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Islamic Microfinance: Financing model for economic growth in Côte d’Ivoire

13.03.2018Mohamed Agrebi, Senior Operations Officer, MFW4A

At the crossroads of conventional microfinance and the principles of Islamic Finance is Islamic Microfinance, a concept that is rapidly growing and which enables millions of disadvantaged people, be they Muslims or otherwise, access innovative financial services aimed at assuring their well-being.  The principles of Islamic Finance are simple and clear, and based on the fundamental belief that money does not have any intrinsic value and that all risks should be borne by both parties ; the lender and borrower. Islamic Finance is an economic system which lies on five core principles, namely ; i) prohibition of interest rates ii) prohibition of uncertainty, iii) prohibition of investing in illegal activities/industries, iv) profit and loss sharing, v) prohibition of using tangible assets as collateral.

Islamic Microfinance differentiates itself from conventional microfinance systems by the simple fact that it offers accessible and adaptable financial products to all sectors of the economy. The concept contributes to financing viable products through participatory financing which expands the possibility of implementing investment projects and favouring economic growth.

Today in Côte d’Ivoire, there are two distinct sectors that are directly linked to economic growth; the agricultural and small-and-medium-sized (SME) sectors. These two sectors contribute to the tune of 25%  and 18%  respectively towards the national GDP and employ more than 70% of the working population.

As regards the agricultural sector, producers are mainly in the northern part of the country, a predominantly Muslim region. In recent years, Côte d’Ivoire has proved itself as one of the  world’s top producers of several agricultural products such as cocoa, cashew nuts, kola nuts to mention but a few. Yet, only 13% of conventional microfinance institutions are present in these regions, and where Islamic microfinancial institutions are yet to set up businesses.

In terms of agricultural finance, Islamic finance offers products such as Salam, which is well adapted to the sector.  Salam is a forward financing transaction where the seller is obliged to deliver specified goods/assets to the buyer on a pre-agreed date in exchange for payment made out in full at the singing of the contract. Salam has a number of advantages especially for agricultural producers, notably, the absence of interest rates, profit and loss sharing with the financer, in addition to direct financial contribution to cover overhead expenses such as salaries and taxes. In this regard, Salam is an ideal financing model for activities like agriculture, handicrafts as well as SMEs.

The SME sector makes up 80% of the economic fabric of Côte d’Ivoire and contributes upto 18% of the country’s GDP . Looking at these statistics it can easily be said that Côte d’Ivoire’s economy is mainly run by the SME sector.

Financing businesses is at the heart of Islamic Finance. Islamic microfinance institutions have an array of participatory financial products such as Mudaraba and Musharaka, which easily adapt to the needs of SMEs. In the case of Mudaraba, the financing bank can take full responsibility for funding the entire investment project as a business associate. This kind of funding is suitable for startup SMEs looking for initial capital. Musharaka, on the other hand, is a contract between two or more parties and is mainly used to fund projects where profits or losses are shared on a prorata basis depending on the capital contributions of the concerned parties. The Musharaka financial instrument aims to essentially fund an investment project that is considered profitable while remaining compatible with the principles of Islamic Finance. The investment using Musharaka is a contribution from parties who are supportive of one another in the event of loss and who share the profits if and when the venture is profitable.

As such, Islamic Microfinance has a great potential to respond to the needs of several economic sectors through the use of innovative and participatory financial instruments. Nonetheless, the sector is still in its nascent stages in Côte d’Ivoire. The Ivorian Islamic microfinance market is mainly made up of two players, notably, Raouda Finance based in the economic capital, Abidjan and Al-Barakat, in Daloa, a town in the mid-west region of the country.

In addition to the issue of geographical distribution in the country, (for example Raouda Finance has only 4 branches in the southern part of the country) these microfinance institutions face a number of major challenges such us the lack of a governing framework which takes into consideration the specificities of Islamic Finance, and insufficient resources as well as lack of skilled workers in the domain.

The operations of Islamic Microfinance institutions are generally impeded by the governing framework which does not take into consideration their particularities, despite the fact that Ivorian authorities have up until now tolerated their operations. The temptation to go back to conventional financing options is real given the insufficient resources of islamic microfinance institutions. There is also a lack of skilled personnel particularly with regard to certain complex aspects of Islamic financial concepts such as the profit and loss sharing (PLS). Financial solutions based on PLS require a good understanding the principles of risk management. Furthermore agents working in MFIs have been trained in conventional financing models and therefore end up using inappropriate terminology such as « we can give you a loan to the tune of…. » «…. the interest rate is….. ».

Islamic microfinance is a financial paradigm capable of triggering a buzz in the Ivorian financial landscape especially with regard to sustainable economic growth for the country. However, its development highly depends on the political and economic will of the country’s decision makers.


About the Author

Mohamed Agrebi is the Senior Operating Officer at Making Finance Work for Africa (MFW4A), hosted by the African Development Bank (AfDB). Since 2010, he has been working for MFW4A. Mohamed also leads on MFW4A' Islamic Finance-related activities. He holds an executive master degree in Islamic Finance and Banking from “Ecole Superieure des Sciences Economiques et Commerciales de Tunis”. In 2017, he authored a research paper on the prospects of Islamic Microfinance in Côte d’ivoire.

What we learned from the Conference on Financial Sector Development in African States Facing Fragile Situations? - Part 1

19.07.2016Amadou Sy, Director of Africa Growth Initiative, Brookings Institution

Last month, leaders from the public and private sectors and development partners gathered in Abidjan to discuss the links between fragility, resilience and financial sector development in Africa. This event, a joint initiative created by the African Development Bank, the Making Finance Work for Africa Partnership (MFW4A), FSD Africa, FIRST Initiative and the Initiative for Risk Mitigation in Africa (IRMA), also provided an opportunity to explore prospects for partnerships, innovative policies and private sector-led solutions to accelerate financial sector development in fragile situations in Africa.

In this first instalment of a six-part series, Amadou Sy, Senior Fellow and Director of the African Growth Initiative, Brookings Institution, looks at some of the major takeaways of the conference.

What is fragility?

Using a "harmonized definition," the African Development Bank (AfDB), the Asian Development Bank, and the World Bank classify states as being fragile when they exhibit poor governance or when they face an unstable security situation. For practical purposes, governance is measured by the quality of policies and institutions (states with a CPIA score less than or equal to 3.2) and insecurity is assessed by the presence of United Nations or regional peace keeping operations (PKO). In sub-Saharan Africa most fragile states are also low-income countries (LICs).

While the focus of the "harmonized definition" is on institutions and insecurity, participants stressed that fragility is a multi-faceted concept. In particular, fragility implies weak state institutions, poor implementation capacity, underdeveloped legal and financial infrastructure as well as low social cohesion and the exclusion of a large share of the population from financial and other services. The nature of fragility is also fluid and fragile states face situations ranging from violent conflicts to post-conflict economic recovery. The sources of fragility go beyond poor governance, low GDP per capita, and conflicts to include vulnerability to commodity shocks and other macroeconomic shocks, and exposure to the risk of pandemics.

The need to broaden the definition of fragility was further explored with reference to a quote from President Ellen Johnson Sirleaf of Liberia "fragility is not a category of states, but a risk inherent in the development process itself". Mr. Sibry Tapsoba, Director of the Transition Support Department of the AfDB argued for a multidimensional approach, which applies a fragility lens to (i) look beyond conflict and violence; (ii) focus on inclusiveness and institutions; (iii) recognize the importance of the private sector; and (iv) recognize the presence of asymmetries in resources, policy, and capacity.

Participants also insisted on the need to go beyond the negative connotation of fragility and recognize instead that fragile states are in transition and present opportunities for human and financial sector development.

What role for financial sector development (FSD) in fragile countries?

Empirical evidence points to the positive role that financial sector development (FSD) can play in fragile countries. There is a positive correlation between financial sector and economic growth, poverty reduction, and inequality reduction. FSD can be a driver of growth through increased job creation and it can help mitigate risks through increased savings, loans, and insurance.

A key finding stressed by Ms. Emiko Todoroki, Senior Financial Sector Specialist at FIRST Initiative is that fragile countries fare worst in all macro and financial metrics, except one: the share of adults with mobile accounts. Digital financial services are offering solutions in fragile states and there is a need to understand better their role.

In the same vein, Ms. Thea Anderson, Director at Mercy Corps argued for the need to focus in on micro issues such as the role of delivery channels, payments infrastructure, insurance, and blended finance (including impact investment), and Islamic finance. As she noted, FSD is relevant even in the more volatile security situations. For instance, refugees and internally displaced persons (IDPs) can be viewed as a market segment and their financial inclusion can be kick-started with the use of functional identification (which also help comply with Know Your Customer (KYC) requirements). Mr. Paul Musoke, Director of Change Management at FSD Africa also highlighted the role of markets and market building in a difficult context. He noted the need to look for scale, sustainability, and systemic change. As markets are dynamic and not predictable, taking a systems approach can be useful. Such an approach includes asking questions such as what factors are going to play a role in the future? Who is going to pay for infrastructure? What level of development should we target?

Lastly, Mr. Cedric Mousset, Lead Financial Sector Specialist, World Bank reminded the audience that governance remains a key dimension of fragility. Weak governance in fragile countries exposes them to a higher risk of non-compliance with regulations such as anti-money laundering and combating the financing of terrorism (AML-CFT) regulation. Improving governance, although it may be a slow process, is needed to support FSD. Measures to support political stability, improve the business and macroeconomic environment, ensure legal security, and build capacity remain important.


You can download all the presentations on the conference website.

You can also view a selection of photos here.

For more information, please contact:

Pierre Valere Nketcha Nana
Email :p.nketcha-nana[at]

Abdelkader Benbrahim
Email: a.benbrahim[at]

Islamic Banking Development and Access to Credit

22.02.2016Florian Léon, Université d'Auvergne, Laurent Weill, University of Strasbourg

Islamic finance has considerably expanded with an increase of Islamic financial assets from $150bn in the mid-1990's to $1800bn at the end of 2013 (Kuwait Finance House, 2014), with Islamic banks being particularly active in Middle Eastern countries and in Southeast Asia but also in Africa (Sudan, Nigeria). An emerging literature has investigated the macroeconomic impact of Islamic finance and tend to support the view of a positive influence of Islamic banking development on economic development. A major potential effect of the growth of Islamic banking is its influence of access to credit, as countries with developed Islamic banking sectors are typically emerging countries in which access to credit is a major concern.

In a recent paper, we investigate the influence of Islamic banking development on access to credit. The effect of Islamic banking development on credit availability is ambiguous. On the one hand, Islamic finance proposes specific financing instruments that may relax credit constraints. For instance, Islamic finance promotes risk-taking by banks and as such no collateral is supposed to be required when granting a loan. Therefore, as collateral requirements are a major obstacle to have financing, Islamic banking presence should favor access to credit. On the other hand, Islamic finance can also deteriorate access to credit as they can be more expensive than the conventional financing instruments. In addition, Islamic banks face refinancing constraints which can reduce their lending possibilities.

To examine this question, we perform regressions of credit availability on a set of variables including the presence of Islamic banks in the country at the firm level for a sample of 15,309 firms from 52 countries for which we have information on credit constraints and on the presence of Islamic banks. Data on Islamic banking presence come from a unique database, "IFIRST" ("Islamic Finance Recording and Sizing Tool") which provides the assets of all active Islamic banks worldwide over the period 2000-2005. In comparison with other sources of data, this database is exhaustive and does not suffer from misclassification issues. Firm-level variables come from World Bank Enterprise Survey which includes information on credit constraints at the firm level on a large set of countries.

We found that Islamic banking has overall no impact on credit constraints, while banking development and conventional banking development alleviate obstacles to financing. We consequently did not support the view that Islamic banking development would be associated as a whole to better access to credit thanks to the specific characteristics of this form of banking. However we observed that Islamic banking development exerts a positive impact on access to credit when conventional banking development is low. We therefore provided support to substitution effect between Islamic banking and conventional banking. In a nutshell, Islamic banking expansion would generate benefits in terms of access to credit for developing and emerging countries until a certain level but not for developed countries and the most advanced emerging countries in terms of financial development.

Overall, our study suggests that Islamic banking development cannot always promote credit access. However, in the least financially developed economies, Islamic finance can be a substitute to conventional banking system.


About the Authors

Florian Léon is currently a postdoctoral research fellow at CREA (University of Luxembourg). He holds a PhD (2014) in economics at the Université d'Auvergne (France). 

Laurent Weill is an Associate Professor of Economics at EM Strasbourg Business School, University of  Strasbourg

Gravatar: Mohamed El-Komi, Assistant Professor of Economics, American University in Cairo

Experiments in Islamic Microfinance

05.10.2015Mohamed El-Komi, Assistant Professor of Economics, American University in Cairo

Financial access in Africa is heavily constrained. The percentage of adults with a bank account in sub-Saharan Africa was only 34% in 2014 (compared with 51.4% in Latin America, 93.6% in the US and 69% in East Asia & Pacific). This limited access has important implications for economic development; lowering savings, impeding efficient channeling of funds and generating and sustaining poverty traps.

Many projects have worked on addressing the different causes of these limitations that includes underdeveloped financial infrastructure, financial illiteracy and poor economic performance. However, other factors have been overlooked, including the fact that cultural/religious causes prevent many Muslims from dealing with the traditional banking services. Muslims constitute more than half of Africans (around 53%). Many Muslims are traditionally opposed to interest-bearing accounts (because of the Islamic ban of riba), which distance them even further from formal financial services.

Several financial products are permissible for Muslims, although they differ in their degree of acceptance. Some of the most acceptable financial products are based on profit-and-loss sharing (PLS), although they are the least used in Islamic banking because they are perceived to be extremely risky.

In a recent paper, we examine this perception and experimentally demonstrate that PLS Islamic finance products are no more risky than other financial products like interest-based loans.

We compared two PLS microfinance contracts that are Islamic-compliant (profit sharing and joint venture) with interest loans. Each borrower made decisions to invest in risky projects using the three types of contracts. The outcome of the project is known to the borrower, but not to the lender. We then compared the compliance rates of the participants in each of the three contracts. If indeed, PLS contracts are riskier, we would have expected to find higher default rates in those contracts relative to interest-bearing contracts.

In contrast, we found that Islamic-compliant loans induce at least as much compliance as interest loans, and sometimes significantly more. Lenders' return on investment was higher in profit and loss sharing agreements than either profit sharing or interest-based loans (which were roughly equivalent). We also found that women comply more than men, consistent with common wisdom and practice in microfinance. Further, religiosity increases compliance rates. It is worth noting these patterns hold regardless of any particular religious belief.

Based on this research, we suggest that PLS microfinance products should be seriously considered. These products would benefit and attract African Muslims, and would provide the poor with a financial instrument that they can utilize without increasing the risks to the lender. Profit sharing and joint venture contracts would be useful tools for both Muslims and non-Muslims in Africa. For Muslims, they will increase banking account access and for everyone, our results suggest that they will yield greater compliance rates in microfinance than the contracts currently in use.

In summary, we hope that this research will encourage microfinance scholars and practitioners to consider new and innovative contractual designs, which will help in increasing access to credit for the limited-income consumer.


This blogpost is based on the academic study "Experiments in Islamic Microfinance", Journal of Economic Behaviour and Organization, Vol. 95, November 2013, pp. 252-269.

About the Study Authors:

Mohamed El-Komi is Assistant Professor of Economics at the American University in Cairo;

Rachel Croson is Professor and Dean of the College of Business at the University of Texas at Arlington.

This blogpost was written by Mohamed El-Komi, Assistant Professor of Economics at the American University in Cairo, and approved by the study authors.

Gravatar: Enrique Gelbard, Mumtaz Hussain, Rodolfo Maino, Yibin Mu, and Etienne B. Yehoue

Status and Development of Islamic Finance in Sub-Saharan Africa

09.03.2015Enrique Gelbard, Mumtaz Hussain, Rodolfo Maino, Yibin Mu, and Etienne B. Yehoue

The Islamic finance industry has been growing rapidly in various regions, and its banking segment has become systemic in some countries, with implications for macroeconomic and financial stability. While not yet significant in Sub-Saharan Africa (SSA), several features make Islamic finance instruments relevant to the region, in particular the ability to foster SMEs and micro-credit activities. In a recent paper, we provide a survey on Islamic Finance in SSA where on-going activities include Islamic banking, sukuk issuances (to finance infrastructure projects), Takaful (insurance), and microfinance. Should they wish to develop the market, policy makers could introduce Islamic financing windows within the conventional system and facilitate sukuk issuance to tap foreign investors. The entrance of full-fledged Islamic banks would require addressing systemic issues and adapting crisis management and resolution frameworks.

The financial sector in SSA has been growing rapidly in the past two decades. New products have been introduced and financial institutions are playing an increasing role in financial intermediation, including cross-border financial intermediation.

However, Islamic finance remains small, although it has potential given the region's demographic structure and potential for further financial deepening. As of end-2012, about 38 Islamic finance institutions-comprising commercial banks, investment banks, and takaful (insurance) operators-were operating in Africa. Out of this, 21 operated in North Africa, Mauritania and Sudan, and 17 in Sub-Saharan Africa.

Botswana, Kenya, Gambia, Guinea, Liberia, Niger, Nigeria, South Africa, Mauritius, Senegal and Tanzania have Islamic banking activities. There is also scope for development in Zambia, Uganda, Malawi, Ghana and Ethiopia, as all but Zambia has relatively large Muslim populations-Zambia is interested in using Islamic finance instruments to fund investment in the mining sector. In Uganda, the central bank has started the process of amending its banking regulations to allow for the establishment of Islamic banks and three Islamic banks have applied for a license.

Islamic finance is still at a nascent stage of development in SSA. The share of Islamic banks is small, and Islamic capital markets are virtually non-existent (there were small Sukuk issuances in Gambia and Nigeria). At the same time, the demand for Islamic finance products is likely to increase in coming years. At present, about half of the region's total population remains to be banked. Furthermore, the SSA Muslim population, currently at nearly 250 million people, is projected to reach 386 million in 2030 and financial activities are expected to rise as a share of GDP. Many countries are expected to introduce Islamic finance activities side-by-side conventional banking. Opportunities for the development of Islamic finance are expected to comprise retail products to small and medium-sized enterprises. The sub-continent's growing middle class, combined with its young population is an opportunity for Islamic finance to expand its services. SSA's large infrastructure needs will also provide an opportunity for Sukuk issuance to channel funds from the Middle-East, Malaysia, and Indonesia. For example, recent issuance of a Shari'ah-compliant bond by Osun state in Nigeria and South Africa could start a trend in favour of sukuk, especially if planned sukuk by Senegal.

Developing Islamic Finance in Sub-Saharan Africa

The development of Islamic Finance could increase the depth and breadth of intermediation, extending the reach of the system (e.g. extension of maturities and facilitation of hedging and risk diversification). At the same time, the much larger non-Muslim population could find Islamic financial instruments attractive in broadening the range of available options, particularly for SMEs and micro-credit. Moreover, financial deepening and inclusion could be further enhanced if new instruments are inspired from Islamic finance, but without necessarily being Shari'ah certified. The development of partial risk guarantees, as in Mauritius, could be seen as an example.

In addition, SSA countries could tap into growing Islamic financial markets to meet infrastructure financing needs. By opening doors to Islamic finance, SSA can seek to attract capital from Muslim countries whose savings rates are high and projected to grow. In particular, sukuk financing, which is expanding in other countries, could be a useful tool to finance infrastructure investments.

Lastly, Islamic financing can help develop small and medium enterprises and microfinance activities, given those African households and firms have less access to credit from conventional banks compared to other developing regions. Islamic banks can tap a segment of depositors that do not participate in interest-based banking. They can also promote SMEs' access to credit through expanding acceptable collaterals by extending funds on a participatory basis in which collateral is either not necessary or includes intangible assets.

Through its different forms-windows, full-fledged banking, investment banking, and Insurance-Islamic finance activities ensure appropriate leverage and help limit speculation and moral hazard. It should be noted, however, that they are also subject to constraints and risks, most notably the difficulties and costs involved in supervising and monitoring and the reputational risk implicit in some products that are not properly certified as compliant with Islamic principles.

For countries that want to develop Islamic finance in their jurisdictions, a strategy could contemplate the following steps: launching a public awareness campaign, providing the needed infrastructure (i.e. amending as needed laws and accounting and prudential frameworks), building capacity at the central bank (especially on supervision), and considering the need to set up an appropriate liquidity management framework and introduce adequate monetary operations instruments.

This blogpost is based on the academic study "Islamic Finance in Sub-Saharan Africa: Status and Prospects", prepared by Enrique Gelbard, Mumtaz Hussain, Rodolfo Maino, Yibin Mu and Etienne B. Yehoue.


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