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Financial Inclusion: Islamic Finance Perspective

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  • Mirakhor, Abbas
  • Iqbal, Zamir

Abstract

Enhancing financial inclusion or access to finance can make critical contributions to the economic development. Conventional mechanisms such as micro-finance, small-medium-enterprises (SME), and micro-insurance to enhance financial inclusion have been partially successful in enhancing the access and are not without challenges. Islamic finance, based on the concept of risk-sharing offers set of financial instruments promoting risk-sharing rather than risk-transfer in the financial system. In addition, Islam advocates redistributive risk-sharing instruments such as Zakah, Sadaqat, Qard-al Hassan, etc, through which the economically more able segment of the society shares the risks facing the less able segment of the population. These are not instruments of charity, altruism or beneficence but are instruments of redemption of rights and repayment of obligations. In addition, the inheritance rules specify how the wealth of a person is distributed among present and future generations of inheritors. This paper argues that conventional modes of enhancing financial inclusion can be replicated through instruments of Islamic finance allowing risk sharing and risk diversification. However, even after availability of micro-finance and SME financing, financial exclusion may not be fully overcome. Therefore, one needs to utilize, Islam’s instruments of redistribution where mandated levies and recommended avenue of spending may play their role. They help reduce the poor’s income – consumption correlation. The paper concludes that Islamic finance provides a comprehensive framework to enhance financial inclusion through the principle of risk-sharing and through Islam’s redistributive channels which are grossly under-utilized in Muslim countries. The redistributive instruments may be developed as proper institutions to optimize the function of such instruments. Applications of financial engineering can device innovative ways to develop hybrids of risk-sharing and redistributive instruments to enhance access to finance to promote economic development.

Suggested Citation

  • Mirakhor, Abbas & Iqbal, Zamir, 2012. "Financial Inclusion: Islamic Finance Perspective," MPRA Paper 55977, University Library of Munich, Germany, revised 2012.
    • Handle: RePEc:pra:mprapa:55977
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    References listed on IDEAS

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    Cited by:

    1. Zhian Zhiow Augustinne Wong & Ramez Abubakr Badeeb & Abey P. Philip, 2023. "Financial Inclusion, Poverty, and Income Inequality in ASEAN Countries: Does Financial Innovation Matter?," Social Indicators Research: An International and Interdisciplinary Journal for Quality-of-Life Measurement, Springer, vol. 169(1), pages 471-503, September.
    2. Salem Hathroubi, 2019. "Inclusive Finance, Growth and Socio-Economic Development in Saudi Arabia: A Threshold Cointegration Approach," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 44(2), pages 77-111, June.
    3. Ngasuko, Tri Achya, 2018. "Peningkatan Keuangan Inklusif di Indonesia melalui Fintech Syariah [Increasing Financial Inclusion Through Syaria Fintech]," MPRA Paper 99180, University Library of Munich, Germany, revised 01 Aug 2018.
    4. Abdul Razak, Azila & Asutay, Mehmet, 2022. "Financial inclusion and economic well-being: Evidence from Islamic Pawnbroking (Ar-Rahn) in Malaysia," Research in International Business and Finance, Elsevier, vol. 59(C).
    5. Hakeem, Muhammad Mohsin, 2019. "Innovative solutions to tap “Micro, Small and Medium Enterprises” (MSME) market A way forward for Islamic banks," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 27, pages 38-52.

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    More about this item

    Keywords

    Financial inclusion; redistributive risk-sharing; Risk transfer; Zakah; Inheritance rules; Zakah; Sadaqat; Qard-al Hassan;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • P40 - Political Economy and Comparative Economic Systems - - Other Economic Systems - - - General

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