Can Islamic Banking Increase Financial Inclusion?

IMF Working Papers, February 13, 2015

Source details

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.
The share of excluded individuals citing religious reasons for not using bank accounts is noticeably greater in OIC countries than in other countries; Islamic banking would therefore seem to be an effective avenue for financial inclusion.
Although physical access to financial services has grown more rapidly in the OIC countries, the use of these services has not increased as quickly.
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.

Financial inclusion indicators are generally lower in OIC countries compared with other countries.
Religious reasons are cited more frequently among excluded individuals in OIC countries as the reason for not using bank accounts.
Physical access (e.g., availability of Islamic banking outlets) has expanded faster in OIC countries than usage rates have grown.
Empirical analysis provides tentative and relatively weak evidence of a positive association between Islamic banking development and:
- credit to households, and
- credit to firms for financing investment.

Regression analyis (as reported) indicates:
- Evidence of a positive link between Islamic banking development and credit to households.
- Evidence of a positive link between Islamic banking development and credit to firms for financing investment.
The authors characterize these empirical links as tentative and relatively weak.

The paper explores reasons why stronger Islamic banking development has not translated into proportionally greater use of financial services in OIC countries.
Specific reasons are discussed in the paper (text provided here summarizes that these reasons are explored but does not enumerate them verbatim).

The paper suggests several recommendations to enhance the ability of Islamic banking to promote financial inclusion (the landing page indicates recommendations are provided; for the detailed recommendations see the full working paper).