Inclusive and Pro-Poor Financial System in Africa: Does Islamic Finance Development Matter?

Why is African financial system less developed in general and how can it impact the real economy? Is Islamic finance development instrumental for inclusive and pro-poor financial system in Africa? Does it matter in improvement of financial development impact on GDP per capita in particular? Are findings valid when we consider non-Muslim countries? This paper assesses the Ben Jedidia and Ben Ayed (2012) conclusions in the African context. Thus the intuition was to assess if Islamic finance can be instrumental in the way toward pro poor and inclusive financial system in Africa through improvement of financial development impact on GDP per capita. A TSLS-IV estimation technique is applied to undertake the analyses. In the analyses, while the Islamic finance dimensions have been approximated by the gap between overall financial depth and traditional banking depth, the financial development dimension was captured by an indicator constructed with Principal component analyses. The main finding is that Islamic finance is a powerful tool for pro poor and inclusive financial system in Africa regardless the fact that they are Muslim country or not. African countries should put emphasis on Islamic finance development for pro poor and inclusive financial system and thus pro poor economic growth, regardless of their religion affiliations. This paper has tested the Ben Jedidia and Ben Ayed (2012) hypotheses in the continent where concerns of less developed financial system, poverty and low economic development are most acute.