Can Islamic banking increase financial inclusion?

Financial inclusion has become an increasingly important concern for a vast number of countries worldwide. At the same time, a fast-growing amount of literature has emerged to examine its measurement, determinants and impacts. Governments have made the promotion of it a priority. For example, the World Bank’s 2014 Global Financial Development Report (GFDR), devoted to financial inclusion, reports that 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. Last year, the World Bank President announced a global target of universal financial access by 2020. Defined as the share of the population who use financial services, financial inclusion has proven to be linked to desirable economic outcomes above and beyond those associated with the more familiar concept of financial depth. In this chapter, we analyse the existing country-level information on both financial inclusion and the penetration or presence of Islamic banking in order to ascertain the extent to which Islamic banking has contributed to financial inclusion. This chapter tests for a possible financial inclusion of Islamic banking relationships across a wide variety of measures. Our findings suggest a weak and tentative evidence of Islamic banking’s positive impact on some types of inclusion. This weakness in the results may be partially related to data issues, including the limited coverage of Islamic banking indicators and of financial inclusion indicators among the Organization for Islamic Cooperation (OIC) countries.