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The role of Islamic finance in enhancing financial inclusion in organization of Islamic cooperation (OIC) countries

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  • Mohieldin, Mahmoud
  • Iqbal, Zamir
  • Rostom, Ahmed
  • Fu, Xiaochen

Abstract

The core principles of Islam lay great emphasis on social justice, inclusion, and sharing of resources between the haves and the have nots. Islamic finance addresses the issue of"financial inclusion"or"access to finance"from two directions -- one through promoting risk-sharing contracts that provide a viable alternative to conventional debt-based financing, and the other through specific instruments of redistribution of the wealth among the society. Use of risk-sharing financing instruments can offer Shariah-compliant microfinance, financing for small and medium enterprises, and micro-insurance to enhance access to finance. And redistributive instruments such as Zakah, Sadaqat, Waqf, and Qard-al-hassan complement risk-sharing instruments to target the poor sector of society to offer a comprehensive approach to eradicating poverty and to build a healthy and vibrant economy. Instruments offered by Islam have strong historical roots and have been applied throughout history in various Muslim communities. The paper identifies gaps currently existing in Organisation of Islamic Cooperation (OIC) countries on each front, that is, Shariah-compliant micro-finance and financing for small and medium enterprises and the state of traditional redistributive instruments. The paper concludes that Islam offers a rich set of instruments and unconventional approaches, which, if implemented in true spirit, can lead to reduced poverty and inequality in Muslim countries plagued by massive poverty. Therefore, policy makers in Muslim countries who are serious about enhancing access to finance or"financial inclusion"should exploit the potential of Islamic instruments to achieve this goal and focus on improving the regulatory and financial infrastructure to promote an enabling environment.

Suggested Citation

  • Mohieldin, Mahmoud & Iqbal, Zamir & Rostom, Ahmed & Fu, Xiaochen, 2011. "The role of Islamic finance in enhancing financial inclusion in organization of Islamic cooperation (OIC) countries," Policy Research Working Paper Series 5920, The World Bank.
  • Handle: RePEc:wbk:wbrwps:5920
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    References listed on IDEAS

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    1. Thorsten Beck & Asli Demirgüç-Kunt, 2008. "Access to Finance: An Unfinished Agenda," World Bank Economic Review, World Bank Group, vol. 22(3), pages 383-396, November.
    2. Nasim Shah Shirazi & Md. Fouad Bin Amin, 2009. "Poverty Elimination Through Potential Zakat Collection in the OIC-member Countries: Revisited," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 48(4), pages 739-754.
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    6. Rocha, Roberto & Farazi, Subika & Khouri, Rania & Pearce, Douglas, 2011. "The status of bank lending to SMES in the Middle East and North Africa region : the results of a joint survey of the Union of Arab Bank and the World Bank," Policy Research Working Paper Series 5607, The World Bank.
    7. Coşgel, Metin, 2011. "The Long Divergence: How Islamic Law Held Back the Middle East. By Timur Kuran. Princeton, NJ: Princeton University Press, 2010. Pp.xvi, 405. $29.95, hardcover," The Journal of Economic History, Cambridge University Press, vol. 71(04), pages 1114-1116, December.
    8. Ayyagari, Meghana & Beck, Thorsten & Demirguc-Kunt, Asl, 2003. "Small and medium enterprises across the globe : a new database," Policy Research Working Paper Series 3127, The World Bank.
    9. Gabriel Di Bella, 2011. "The Impact of the Global Financial Crisison Microfinance and Policy Implications," IMF Working Papers 11/175, International Monetary Fund.
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    Citations

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    Cited by:

    1. Sami Ben Naceur & Adolfo Barajas & Alexander Massara, 2017. "Can Islamic banking increase financial inclusion?," Chapters,in: Handbook of Empirical Research on Islam and Economic Life, chapter 9, pages 213-252 Edward Elgar Publishing.
    2. Mohieldin, Mahmoud, 2012. "Realizing the Potential of Islamic Finance," World Bank - Economic Premise, The World Bank, issue 77, pages 1-7, March.
    3. Lebdaoui Hind & Wild Joerg, 2016. "Islamic Banking and Financial Development," Review of Middle East Economics and Finance, De Gruyter, vol. 12(2), pages 201-224, August.
    4. Novat Pugo Sambodo & Riswanti Budi Sekaringsih & Meikha Azzani & Esa Assyahid, 2016. "Indonesian Muslim Household Financial Inclusion Profile: Evidence from IFLS4 and IFLS5 Panel Data," Universitas Gadjah Mada Working Papers on Islamic Economics and Business 2017007, Universitas Gadjah Mada, Faculty of Economics and Business.
    5. ZOUARI, Zeineb & NABI, Mahmoud Sami, 2013. "Enhancing the Enforceability of Islamic Microfinance Contracts in OIC countries," MPRA Paper 49816, University Library of Munich, Germany.
    6. Demirguc-Kunt Asli & Klapper Leora & Randall Douglas, 2014. "Islamic Finance and Financial Inclusion: Measuring Use of and Demand for Formal Financial Services among Muslim Adults," Review of Middle East Economics and Finance, De Gruyter, vol. 10(2), pages 1-42, August.
    7. Simplice Asongu & Jacinta C. Nwachukwu, 2017. "Recent finance advances in information technology for inclusive development: a survey," Working Papers 17/009, African Governance and Development Institute..
    8. repec:ovi:oviste:v:xvii:y:2017:i:1:p:195-204 is not listed on IDEAS
    9. Akin, Tarik & Iqbal, Zamir & Mirakhor, Abbas, 2016. "The composite risk-sharing finance index: Implications for Islamic finance," Review of Financial Economics, Elsevier, vol. 31(C), pages 18-25.
    10. repec:eee:intfin:v:48:y:2017:i:c:p:1-24 is not listed on IDEAS
    11. Asongu, Simplice & De Moor, Lieven, 2015. "Recent advances in finance for inclusive development: a survey," MPRA Paper 67299, University Library of Munich, Germany.
    12. repec:eee:finsta:v:34:y:2018:i:c:p:12-43 is not listed on IDEAS
    13. Evans, Olaniyi, 2016. "Determinants of Financial Inclusion in Africa: A Dynamic Panel Data Approach," MPRA Paper 81326, University Library of Munich, Germany.
    14. repec:eee:riibaf:v:43:y:2018:i:c:p:1-14 is not listed on IDEAS
    15. Mirakhor, Abbas & Iqbal, Zamir, 2012. "Financial Inclusion: Islamic Finance Perspective," MPRA Paper 55977, University Library of Munich, Germany, revised 2012.
    16. Ahmed,Habib & Mohieldin,Mahmoud & Verbeek,Jos & Aboulmagd,Farida Wael, 2015. "On the sustainable development goals and the role of Islamic finance," Policy Research Working Paper Series 7266, The World Bank.
    17. Volker Nienhaus, 2014. "Religion and development," Chapters,in: Handbook on Islam and Economic Life, chapter 28, pages iii-iii Edward Elgar Publishing.

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    Keywords

    Access to Finance; Debt Markets; Banks&Banking Reform; Emerging Markets; Islamic Finance;

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