Despite rapid globalisation, roughly half of the world’s adult population still lives outside the formal banking system. For some, the obstacles are practical: limited funds or lack of banking infrastructure. Others, however, voluntarily choose not to open a formal account based on religious grounds. Under Shariah, the complete body of all Islamic laws, practices such as charging interest (riba) and speculative trading are explicitly forbidden. While Muslims make up only a meek percentage of the world’s unbanked, their influence has helped shape one of the fastest-growing sectors in global finance. Over the last two decades, Islamic non-interest banks have gained popularity outside traditional Asian Muslim countries, with a new frontier emerging in East Africa. This trend signals further tightening of the region’s relations with the Middle East, and a departure from its ever deteriorating connection to Europe and the Western hemisphere. Does this mean Islamic banking can better cultivate financial inclusion and development of some of the poorest countries in the world?
New Frontier Developments
East Africa’s significant Muslim population makes the region an attractive environment for Islamic banking. Simultaneously, its underdevelopment creates an opportunity for high economic growth and calls for closer cooperation with the Gulf countries in terms of trade and investment. For example, Somalia’s national Islamic banks are surprising leading players in recent developments, despite the country’s poor economic performance. The largest financial institution operating in the country to this day is a Shariah-compliant bank established in 2009. Together with other successively opening Somali-owned entities, it has spread into the neighbouring East African countries. In 2011, Islamic finance had already been introduced in Ethiopia and Djibouti, now fully integrated within the countries’ national and commercial banks. In recent years, the governments of these two further incorporated Islamic banking law on a national level. The trend has expanded into Kenya, where Islamic finance was already active, although on a smaller level. In 2017, the Islamic institutions became a major part of the country’s financial infrastructure, often through acquisition by Somali-owned banks. Uganda followed suit most recently, launching its first Shariah-compliant financial institution in 2024. In Tanzania, the recent rapid infrastructure development has similarly increased the demand for more Islamic windows in financial institutions, along with the popularity of the fully fledged Islamic bank operating for over 15 years now. These institutions seem to reach the underserved communities and cater to not only their religious needs, but also cultural heritage, education, and entrepreneurial skills in the region.
How the Interest is Evaded
To avoid riba, Islamic finance was founded on risk sharing between the parties involved in all operations. The Shariah-compliant bank must make profit to sustain itself alongside conventional banking, so it runs operations on behalf of its account holders, who in turn neither have to ask for, nor pay any interest. One way of doing so is to buy a commodity and sell it (Murabaha) or lease it (Ijara) to the clients for a higher price. The bank may also invest in the enterprise (Mudarabah) or channel the depositor’s funds to borrowers and investments (Wakala) to then share the profits. Frequently, the account holders will agree to create a pool of funds shared between them and also among the partner banks, providing for insurance (Takaful). While the establishment of the Islamic finance industry has been an alternative solution for practicing Muslims, many of its banks have since included non-Muslims in the same way. An honest assessment, however, points out that the Shariah-compliant practices echo at large those of conventional Western banking, despite their Arabic labels.
The Question of Financial Inclusion
Financial inclusion simply means allowing those with no access to traditional banks to still take advantage of financial services. Savings, money transfers, online payments, and insurance programs—to name just a few examples—protect individuals against economic insecurities. Yet, half of the adult population worldwide has no access to these services or lacks fundamental legal rights in the financial industry. The worst instability is exemplified in the African continent, where additional issues such as low income, shortage of money in circulation, limited education, or poor infrastructure result in financial self-exclusion.
The good news for the continent, particularly for East Africa, is that years of research indicate that the introduction of Islamic banking has provided financial inclusion of the region —at least to some extent.
The expected benefits of this inclusion are a reduction in poverty, increased entrepreneurship, as well as higher incomes and spending. The unbanked gain access to funds of Islamic institutions, stimulating more borrowing and consumption. Those with entrepreneurial vision may finance their businesses, which in turn drives the GDP of their country. Since the Islamic banks grant asset-based loans, what may be observed is that an increase in borrowers multiplies the resources held by the institutions, allowing more people to access credit over time. Eventually, economic development may allow for greater savings and investment in the region. However, this is yet to be observed in East Africa.
Despite the regional optimism, some limitations of Islamic finance inclusion remain. Originating from the significantly richer region of the Middle East, these institutions offer better terms of opening accounts for the unbanked in Asian Muslim countries than in Africa. Higher banking assets are readily available to customers, which may trigger financial migration from disadvantageous East Africa. The same holds true for customers’ legal rights and access to information, both of which are generally more limited in the recently developing banks. It is legal protection of individuals and trust that have been lacking thus far, failing to properly stimulate financial inclusion in the African continent. Another aspect of concern is women’s special status in the Islamic banking system.
Written by Aleksandra Drozd, Edited by Rosey Holland
Photo Credit: Fer ID (Uploaded August 24, 2025) on Pexels
