## _wp1531

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### I. Introduction and central research question
- Financial inclusion defined as "the share of the population who use financial services."
- Policy context and motivation:
  - World Bank’s 2014 Global Financial Development Report: more than two-thirds of regulatory and supervisory agencies have been tasked with encouraging financial inclusion, and more than 50 countries have set formal targets.
  - World Bank President announced a global target of universal financial access by 2020.
  - Micro evidence: access to savings accounts and credit increases savings, investment, consumption, income, entrepreneurship, and reduces poverty.
  - Macro evidence: less robust; suggestive weaker association between financial depth and long-term growth in MENA, low-income countries, and oil exporters.
- Central question: To what extent has the rapid growth of Islamic finance contributed to financial inclusion by reducing religious self-exclusion in Muslim countries?
  - Noted: assets of Islamic financial institutions "more than doubling since 2006."

### II. Data sources and empirical strategy
- Main data sources:
  - IMF Financial Access Survey (FAS): supplier-side data for 189 countries, approximately 150 time series and 50 key indicators, annual data for the period 2004–13; breakdown by households and SMEs.
  - World Bank Global Findex: user-side household survey (triennial, first conducted in 2011).
  - World Bank Enterprise Survey: user-side firm-level survey (country-by-country every three to five years).
  - World Bank’s Islamic Finance database used to classify OIC countries with and without Islamic banking.
- Empirical approach:
  - Use FAS supply-side trends (2004–13) and compare OIC (57 members) vs non-OIC; within OIC compare countries with Islamic banking (36 classified as Islamic banking countries) vs those without.
  - Two-sample t-tests on difference in mean growth rates (FAS) and levels (Global Findex and Enterprise Survey).
  - Cross-country regressions linking Global Findex user-side measures to Islamic banking measures (IB0, IB1) and controls (income per capita, legal rights, credit information, bank competition).
  - Benchmarking (Gap) analysis using Feyen, Kibouka, and Sourrouille (2013) structural predictors to compare actual inclusion to predicted inclusion given structural characteristics.
  - Fixed-effects regressions for panel analysis and regressions restricted to OIC sample for robustness.

### III. Stylized supply-side and user-side findings (2004–13 and 2013 levels)
- Decade-long growth patterns (2004–13):
  - Global: majority of financial inclusion indicators grew steadily; growth slowed after the global financial crisis.
  - Comparative growth (averages as reported):
    - ATMs: OIC average growth nearly 20 percent annually; rest of the world averaged 11 percent.
    - Commercial bank branches: OIC group growth 8 percent vs rest of world 4 percent.
    - Within OIC: bank branches growth averaged more than 10 percent for OIC without Islamic banking vs 7 percent for OIC with Islamic banking.
    - Commercial bank depositors growth: OIC without Islamic banking 12 percent vs OIC with Islamic banking 8 percent.
    - Borrowers and loan accounts growth within OIC:
      - OIC without Islamic banking—total borrowers 16 percent and total loan accounts 14 percent.
      - OIC with Islamic banking—10 percent and 8 percent, respectively.
  - Income-group pattern: low- and lower-middle-income countries show higher average growth in selected inclusion indicators than upper-middle- and high-income countries; pattern generally holds within OIC.
- Statistically significant growth differences:
  - OIC countries outperformed the rest of the world in growth of bank branches, ATMs, and deposit accounts.
  - Within OIC, countries without Islamic banking registered significantly higher growth rates in bank branches, deposit accounts, percentage of bank borrowers, and outreach of loan accounts.
  - Caveat: higher recent growth rates for OIC countries without Islamic banking reflect partial catch-up; absolute levels often remain higher for OIC countries with Islamic banking.
- Cross-sectional levels in 2013 (selected):
  - Accounts per 1,000 adults (commercial banks):
    - World: just less than 12 accounts per 1,000 adults.
    - OIC member countries: about 8¾ accounts per 1,000 adults.
  - Firms reporting a loan or line of credit:
    - World average: about 35 percent of firms.
    - OIC average: less than 21 percent of firms.
  - Financial depth (private credit / GDP):
    - OIC average depth: 32 percent of GDP, which is 25 percentage points below the world average (implied world average 57 percent).
  - OIC countries with Islamic banking:
    - Use of loans for small firms: 17½ percent (about 1 percentage point greater than OIC average).
    - Depth: 38 percent of GDP (6 percentage points greater than overall OIC average).
- Household-level Global Findex (2013):
  - More than half of the world’s adult population does not have an account with a formal financial institution (Global Findex sampling: 149 countries and more than 124,000 individuals).
  - Reasons among the unbanked (share of those reporting not having an account):
    - 30 percent cited lack of sufficient funds as the sole reason.
    - 23 percent cited someone else in the household had an account.
    - 5 percent cited religious reasons.
  - Religious self-exclusion (share of adults citing religious reasons among those without accounts) varies widely:
    - Afghanistan: 34 percent.
    - Iraq and Tunisia: 26–27 percent.
    - Djibouti and Saudi Arabia: 23–24 percent.
    - Malaysia: virtually zero.
    - Kuwait and the United Arab Emirates: 2½–3 percent.
    - Sudan: 4½ percent.
- Firm-level findings (Enterprise Survey, 2013):
  - On average, 17 percent of OIC firms use bank loans to finance investment, compared to a worldwide average of 25½ percent.
  - Percentage of working capital funded by banks:
    - OIC: 24¼ percent.
    - Worldwide average: 32¼ percent.
  - OIC firms are more likely to view access to credit as a major obstacle to growth prospects by 7 percentage points.
  - Within OIC, Islamic banking countries outperform the OIC average on bank funding of investment but underperform with regard to funding of working capital.

### IV. Regression and benchmarking results — magnitudes and inference
- Difference-in-means and regression magnitudes (examples reported):
  - OIC countries (compared with ROW) estimated differences include:
    - between 400 and 450 fewer accounts per 1,000 adults;
    - 12 fewer branches per 100,000 adults;
    - about 20 percentage points lower use of credit by all firms;
    - 16–17 percentage points lower use of credit for small firms;
    - financial depth lower in OIC countries by some 25–35 percentage points of GDP.
- Income per capita:
  - Significant determinant of inclusion (more accounts, more branches, greater use of accounts and bank loans by households and firms; lower perceived financing constraints).
  - Income is not significantly related to religious self-exclusion.
- Islamic banking indicators (IB0, IB1) — associations after controls:
  - Positive associations detected with:
    - Greater use of bank credit by households.
    - Greater use of bank credit by firms, primarily for investment purposes.
  - No significant association with:
    - Ownership of accounts by households.
    - Incidence of religious self-exclusion.
    - Firms’ perception that there are obstacles to financing.
  - After including controls (legal rights, credit information, bank competition), associations weaken; only a weak positive association remains between Islamic banking and percentage of firms with bank credit, while household and firm investment credit associations often remain significant.
- Benchmark (Gap) findings:
  - On average (1998–2013), OIC countries underperform relative to structural peers on access to accounts and to firm credit, but slightly overperform in access to branches and depth.
  - OIC countries with Islamic banking: underperform on proliferation of bank branches, underperform more on accounts and firm bank credit, and overperform more on financial depth.
  - Regressions of Gap on Islamic banking variables (IB0, IB1, WBIB dummy) fail to register significant associations; OIC dummy also not significant once structural factors accounted for.
  - Regressions of change in Gap over time yield similarly weak results; OIC dummy coefficients positive but not significant.
  - Limiting sample to OIC countries often weakens pooled positive coefficients or reverses them in fixed-effects regressions.

### V. Constraints, evidence of demand, and data caveats
- Identified constraints limiting Islamic banking’s inclusion impact:
  - Weak financial infrastructure in OIC and ISB countries (e.g., low legal rights index scores).
  - Incipient regulatory environment for Islamic banking constraining product innovation.
  - Islamic banking represents less than 2 percent of banking assets worldwide.
  - Shortage of qualified Islamic-banking talent; recruitment practices may limit outreach.
  - Data limitations and definitional inconsistencies for Islamic banking measures across sources (Bankscope may undercount; World Bank Islamic Database may understate assets).
- Evidence of demand and potential uptake among SMEs:
  - Saudi Arabia: 90 percent of SMEs indicate a strong preference for Shari’ah-compliant products.
  - Morocco: 54 percent of SMEs report strong interest.
  - Jordan: 45 percent of SMEs report strong interest.
  - Approximately 35 percent of MENA SMEs express need for financing by Islamic banks.
  - Survey captions and notes: "Cumulative weighted ave rage : 32. 19  %"; "54 percent of population express willingness to adopt Islamic finance products, whereas, 6 percent enterprises also express willingness for Shariah compliant products."
- Data and inference caveats:
  - Limited coverage, uniformity of definitions, and completeness for Islamic banking weaken detectable associations.
  - Country-specific conditions and complementary policies may determine whether Islamic banking boosts inclusion in particular cases; generalization is difficult.

### VI. Policy implications and recommendations
- If Islamic banking positively affects some inclusion measures:
  - Promote development of Islamic banking where empirically supported.
- Improve Islamic banks’ operating model:
  - Create separate SME business units within Islamic financial institutions.
  - Better train bank personnel in Shari’ah-compliant instruments and streamline execution of Islamic transactions.
  - Introduce credit evaluation techniques (behavioral scoring, early warning systems).
  - Develop equity-related instruments (musharaka and mudaraba) and ijara for SMEs.
  - Explore private equity (PE) and venture capital (VC) suited to Islamic finance models; Bahrain example noted for Islamic VC bank.
  - Support domestic capital market development, business incubators, and legal frameworks (intellectual property, security of financial transactions).
- Private and public initiatives to broaden inclusion:
  - Islamic microfinance: mobilize zakat and waqf; use Profit and Loss Sharing (PLS) schemes (mudarabah, musharaka).
  - Allow Islamic banks to open microfinance branches or develop Shari’ah-compliant microfinance models.
  - Make Qard-al-Hassan resources available to Islamic microfinance institutions.
  - Use zakat funds to cover default risk and build capacity.
  - Establish Islamic equity funds and promote sukuk issuance suitable for SMEs and for securitizing micro/SME loans.
  - Institutionalize Islamic redistributive mechanisms (zakat, sadaqat, qard-al-Hassan, waqf) with formal structures proposed.
  - Islamic partial credit guarantee schemes (IPCG) or Shari’ah-compliant extensions of PCG:
    - Consider coverage ratios "closer to international standards (around 30–40 percent)."
    - Tie fees to risk and conduct regular systematic assessments.
    - Jordan example: recently established a Shari’ah-compliant loan guarantee.
- Broader financial infrastructure and regulatory reforms (apply to Islamic and conventional finance):
  - Improve credit reporting depth and coverage; introduce or strengthen private credit bureaus and movable collateral registries.
  - Enlarge the pool of assets acceptable as collateral; adopt collateral regimes; develop out-of-court enforcement.
  - Increase bank competition (ease entry, develop capital markets, reduce loan concentration).
  - Strengthen consumer protection, financial education, and a sound regulatory and supervisory framework for Islamic finance.
  - Support better access to Shari’ah-compliant instruments alongside financial stability goals.

### VII. Overall assessment and conclusions
- Empirical verdict:
  - The link between Islamic banking and financial inclusion at the macro level is tentative and relatively weak.
  - Some significant associations exist for user-side indicators (household and firm use of bank credit for investment) but not for account ownership, religious self-exclusion, or firms’ perceived financing obstacles.
  - Once income per capita and broader structural determinants are accounted for (benchmarking), differences between OIC countries and others, and within OIC between Islamic-banking-active and inactive countries, largely disappear.
- Recommendations for research and policy analysis:
  - Improve data coverage and uniformity of Islamic banking definitions and reporting.
  - Account for a broader set of structural determinants before attributing inclusion differences to OIC status or Islamic-banking presence alone.
  - Consider country-specific complementary policies to enable Islamic banking to contribute more effectively to inclusion.

- Key cross-country statistics and illustrative figures (selected, reported verbatim):
  - Religious self-exclusion (share of adults citing religious reasons among those without accounts):
    - OIC countries: 9¼ percent.
    - Worldwide average: 5½ percent.
    - OIC Islamic Banking Countries: 10¼ percent.
  - Firms’ use of bank financing and perceived constraints:
    - 17 percent of OIC firms use bank loans to finance investment.
    - Worldwide average: 25½ percent.
    - Percentage of working capital funded by banks: OIC 24¼ percent; worldwide 32¼ percent.
    - OIC firms more likely to view access to credit as a major obstacle by 7 percentage points.
  - Mean growth rates and levels (selected Table excerpts as reported):
    - Commercial bank branches (avg. growth): OIC 8.2, ROW 3.6, OIC w/ISB 7.0, OIC no ISB 10.5.
    - ATMs (avg. growth): OIC 18.3, ROW 11.3, OIC w/ISB 18.4, OIC no ISB 18.0.
    - Percent of households with an account at a formal financial institution (level): OIC 26.8, ROW 55.3, OIC w/ISB 31.2, OIC no ISB 19.2.
    - Selected magnitude estimates from regressions: between 400 and 450 fewer accounts per 1,000 adults in OIC; 12 fewer branches per 100,000 adults; financial depth lower by some 25–35 percentage points of GDP in OIC.

*Source: _wp1531 — IMF Working Paper (chapter/section).*

### References .............................................................................................................

### _wp1531 - References

### I. Introduction: context and research question
- Financial inclusion defined as "the share of the population who use financial services."
- Policy context and targets cited:
  - World Bank’s 2014 Global Financial Development Report: more than two-thirds of regulatory and supervisory agencies have been tasked with encouraging financial inclusion, and more than 50 countries have set formal targets.
  - World Bank President announced a global target of universal financial access by 2020.
- Key empirical concerns motivating the paper:
  - Micro evidence that access to savings accounts and credit increases savings, investment, consumption, income, entrepreneurship, and reduces poverty (references to GFDR and case studies).
  - Macro evidence is less robust; suggestive findings include weaker positive association between financial depth and long-term growth in MENA, low-income countries, and oil exporters—groups that tend to underperform on financial inclusion (Barajas, Chami, and Yousefi, 2013).
  - Bhattacharaya and Wolde (2010) find lack of access to credit contributed to lower growth in MENA.
- Central question: To what extent has the rapid growth of Islamic finance contributed to financial inclusion by reducing religious self-exclusion in Muslim countries?
  - Noted fact: assets of Islamic financial institutions "more than doubling since 2006."

### II. Data sources and methodological approach
- Main data sources:
  - IMF Financial Access Survey (FAS): supplier-side data for 189 countries, approximately 150 time series and 50 key indicators, annual data for the period 2004–13; breakdown by households and SMEs.
  - World Bank Global Findex: user-side household survey (triennial, first conducted in 2011).
  - World Bank Enterprise Survey: user-side firm-level survey (country-by-country every three to five years).
  - World Bank’s Islamic Finance database used to classify OIC countries with and without Islamic banking.
- Empirical strategy overview:
  - Section II: use FAS supply-side trends (2004–13) and compare OIC (57 members) vs non-OIC, and within OIC compare countries with Islamic banking (36 classified as Islamic banking countries) vs those without.
  - Two-sample t-tests on difference in mean growth rates (FAS) and levels (Global Findex and Enterprise Survey).
  - Section III: cross-country tests linking Global Findex user-side measures to measures of Islamic banking (number of Islamic banks, assets of Islamic banks normalized by adult population, banking industry size, or GDP) and control for structural determinants using benchmarked inclusion measures.
  - Section IV: policy implications, including promoting Islamic banking where empirically supported, addressing limitations (especially for SMEs), and referring to proven policies for enhancing financial inclusion generally.

### III. Stylized facts from supplier-side (FAS) and user-side data
- Coverage and definition notes:
  - FAS is supplier-side; Findex and Enterprise Survey are user-side and more granular but have less coverage and periodicity.
  - Comparisons rely on 2004–13 growth rates for FAS indicators and 2013 (single-year) levels for Findex and Enterprise Survey.
- Decade-long growth patterns (2004–13):
  - Global pattern: majority of financial inclusion indicators grew steadily over the past decade, with growth slowing after the global financial crisis.
  - Comparative growth observations (averages reported in text):
    - ATMs: OIC average growth nearly 20 percent annually; rest of the world averaged 11 percent.
    - Commercial bank branches: OIC group growth 8 percent vs rest of world 4 percent.
    - Within OIC: bank branches growth averaged more than 10 percent for OIC without Islamic banking vs 7 percent for OIC with Islamic banking.
    - Commercial bank depositors growth: OIC without Islamic banking 12 percent vs OIC with Islamic banking 8 percent.
    - Borrowers and loan accounts growth within OIC: OIC without Islamic banking—total borrowers 16 percent and total loan accounts 14 percent; OIC with Islamic banking—10 percent and 8 percent, respectively.
  - Income-group patterns:
    - Low- and lower-middle-income countries show higher average growth in selected inclusion indicators than upper-middle- and high-income countries; this pattern generally holds within the OIC group.
- Statistically significant differences in growth (summary):
  - OIC countries outperformed the rest of the world in growth of bank branches, ATMs, and deposit accounts.
  - Within OIC, countries without Islamic banking registered significantly higher growth rates in bank branches, deposit accounts, percentage of bank borrowers, and outreach of loan accounts.
  - Caveat: these higher recent growth rates for OIC countries without Islamic banking reflect partial catch-up; in many indicators absolute levels remain higher for OIC countries with Islamic banking.

### IV. Cross-sectional levels of inclusion (2013) — supplier and user-side findings
- Selected household and firm-level comparisons (levels in 2013):
  - Accounts per 1,000 adults (commercial banks):
    - World: just less than 12 accounts per 1,000 adults.
    - OIC member countries: about 8¾ accounts per 1,000 adults.
  - Firms reporting a loan or line of credit:
    - World average: about 35 percent of firms report having a loan or line of credit.
    - OIC average: less than 21 percent of firms report having a loan or line of credit.
  - Financial depth (private credit / GDP):
    - OIC average depth: 32 percent of GDP, which is 25 percentage points below the world average (world average therefore implied as 57 percent by the text’s arithmetic).
- Comparing OIC with Islamic banking subgroup:
  - The OIC countries with Islamic banking exhibit average levels of inclusion and depth that "surpass those of the typical OIC country."
    - Use of loans for small firms: OIC Islamic banking countries 17½ percent (about 1 percentage point greater than OIC average).
    - Depth: OIC Islamic banking countries 38 percent of GDP, which is 6 percentage points greater than overall OIC average.
- Household use of financial services (Global Findex indicators, 2013):
  - Worldwide more than half of the world’s adult population does not have an account with a formal financial institution (Global Findex sampling: 149 countries and more than 124,000 individuals).
  - Reasons among the unbanked (as percentage of those who reported not having an account):
    - 30 percent cited lack of sufficient funds as the sole reason.
    - 23 percent cited someone else in the household had an account.
    - 5 percent cited religious reasons.
  - Religious self-exclusion varies markedly across countries (share of adults citing religious reasons among those without accounts):
    - Afghanistan: 34 percent.
    - Iraq and Tunisia: 26–27 percent.
    - Djibouti and Saudi Arabia: 23–24 percent.
    - Malaysia: virtually zero.
    - Kuwait and the United Arab Emirates: 2½–3 percent.
    - Sudan: 4½ percent.
- Firm-level use (Enterprise Survey, 2013):
  - Figures presented for percent of firms using banks to finance investments and working capital, and the proportion financed by banks; textual summary indicates OIC countries underperform relative to world averages, while OIC Islamic banking subgroup tends to perform better than OIC average.

### V. Tentative implications and policy directions (as stated in the paper)
- If evidence supports a relationship between Islamic banking and some measures of financial inclusion:
  - The simplest policy recommendation is to promote the development of Islamic banking.
- Where limitations or weaknesses are found:
  - The paper draws on recent studies and case evidence suggesting avenues to enhance Islamic banking’s ability to promote inclusion, specifically among SMEs (discussion is less strictly supported by cross-country empirical analysis and relies more on case studies and anecdotal evidence).
- Regardless of Islamic banking presence:
  - Section IV refers to proven policies for enhancing financial inclusion in general (these are summarized in the paper drawing on empirical analysis and the existing literature).

*Source: _wp1531 - References.*

### Introduction, religious self-exclusion—

### Introduction, religious self-exclusion—

### Religious self-exclusion: prevalence
- The percentage of adults citing religious reasons for not having an account is noticeably higher in OIC countries, 9¼ percent compared to the worldwide average of 5½ percent.
- It is higher still for the Islamic Banking Countries within OIC, at 10¼ percent.

### Firms’ use of bank financing and perceived constraints
- On average, 17 percent of OIC firms use bank loans to finance investment, compared to a worldwide average of 25½ percent.
- The percentage of working capital funded by banks is 24¼ percent for OIC and 32¼ percent for the worldwide average.
- OIC firms are more likely to view access to credit as a major obstacle to their growth prospects, by 7 percentage points.
- Within OIC, Islamic banking countries outperform the OIC average with regard to bank funding of investment, but underperform with regard to funding of working capital.

### Statistical testing approach
- Two key issues identified: (i) whether observed differences across groups are statistically significant; (ii) whether cross-country differences reflect structural/non-policy factors such as income per capita.
- Tests conducted:
  - t-tests of differences in means (Table II.4).
  - Two types of regressions:
    - (i) a cross-country regression with a single observation of each financial access and depth variable for each country (two versions: average over 1998–2013; or last observation available).
    - (ii) a fixed-effects regression including all available country and time observations.
- A second set of regressions assesses differences within OIC (Islamic Banking Countries vs. rest), controlling for country income per capita, using the specified equation:
  -  0123iiiii FIyOICOIC   WBIB           (III.1)
- For FI variables with multiple time observations, the last available observation was taken.

### Key regression findings and magnitudes
- First set of regressions (means differences tests comparing OIC to other countries) shows:
  - Financial inclusion in OIC countries is significantly lower.
  - Examples of estimated differences:
    - between 400 and 450 fewer accounts per 1,000 adults;
    - 12 fewer branches per 100,000 adults;
    - about 20 percentage points lower use of credit by all firms;
    - 16–17 percentage points lower use of credit for small firms;
    - financial depth lower in OIC countries by some 25–35 percentage points of GDP.
- Second set of regressions (controlling for income per capita) continues to give strong evidence that financial inclusion in OIC countries is significantly lower:
  - Households are less likely to own accounts or borrow from banks and are more likely to cite religious reasons for not having accounts.
  - Firms—both large and small—are less likely to borrow from banks in general and to finance investment in particular, and are more likely to identify access to finance as a major constraint.

### Role of income per capita
- Country income is a determining factor in financial inclusion:
  - Associated with a greater proliferation of accounts and bank branches;
  - More extensive use of accounts and bank loans by households and of loans by firms;
  - A lower perception of financing constraints.
- Income is not significantly related to religious self-exclusion.

### Within-OIC differences (Islamic Banking Countries)
- Looking at differences within the OIC grouping does not reveal any distinct advantage of the Islamic Banking countries.
- The coefficients of the interaction between OIC and WBIB are generally of the same sign as in the means differences tests in the descriptive comparisons.

*Source: _wp1531 - Introduction, religious self-exclusion—*

### Section II—indicating that OIC Islamic Banking countries display greater access and use of

### _wp1531 - Section II—indicating that OIC Islamic Banking countries display greater access and use of

### Research questions and empirical strategy
- Two key questions:
  - (i) Does the presence and/or activity of Islamic Banks play a visible role in enhancing inclusion?
  - (ii) Does the answer change once other structural or nonpolicy factors affecting inclusion are taken into account?
- Indicators of Islamic banking used:
  - Number of Islamic banks operating in the country (IB0) and total assets of these banks (IB1), scaled by adult population (and alternatively scaled by total population, number of banks, or total banking assets).
  - Data sources: Bankscope; World Bank Islamic Banking Database (version updated as of February, 2014); supplemented where possible by central bank data.
- Main regression specifications:
  - Equation (III.2): replaces the WBIB dummy with Islamic banking indicator IBj and includes expanded controls X (income per capita, legal rights, credit information, banking sector competition).
  - Benchmarked “Gap” analysis: Gap = FAit − FAitB (equation (3)) using Feyen, Kibouka, and Sourrouille (2013) structural benchmarks.
  - Simple Gap regression (equation (4)) omits GDP per capita because it is incorporated in the benchmark.

### Empirical findings — supply-side and user-side indicators
- Income per capita:
  - Income per capita is a significant determinant of financial inclusion across indicators (more branches, more account ownership and borrowing, lower perceived financing obstacles).
- Raw comparisons:
  - OIC countries in general exhibit lower financial inclusion; initial differences in means may be partly attributable to differences in income per capita.
  - Religious self-exclusion appeared to contribute to lower inclusion in OIC countries in initial comparisons.
- Islamic banking presence/activity (IB0, IB1) — main associations:
  - Positive associations found with:
    - Greater use of bank credit by households.
    - Greater use of bank credit by firms, primarily for investment purposes.
  - No significant association with:
    - Ownership of accounts by households.
    - Incidence of religious self-exclusion.
    - Firms’ perception that there are obstacles to financing.
  - After including legal rights, credit information, and bank competition controls:
    - Income per capita remains significant.
    - Only a weak positive association between Islamic banking and percentage of firms with bank credit.
    - Associations with household bank credit use and firms’ financing of investment remain significant.
- Benchmarked (Gap) results:
  - Average benchmarking findings (1998–2013) for OIC:
    - On average, OIC countries underperform relative to structural peers on access to accounts and to firm credit, but slightly overperform in access to branches and depth.
    - OIC countries with Islamic banking underperform similarly on proliferation of bank branches, underperform more on accounts and use of bank credit by firms, and overperform more on financial depth.
  - Regression on Gaps:
    - All three Islamic banking variables (IB0, IB1, WBIB dummy) fail to register a significant association with Gap.
    - The OIC dummy also fails to be significant once structural factors are accounted for.
    - Regressions of change in Gap over time yield similarly weak results; OIC dummy coefficients are positive but not significant.
  - Robustness notes:
    - Using Islamic banking measures as shares of total commercial bank industry gives limited evidence (mostly on access to branches) but results are not robust to specifications.
    - Financial depth was sometimes negatively associated with Islamic banking, though rarely significantly so.
    - Limiting the sample to OIC countries often weakens or reverses pooled regression findings (e.g., positive pooled coefficients become negative and significant in fixed-effects regressions).

### Financial Possibilities Frontier (conceptual framework) and benchmarking approach
- Conceptual distinction:
  - Two factor types constrain financial development: time-invariant structural characteristics (income per capita, population size/density, degree of informality) and policy/enabling-environment factors (macroeconomic stability, legal/institutional framework).
  - Structural Access line: average relationship between structural characteristics and inclusion measures.
  - Financial Possibility Frontier (FPF): maximum sustainable level of inclusion given structural and policy constraints.
- Benchmarking methodology:
  - Feyen, Kibouka, and Sourrouille (2013) panel regressions predict FAi,tB using:
    - log GDP per capita and its square; log population; log population density; log age dependency ratio; and dummies (offshore center, transition country, oil-exporting).
  - Gap = Actual FA − Predicted FAitB; positive gap = overperformance; negative gap = underperformance.
- Indicators benchmarked:
  - Number of bank accounts per 1,000 adults.
  - Number of branches per 100,000 adults.
  - Percent of firms with credit (or a credit line).
  - Percent of small firms with credit (or a credit line).

### Constraints limiting Islamic banking’s impact and potential for inclusion
- Identified constraints:
  - Weak financial infrastructure in OIC and ISB countries (e.g., strength of legal rights index: scale 0–10; OIC performance well below averages in other regions).
  - Incipient regulatory environment for Islamic banking in many OIC/ISB countries, constraining product innovation (IFC, 2014).
  - Islamic banking represents less than 2 percent of banking assets worldwide (UKIFS, 2013).
  - Shortage of qualified Islamic-banking talent; recruitment from conventional banking may limit outreach (Jabr 2003).
  - Data limitations and definitional inconsistencies for Islamic banking measures across sources (Bankscope may undercount number/assets; World Bank Islamic Database may understate assets).
- Evidence of demand and potential:
  - Country-level SME preferences for Shari’ah-compliant products:
    - Saudi Arabia: 90 percent of SMEs indicate a strong preference for Shari’ah-compliant products.
    - Morocco: 54 percent of SMEs report strong interest.
    - Jordan: 45 percent of SMEs report strong interest.
    - Approximately 35 percent of MENA SMEs express need for financing by Islamic banks.
  - Figure caption data: "Cumulative weighted ave rage : 32. 19  %"
  - Survey note: "54 percent of population express willingness to adopt Islamic finance products, whereas, 6 percent enterprises also express willingness for Shariah compliant products."
  - Weighted-average methodology described in source for SME preference percentages.

### Conclusions and policy implications (high-level)
- Overall assessment:
  - The empirical link between Islamic banking and financial inclusion at the macro level is tentative and relatively weak, mirroring micro-level findings (Demirguc-Kunt, Klapper, and Randall, 2013).
  - Some significant associations exist for user-side indicators (household and firm use of bank credit for investment) but not for account ownership, religious self-exclusion, or firms’ perceived financing obstacles.
  - Once income per capita and broader structural determinants are accounted for (benchmarking), differences between OIC countries and others, and within OIC between Islamic-banking-active and inactive countries, largely disappear.
- Data and inference caveats:
  - Data coverage, uniformity of definitions, and completeness for Islamic banking are imperfect and likely weaken detectable associations.
  - Country-specific conditions and complementary policies may determine whether Islamic banking boosts inclusion in particular cases; generalization across countries is difficult.
- Implication for policy analysis:
  - Wider coverage and greater uniformity of definitions for Islamic banking are crucial to uncover statistically reliable associations.
  - Accounting for the broader set of structural determinants is necessary before attributing inclusion differences to OIC status or Islamic-banking presence alone.

*Italic: Source — _wp1531 - Section II—indicating that OIC Islamic Banking countries display greater access and use of (PDF chapter/section).*

### Introduction, the Demirguc-Kunt, Klapper, and Randall (2013) study reports that a plurality

### _wp1531 - Introduction, the Demirguc-Kunt, Klapper, and Randall (2013) study reports that a plurality

### Survey findings and behavioral notes
- In Demirguc-Kunt, Klapper, and Randall (2013), "more than half of respondents were unaware of the existence of Islamic banking services."
- "A plurality of respondents to an interview of 5000 adults in five MENA countries expressed a preference for Shari’ah-compliant products, even though these have higher costs than conventional products."

### Policies to foster access through Islamic finance — three policy dimensions
- The paper outlines three dimensions of policy to help Islamic finance enhance financial access:
  - Improvement of the current operating model of Islamic banks.
  - Private and public sector initiatives to strengthen the role of Islamic finance in broadening financial access.
  - Reforms of financial infrastructure and regulation that could also apply to conventional finance.

### Improve Islamic banks’ operating model (findings and recommendations)
- Islamic banks may need to improve their current operating model to attract depositors and serve SMEs excluded from the formal financial sector for religious considerations.
- Specific recommendations:
  - Create separate SME business units within Islamic financial institutions to understand market dynamics and tailor Islamic financial instruments to SME needs.
  - Better train bank personnel in Shari’ah-compliant instruments and streamline execution of Islamic transactions, particularly loan applications for SMEs.
  - Introduce credit evaluation techniques such as behavioral scoring and an early warning system to better price and reduce risk exposure to SMEs.
  - Develop equity-related instruments (musharaka and mudaraba) and ijara for SMEs.
  - Explore the potential of private equity (PE) and venture capital (VC) as they "seem well suited to Islamic models of finance."
  - Bahrain provides an example of the successful introduction of an Islamic VC bank focused on financing SMEs.
  - Encourage development of the domestic capital market to ease exits for VC banks, promote business incubators, and review legal frameworks related to intellectual property protection and the security of financial transactions (OECD, 2006).

### Private and public sector initiatives to enlarge Islamic finance’s role in inclusion
- Islamic microfinance could offer more effective tools for improving financial inclusion than conventional microfinance.
  - On the funding side, Islamic microfinance companies can mobilize additional resources such as zakat and waqf.
  - On the lending side, Islamic microfinance mainly uses Profit and Loss Sharing (PLS) schemes such as mudarabah and musharaka rather than loans, avoiding the imposition of oppressively high interest rates on poor households and small entrepreneurs.
- To help Islamic microfinance improve access:
  - Islamic banks could be allowed to open microfinance branches or develop a Shar’iah-compliant finance model for microfinance.
  - Qard-al-Hassan resources should be made available to Islamic microfinance institutions to reduce the burden of high interest charges on their borrowers (Iqbal and Mirakhor, 2013).
  - Zakat funds could be used to cover the default risk of microenterprises and to build capacity and skills (Iqbal and Mirakhor, 2013).
- Establishing Islamic equity funds for SMEs is a potential source of finance, especially for high-risk SMEs that lack access to conventional bank finance and cannot afford listing compliance costs.
- Developing a Shar’iah-compliant financial market (equity and sukuk) could help alleviate finance constraints on SMEs; sukuk issuance is encouraged as more appropriate than issuing securities for SMEs because sukuk protect shareholders against ownership dilution and could be used to securitize loans to microenterprises and SMEs.
- Institutionalization of Islamic redistributive mechanisms (zakat, sadaqat, qard-al-Hassan, waqf) could formalize and standardize operations to enhance effectiveness in addressing lack of financial inclusion (Mohieldien and others, 2011).
  - Proposals include a nonprofit financial institution funded by waqf to provide Qard-al-Hassan to poor consumers, and an awqaf fund to provide investment and working capital financing to microenterprises.

### Islamic partial credit guarantee schemes (IPCG) and guarantees
- Establishment of an Islamic partial credit guarantee scheme (IPCG) or extension of existing PCG to Islamic banks could help reach underserved groups such as SMEs and startups.
- Design considerations and past experience:
  - Successful IPCGs may consider a coverage ratio "closer to international standards (around 30–40 percent)."
  - Fees could be closely tied to risks.
  - Systematic assessments should be conducted regularly to ensure cost-effectiveness and customer satisfaction (Saadani and others, 2010).
  - Example cited: Jordan recently established a Shari’ah-compliant loan guarantee.

### Financial infrastructure and regulatory reforms (general pro-inclusion actions)
- Improvements effective for banking systems in general are also relevant for Islamic finance.
- In particular, credit reporting "needs to improve in both depth and coverage," which would require upgrade of public registries (figure captions reference credit information depth and Lerner Index comparisons across regions and OIC/ISB, with sources World Bank, IFC, World Financial Development).

*Source: _wp1531 - Introduction, the Demirguc-Kunt, Klapper, and Randall (2013) study reports that a plurality — https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp1531.pdf*

### introduction of private credit bureaus, the

### _wp1531 - introduction of private credit bureaus, the

### Credit protection and information infrastructure
- The region ranks low in the area of credit rights as measured by the legal rights index, indicating a need to improve credit protection.
- Policy actions suggested:
  - Enlarge the pool of assets acceptable as collateral.
  - Adopt collateral regimes.
  - Develop out-of-court enforcement mechanisms.
- Empirical evidence cited: the introduction of movable collateral registries has been associated with increased access by firms to bank credit (Love, Martínez Pería, and Singh (2013)).

### Bank competition and financial inclusion
- Macro-level results and firm-level evidence (Love and Martínez Pería (2012)) show that increased bank competition is associated with gains in financial inclusion on the credit side.
- OIC and Islamic banking countries tend to display less competition as shown by the Lerner index in Figure IV.4, suggesting scope for improvement.
- Suggested measures to enhance competition and inclusion:
  - Ease entry into banking.
  - Develop the capital market.
  - Reduce loan concentration through prudential measures.
  - Encourage Islamic and conventional banks to develop business lines beyond large corporations and expand SME segments.

### Consumer protection, financial education, and Islamic finance regulation
- Consumer protection, financial education, and a sound regulatory and supervisory framework for Islamic finance could encourage households and enterprises to use Shari’ah-compliant instruments.
- Government and regulators should support improvements in access through Shari’ah-compliant financial instruments and consider better access a goal as important as financial stability (Mohieldien and others 2011).

### Concluding observations on Islamic banking and financial inclusion
- The study explored IMF FAS, World Bank Findex, and Enterprise Survey data to assess links between Islamic banking development and a wide array of supply-side and user-side financial inclusion measures.
- Summary of empirical results:
  - A first look suggested physical access to financial services increased more rapidly in OIC countries, but OIC countries remain less financially inclusive than the rest of the world, in part because of religious self-exclusion.
  - Islamic-banking OIC countries appeared to have slightly higher levels of inclusion, implying some mitigation of religious self-exclusion.
  - After accounting for country income per capita, the lower financial inclusion for OIC countries remained significant, but the Islamic banking subgroup no longer outperformed other OIC countries.
  - There is some evidence that Islamic banking presence and activity were associated with greater inclusion with regard to bank credit by households and by firms as a means to finance investment.
  - When comparing actual to benchmark levels of four indicators of financial inclusion (Gaps relative to structural characteristics), there was no significant impact of Islamic banking; nor were there significant differences between OIC countries and others.
- The evidence of Islamic banking’s positive impact on some types of inclusion is assessed as weak and tentative.

### Data, measurement, and possible reasons for weak links
- Data limitations noted:
  - Limited coverage of Islamic banking indicators and of financial inclusion indicators among OIC countries.
  - Need to encourage countries to collect and report FAS data to the IMF and increase frequency of user-side surveys.
- Other possible explanations for weak empirical links:
  - Additional country-specific characteristics not captured by structural factors.
  - Shortcomings in how Islamic banking has been developing so far.
  - Deficiencies in the credit environment that affect the entire banking system’s ability to advance inclusion.

### Policy recommendations to enhance Islamic finance contribution to inclusion
- Changes to Islamic banks’ operating models:
  - Create separate SME business units.
  - Improve training of bank personnel in Sharia’ah-compliant instruments.
- Concurrent actions to support market development:
  - Support the development of private equity (PE) and venture capital (VC) activity.
  - Explore the potential development of Islamic microfinance.
  - Establish Islamic equity funds for SMEs.
  - Institutionalize Islamic redistributive mechanisms.
- Broader financial system improvements (beneficial regardless of Islamic banking presence):
  - Improve financial infrastructure (including credit information systems and private credit bureaus).
  - Introduce more competition in the banking system.
  - Improve the quality of credit information.
  - Enhance the efficiency of the legal system.

### Key cross-country empirical contrasts and statistics (selected)
- Difference-in-means and significance evidence (summary statements from tables):
  - OIC countries show significantly lower levels of many financial access and depth measures compared with ROW in multiple specifications (significance levels of 10 percent (*), 5 percent (**), and 1 percent (***) reported in tables).
  - Some growth and level statistics reported in the source include:
    - Commercial bank branches (avg. growth): OIC 517, ROW 1215, OIC w/ISB 337, OIC no ISB 180 (Table II.2: Number of observations).
    - ATMs (avg. growth): OIC 382, ROW 1116, OIC w/ISB 268, OIC no ISB 114 (Table II.2).
    - Percent of households with an account at a formal financial institution (level): OIC 49, ROW 100, OIC w/ISB 31, OIC no ISB 18 (Table II.2).
  - Mean growth rates and levels (Table II.3) examples:
    - Commercial bank branches (avg. growth): OIC 8.2, ROW 3.6, OIC w/ISB 7.0, OIC no ISB 10.5.
    - ATMs (avg. growth): OIC 18.3, ROW 11.3, OIC w/ISB 18.4, OIC no ISB 18.0.
    - Percent of households with an account at a formal financial institution: OIC 26.8, ROW 55.3, OIC w/ISB 31.2, OIC no ISB 19.2.
  - Regression results reported across multiple tables (III.1–III.3 and III.2A–F) show:
    - Coefficients for GDP per capita, OIC dummy, OIC × IB interactions, Legal rights, Credit information, and Lerner Index across a variety of dependent variables measuring accounts, branches, credit to firms, small firms, household use, and firm use. Significance levels and t-statistics are provided in the source tables.

*Italicized source attribution: IMF Working Paper _wp1531 — introduction of private credit bureaus, the*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2015/_wp1531.pdf_