Can Islamic Banking Increase Financial Inclusion?

This paper explores the use of Islamic banking as an effective avenue for financial inclusion in Organization for Islamic Cooperation (OIC) countries, where a large share of excluded individuals cite religious reasons for not using bank accounts. The paper finds that although physical access to financial services has grown more rapidly in these countries, the use of these services has not increased as quickly. The paper also provides recommendations to enhance the ability of Islamic banking to promote financial inclusion. Key recommendations include:

• Islamic banks need to improve their current operating model so as to attract depositors and serve SMEs;
• There is a need to better train bank personnel in Shari’ah-compliant instruments and to streamline the execution of Islamic transactions;
• Islamic banks need to introduce credit evaluation techniques;
• Establishing Islamic equity funds for SMEs could also be a beneficial source of finance;
• Islamic banks could be allowed to open microfinance branches or to develop a Shar’iah-compliant finance model for microfinance;
• Consumer protection, financial education, and a sound regulatory and supervisory framework for Islamic finance can help in encouraging households and enterprises use Shari’ah-compliant instruments.