some people invest in a venture just because they hear that it has promising returns. However, Islamic banking requires the investors to analyze a cause and determine whether it is ethical or not.
The investor must determine whether the venture is compliant with the religious beliefs that guide the Islamic fraternity. Some banks see as if they are likely to miss on opportunities that are acceptable to other religions but prohibited by Muslims. Some banks have set up different sections to cater for Muslims to bridge this gap.
Low literacy levels. Only 24% of the African Muslim population has bank accounts. From the findings, it either means that people do not know that there exist financial institutions that offer Islamic products or they do not trust the current financial setting. Even though some conventional banks are offering Islamic products, it will take time before people accept them fully. Information of Islamic banking products available is also very scarce which makes it hard for people to take action.
Even though Africa has not fully adopted Islamic banking, the sector is very promising. Technology will be one of the key drivers that will help increase access to these products. The financial institutions are also allowing non-Muslims to access these products which shows that the general public is enlightened and accepting these products.