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Islamic Banking and Moroccan Attitudes Towards Interest

May 20, 2011

This summer my wife in I were in Morocco studying microfinance and informal lending more generally. Most of the Moroccans we met were very adamant about upholding, at least publicly, the prohibition on informal usury (the casual charging of interest for a loan). Perhaps the most salient driver of attitudes towards usury derives from this passage of the Koran:

 “Those who charge usury are in the same position as those controlled by the devil’s influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever

God condemns usury, and blesses charities. God dislikes every disbeliever, guilty. Lo! those who believe and do good works and establish worship and pay the poor-due, their reward is with their Lord and there shall no fear come upon them neither shall they grieve. O you who believe, you shall observe God and refrain from all kinds of usury, if you are believers. If you do not, then expect a war from God and His messenger. But if you repent, you may keep your capitals, without inflicting injustice, or incurring injustice. If the debtor is unable to pay, wait for a better time. If you give up the loan as a charity, it would be better for you, if you only knew.”[1].

Other Islamic religious prohibitions, such as the ban on music, dancing, and alcohol, seemed to be much less of an issue for the people we spoke to. There was, however, a contradiction in how people viewed usury. Most acknowledged that Morocco’s economy is reliant on western type finance in order to function, that it is a necessary evil, so to speak. For this reason, people didn’t really have a problem with banks, or other formal institutions (but not individuals) offering loans and charging interest.

When we asked a hotel owner, who happened to be married to an American woman, to help us understand how people justified the fact that banks and microfinance institutions charged interest, he told us that many people will take loans from banks only if absolutely necessary, such as the need to purchase a home or start a business, while others will abstain altogether.

Another man explained to us that banks helped with the economic growth of a country, which depended on western business and economic relations, and that if it were not for the need to work with foreign nations, Morocco would not need banks.  His opinion seemed to be at least partly contradicted by trends in consumer demand for credit. We interviewed a couple of banks specialized in giving small loans, small enough to suggest that they are being used for reasons other than essential large purchases or business transactions. Salafin, one bank we interviewed had recently introduced specialized car loans, and claimed to be the first bank in Morocco to offer credit cards.

It is clear that people throughout the Muslim world have a need for financial services, which makes it unsurprising that the demand for Islamic compliant banking has increased along with traditional banking. According to the online news site Magharebia, Islamic banking in Morocco is relatively new and only regular banks are allowed to offer these specialized products. They offer them reluctantly, and charge a higher fee, because they are seen as a threat to traditional, more profitable banking services. The central bank is in the process of approving fully fledged Islamic banks from other countries to operate within Morocco. Islamic banking includes financial services that are considered “halal”, or acceptable within Islamic law. Halal services include Ijarah, Musharakah, and Mubarahah.

“Ijarah is a halal type of leasing contract between a lending institution and a customer. It can take the form of a simple lease agreement or be accompanied by a contract for the lessee to acquire the asset at the end of a fixed period.”

Musharakah is a contract that enables lending institutions to help businesses finance themselves through the sale of stakes in a future or existing company. Both parties are liable for the value of their investment and each gains or loses a previously agreed share of the profits or loses.

Murabahah enables people to acquire assets without taking out an interest-bearing loan. The bank purchases the asset and then resells it to the customer in instalments at an openly stated price, factoring in administrative costs and profit.

The demand for Islamic banking is growing rapidly, even if the provision of it is stalled due to the challenges it presents. This recent article from the guarding is probably worth quoting extensively.

It is interesting to note that while the provision of interest-based microfinance has proliferated in recent years, relatively few microfinance initiatives adhere to Islamic financing principles even when implemented in largely Muslim countries. Despite the fact that almost half of microfinance clients worldwide reside in Muslim countries, Islamic microfinance accounts for less than 1% of total global microfinance outreach. While many Muslim countries have vibrant microfinance sectors, Islamic microfinance only has a limited outreach. It accounts, for example, for just 3% of the total number of microfinance loans in Syria and only 2% in Indonesia. Islamic microfinance institutions remain relatively small, with an average client base of just 2,400.

This is surprising, as the spectacular growth of Islamic finance has shown there is a demand among Muslims for financial services that are compatible with their religious beliefs. While many Muslims will prefer to continue using interest-based services, others are likely to prefer Islamic alternatives and access these once they become available. In fact, many non-Muslims may also be attracted by the “more equitable” nature of Islamic finance. I remember clearly from my time working in the Balkans the number of Serb micro-entrepreneurs who were attracted to loans that shared business risk between the lender and borrower…

However, there are a number of challenges to overcome before Islamic microfinance can flourish. Firstly, Islamic financing – which includes profit and loss sharing techniques and the purchase and delivery of items to micro-entrepreneurs – is typically more time-consuming, costly and complicated to manage than interest-based microfinance. Increasing operational efficiency and developing sustainable operating models that increase scale and outreach are therefore crucial. While increasing interest from IFIs may alleviate the traditional constraint of lack of investment for existing and fledgling Islamic microfinance institutions, this must be accompanied by a concerted effort to increase technical expertise and training opportunities as Islamic microfinance generally requires a greater level of staff involvement and understanding of micro-entrepreneurial activities.

The question for me is: will the provision of Islamic banking grow fast enough and be able to compete with traditional western finance in increasingly secular, upwardly mobile Muslim societies?


[1] From the Koran (Holy book of the Muslim religion) Al-Baqarah 2:275-280


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