IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/55977.html
   My bibliography  Save this paper

Financial Inclusion: Islamic Finance Perspective

Author

Listed:
  • 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
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/55977/1/MPRA_paper_55977.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Chowdhury, Prabal Roy, 2005. "Group-lending: Sequential financing, lender monitoring and joint liability," Journal of Development Economics, Elsevier, vol. 77(2), pages 415-439, August.
    2. Sheng,Andrew, 2009. "From Asian to Global Financial Crisis," Cambridge Books, Cambridge University Press, number 9780521134156, October.
    3. Shiller, Robert J., 1999. "Social security and institutions for intergenerational, intragenerational, and international risk-sharing," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 50(1), pages 165-204, June.
    4. Mohieldin , Mahmoud & Rostom , Ahmed & Fu, Xiaochen & Iqbal, Zamir, 2012. "The Role of Islamic Finance in Enhancing Financial Inclusion in Organization of Islamic Cooperation (OIC) Countries," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 20, pages 55-120.
    5. Thorsten Beck & Asli Demirgüç-Kunt, 2008. "Access to Finance: An Unfinished Agenda," The World Bank Economic Review, World Bank, vol. 22(3), pages 383-396, November.
    6. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-298, April.
    7. Robert J. Shiller, 2004. "Radical Financial Innovation," Cowles Foundation Discussion Papers 1461, Cowles Foundation for Research in Economics, Yale University.
    8. Philippe Aghion & Patrick Bolton, 1997. "A Theory of Trickle-Down Growth and Development," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 64(2), pages 151-172.
    9. Mirakhor, Abbas, 2009. "Islamic Economics and Finance: An Institutional Perspective," MPRA Paper 56017, University Library of Munich, Germany.
    10. Oded Galor & Joseph Zeira, 1993. "Income Distribution and Macroeconomics," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(1), pages 35-52.
    11. W Jean Kwon, 2010. "An Analysis of Organisational, Market and Socio-cultural Factors Affecting the Supply of Insurance and Other Financial Services by Microfinance Institutions in Developing Economies," The Geneva Papers on Risk and Insurance - Issues and Practice, Palgrave Macmillan;The Geneva Association, vol. 35(1), pages 130-160, January.
    12. Stiglitz, Joseph E & Weiss, Andrew, 1981. "Credit Rationing in Markets with Imperfect Information," American Economic Review, American Economic Association, vol. 71(3), pages 393-410, June.
    13. Robert C. Merton, 1983. "On the Role of Social Security as a Means for Efficient Risk Sharing in an Economy Where Human Capital Is Not Tradable," NBER Chapters, in: Financial Aspects of the United States Pension System, pages 325-358, National Bureau of Economic Research, Inc.
    14. Sheng,Andrew, 2009. "From Asian to Global Financial Crisis," Cambridge Books, Cambridge University Press, number 9780521118644, October.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    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.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Frederic S. Mishkin, 2007. "Is Financial Globalization Beneficial?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2-3), pages 259-294, March.
    2. Olaniyi Evans & Olaniyi Lawanson, 2017. "A Multi-Sectoral Study of Financial Inclusion and Economic Output in Nigeria," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(1), pages 195-204, June.
    3. Alexandra D'Onofrio & Pierluigi Murro, 2013. "Local banking development and income distribution across Italian provinces," Working Papers CASMEF 1307, Dipartimento di Economia e Finanza, LUISS Guido Carli.
    4. Inci, Eren, 2013. "Occupational choice and the quality of entrepreneurs," Journal of Economic Behavior & Organization, Elsevier, vol. 92(C), pages 1-21.
    5. Hossein Askari, 2015. "Severe Financial Crises and Fundamental Reforms: The Benefits of Risk-Sharing الأزمات المالية الخطيرة والإصلاحات الأساسية: فوائد تقاسم المخاطر," Journal of King Abdulaziz University: Islamic Economics, King Abdulaziz University, Islamic Economics Institute., vol. 28(1), pages 93-128, January.
    6. Hidalgo-Cabrillana, Ana, 2004. "Does asymmetric information promote talented people?," UC3M Working papers. Economics we042809, Universidad Carlos III de Madrid. Departamento de Economía.
    7. Markus Brückner & Kerstin Gerling & Hans Grüner, 2010. "Wealth inequality and credit markets: evidence from three industrialized countries," Journal of Economic Growth, Springer, vol. 15(2), pages 155-176, June.
    8. Esteban Jaimovich, 2010. "Adverse Selection and Entrepreneurship in a Model of Development," Scandinavian Journal of Economics, Wiley Blackwell, vol. 112(1), pages 77-100, March.
    9. Carmen Camacho & Hye-Jin Cho, 2020. "Sorting in Credit Rationing: An Elementary Survey," Working Papers halshs-03030433, HAL.
    10. Frederic S. Mishkin, 2007. "Is Financial Globalization Beneficial?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 39(2‐3), pages 259-294, March.
    11. Flávia Chein & Cristine Pinto, 2018. "Credit constraint and human capital investment: an empirical analysis using Brazilian household budget survey," Applied Economics, Taylor & Francis Journals, vol. 50(21), pages 2369-2385, May.
    12. D’Onofrio, Alexandra & Minetti, Raoul & Murro, Pierluigi, 2019. "Banking development, socioeconomic structure and income inequality," Journal of Economic Behavior & Organization, Elsevier, vol. 157(C), pages 428-451.
    13. Andrea, Canidio, 2009. "The determinants of long-run inequality," MPRA Paper 25137, University Library of Munich, Germany.
    14. Carmen Camacho & Hye-Jin Cho, 2020. "Sorting in Credit Rationing: An Elementary Survey," PSE Working Papers halshs-03030433, HAL.
    15. Gokmen, Gunes & Morin, Annaig, 2021. "Investment shocks and inequality dynamics," Economic Modelling, Elsevier, vol. 94(C), pages 570-579.
    16. Karlan, Dean & Morduch, Jonathan, 2010. "Access to Finance," Handbook of Development Economics, in: Dani Rodrik & Mark Rosenzweig (ed.), Handbook of Development Economics, edition 1, volume 5, chapter 0, pages 4703-4784, Elsevier.
    17. Mirakhor, Abbas, 2010. "Whither Islamic Finance? Risk Sharing in An Age of Crises," MPRA Paper 56341, University Library of Munich, Germany.
    18. Dilip Mookherjee, 1999. "Contractual Constraints on Firm Performance in Developing Countries," Boston University - Institute for Economic Development 98, Boston University, Institute for Economic Development.
    19. Mertzanis, Charilaos, 2017. "Family ties and access to finance in an Islamic environment," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 48(C), pages 1-24.
    20. Hidalgo Cabrillana, Ana, 2009. "Endogenous capital market imperfections, human capital, and intergenerational mobility," Journal of Development Economics, Elsevier, vol. 90(2), pages 285-298, November.

    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

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:55977. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.