Can Islamic banking increase financial inclusion?

Abstract

The paper analyses existing country-level information on the relationship between the development of Islamic banking and financial inclusion. In Muslim countries-members of the Organization for Islamic Cooperation (OIC)-various indicators of financial inclusion tend to be lower, and the share of excluded individuals citing religious reasons for not using bank accounts is noticeably greater than in other countries; Islamic banking would therefore seem to be an effective avenue for financial inclusion. We found, however, that although physical access to financial services has grown more rapidly in the OIC countries, the use of these services has not increased as quickly. Moreover, regression analyis shows evidence of a positive link to credit to households and to firms for financing investment, but this empirical link remains tentative and relatively weak. The paper explores reasons that this might be the case and suggests several recommendations to enhance the ability of Islamic banking to promote financial inclusion.

Islamic Banking and Financial Inclusion: Evidence from Asian and African Markets

“…Given the high level of financial exclusion among Muslims due to religious reasons, Islamic banking can play a vital role in enhancing financial inclusion among Muslim countries. Several researchers have attempted to establish relationship between Islamic finance (including Islamic banking and Islamic microfinance) and financial inclusion (Ahmed 2002;Aysan, Disli, Ng, & Ozturk, 2016;Demirgüç-Kunt, Klapper, Singer, & Van Oudheusden, 2015;Demirgüç-Kunt, Klapper, & Singer, 2017;El-Zoghbi & Tarazi, 2013;Iqbal & Shafiq, 2015;Léon & Weill, 2017;Mohieldin, Iqbal, Rostom, & Fu, 2012;Naceur, Barajas, & Massara, 2015;Shaikh, Ismail, Shafiai, Ismail, & Shahimi, 2017;Weill, 2011;Weill & Godlewski, 2014). Some of the studies have focused on the OIC countries; some have included both Muslim and non-Muslim countries; and many are single country studies.…”

“…Notably, most of the studies have assessed the impact of Islamic banking on the demand side (i.e., borrowers' side) of financial inclusion. On the other hand, very few researchers have attempted to assess the impact of Islamic banking on both the demand side and supply side (depositors' side) of financial inclusion (e.g., Demirgüç-Kunt et al, 2017;Naceur et al, 2015).…”

“…Hence by reaching the poorest of the poor, Islamic microfinance could play the role of integrating the vulnerable segment of society into the mainstream financial system (Islamic Financial Services Board, 2013). Naceur et al (2015) investigated the impact of Islamic banking development on financial inclusion in Muslim (OIC) countries. They suggested that Islamic banking can be an effective avenue for the inclusion of financially excluded Muslims.…”

“…Zinsa and Weill (2016) have identified GDP per capita income as an important determinant of financial inclusion. Legal rights and financial information have been used byNaceur et al (2015) as control variables. Banking competition has been measured throughLove and Pería (2015).…”

Financial Reporting of Murabaha Contracts: IFRS or AAOIFI Accounting Standards?

“…In the Islamic perspective, financial inclusion is an integral part of Islamic microfinance institutions (IMFI), which were designed to provide various Islamic financial products and services needed by low income and poor groups of society. Islamic microfinance provides a more holistic framework than conventional microfinance in enhancing financial inclusion, eradicating poverty, and promoting a healthy economy through microfinance, MSE financing, and micro insurance (Naceur, 2015). The concept of financial inclusion in the Islamic perspective is based on two main pillars, namely redistributive and risk sharing instruments (Mohieldin, et al, 2012;Iqbal andMirakhor, 2012 andIqbal, 2014), and they encourage social as well as financial inclusion.…”