Can Islamic Banking Increase Financial Inclusion?
42 Pages Posted: 24 Mar 2015
Date Written: February 2015
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 analysis 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.
Keywords: Islamic banking, Financial services, Commercial banks, Bank credit, Bank deposits, Household survey data, Cross country analysis, financial inclusion, Financial Possibility Frontier, finance, bank branches, loans, microfinance, financial institutions, interest
JEL Classification: E44, E52, F60, G20, O16
Suggested Citation: Suggested Citation