The Potential of Microfinance in Increasing Financial Access to Kenya's Unbanked Population a Case Study of Islamic Microfinance in Nairobi, Kenya.

Chapter 1 INTRODUCTION 1.1 Background A study conducted in 2008 by CGAP revealed that globally, an estimated 72 percent of people living in Muslim-majority countries did not use formal financial services. Even where financial services were available, some people viewed conventional products as incompatible with the sharia financial principles set forth in Islamic law (CGAP, 2008). Islamic microfinance represents the confluence of two rapidly growing industries: microfinance and Islamic finance. It has the potential to not only respond to unmet demand but also to combine the Islamic social principle of caring for the less fortunate with microfinance'spower to provide financial access to the poor. Studies confirm that unlocking this potential could be the key to providing financial access to millions of Muslims in the lowest socio-economic segment of the population who reject microfinance products that do not comply with Islamic law. (CGAP, 2008 and Obaidullah, M. 2008). Whereas Islamic microfinance is still in its infancy and business models are just emerging, it could be argued that sharia compliant financial services provide an immense opportunity to the microfinance industry to meet its mandate of providing financial services to the low-end socioeconomic segments of the population. The supply of Islamic microfinance is very concentrated in a few countries, with the top three countries (Indonesia, Bangladesh, and Afghanistan) accounting for 80 percent of global outreach. The demand, however, remains strong as surveys in Jordan, Algeria, and Syria, for example, revealed that 20-40 percent of respondents cited religious reasons for not accessing conventional loans (CGAP, 2008). The global Islamic finance industry is rapidly growing although the total estimated global outreach of Islamic microfinance is estimated at only 380,000 customers. This accounts for an estimated one-half of one percent of total microfinance outreach (Microfinance Information eXchange, 2007a). Whereas conventional microfinance products have been very successfid in Muslim majority countries such as Indonesia and Pakistan, these products do not fulfil the needs of many Muslim clients. (CGAP, 2008).