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

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

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.

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Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5920.

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Date of creation: 01 Dec 2011
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Handle: RePEc:wbk:wbrwps:5920
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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. 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.
  3. Galor, Oded & Zeira, Joseph, 1988. "Income Distribution and Macroeconomics," MPRA Paper 51644, University Library of Munich, Germany, revised 01 Sep 1989.
  4. 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.
  5. Gabriel Di Bella, 2011. "The Impact of the Global Financial Crisison Microfinance and Policy Implications," IMF Working Papers 11/175, International Monetary Fund.
  6. 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, vol. 35(1), pages 130-160, January.
  7. Nasim Shah Shirazi, 2006. "Providing For The Resource Shortfall For Poverty Elimination Through The Institution Of Zakat In Low-Income Muslim Countries," IIUM Journal of Economics and Management, IIUM Journal of Economis and Management, vol. 14(1), pages 1-28, December.
  8. 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.
  9. 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.
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