Islamic Finance, Financial Inclusion Policy and Financial Inclusion: Evidence from Muslim Countries

This paper examines the interlinkage between financial inclusion and the Islamic financial services industry in Muslim countries using qualitative analysis and case study. The finding shows that despite financial sector growth in many Muslim countries over the past decades, many individuals and firms are still financially excluded. Analysis of the usage of and access to financial services by adults and firms also shows that most Muslim countries lag behind other emerging economies in both aspects, with only 27 percent of financial inclusion. Cost, distance, documentation, trust and religious beliefs are among important obstacles. On the other hand, not surprisingly, the outreach of Islamic microfinance is very limited, small by international standards, and of a limited coverage, which accounts for a small fraction of microfinance supply, about 0.5 percent of global microfinance and lack of cost-efficient service model. However, the study suggests that Islamic distributive instruments such as zakah, sadaqa, awqaf, and qard-alhassan, can play a role in bringing more than 40 million financially excluded populations due to religious reasons into the formal financial system. However, it is still a long way for the Islamic financial services industry to be able to improve financial inclusion in many Muslim countries due scale and relatively weak infrastructure.