Enhancing Financial Inclusion through Islamic Finance, Volume II

Despite the role of Financial Inclusion in the progress of efficiency and equality in society, 2.7 billion people (70% of the adult population) in emerging markets have no access to basic financial services—many from countries with a predominantly Muslim population. Bangladesh hosts the third largest Muslim population in the world whose current level of inclusion is 40%. Since the establishment of the Islamic bank in 1983, there are now 57 banks, 8 fully fledged Islamic banks and 15 offering Islamic banking services through branches/windows. The collective market share of Islamic banks in the country is around 25% which is making a remarkable contribution to the GDP and sustainable development of the country. If Bangladesh is to become a middle-income country by 2021, it needs to exploit fully this un-tapped market and enhance financial inclusion. This chapter reviews the Bangladesh financial sector placing special emphasis on the contribution to financial inclusion.

Numerous attempts have been made to study the impact of bank concentration and/or competition on economic growth especially after the global financial crisis. There is scarcity in literature covering this relationship within the Organization of Islamic Cooperation (OIC) member countries. This study investigates whether bank concentration and financial development contribute to economic growth within the OIC countries. It investigates whether the same applies to high-income and low-income countries; corrupted and less-corrupted countries. The study employs the generalized method of moments (GMM) estimators that best fit the sample. Overall, bank concentration seems to have a negative impact and non-linear relationship with economic growth. Financial development has a negative impact on economic growth with minute coefficients’ values that can be ignored economically. Economic conditions within the OIC countries may not be improved by additional financial services, but rather by reducing bank concentration (increasing competition), corruption and improving overall income levels.

Financial inclusion research in Nigeria is generally centered on supply side analysis which makes it virtually impossible to understand the true situation in the country. This research looks at the demand side of financial inclusion in additon to the supply side analysis by focusing on availability, quality, accessibility, impact and usage of Jaiz Bank products and services. The triangulation method was adopted—in which both quantitative and qualitative data were collected. Factor analysis, reliability test and linear regression were applied. The findings indicate that Jaiz Bank offers quality products and services, which are available to all customers regardless of their religious beliefs, and with a satisfactory usage. All these constructs are found to be significant and positively related to financial inclusion. This study concludes that Jaiz Bank as the main Islamic Bank in Nigeria contributes to financial inclusion. It recommends that Jaiz Bank and other stakeholders should intensify awareness efforts regarding the advantages Islamic products and services offer.

Indonesia has the highest concentration of Islamic Microfinance Institutions such as Baitul Mal Wa Tamwil (BMT) that have the potential of promoting financial inclusion among the unbanked poor. In the last decade the Islamic microfinance institutions’ programming reveals a lack of transparency, infrastructure for payments and credit reporting, as well as adequate governance mechanisms. Research on financial inclusion index is largely ignored. This paper is an attempt to fill this gap by proposing an index for financial inclusion disclosure. It examines the extent and quality of the financial inclusion index, specifically the association between this index and the financial inclusion performance of BMT. This paper utilizes the content analysis technique to quantify financial inclusion disclosure from the BMT “Annual Report” in Indonesia during 2014–2015. It will be of interest to managers, regulatory agencies and policy makers involved in developing laws, to strengthen the requirement on disclosure, financial consumer protection, and credit reporting.

Deposit Insurance Scheme is a safety-net instrument used by governments to ensure the stability of the banking systems and protect depositors in the event of bank failure. Islamic deposit insurance is a Shariah-compliant system that provides protection to depositors against this type of failure and reinforces consumer protection aspects inherent to Islam. The inculcation of Islamic deposit insurance will boost the potential and value proposition of Islamic finance, motivating non-users excluded due to lack of trust. This empirical research examines how a deposit insurance scheme for Islamic banks can enhance confidence and facilitate participation in the financial system. A sample of 412 depositors from both Islamic and conventional banks in Nigeria was used to determine the awareness level, knowledge and understanding of the potential of the Islamic deposit insurance scheme. The results suggest that the scheme offers a great opportunity and can lead to increase in access.

Without integration and adaptation of financial inclusion services agricultural projects will not prosper. This chapter evaluates the role of adaptation and integration of Islamic financial inclusion services in improving and developing the agricultural projects, a topic barely studied in the literature. Hypothesis was tested using ten observations based on quantitative and qualitative information of farmers of White Nile State. The findings indicate that Alfal Microfinance through Mudaraba, Murabaha, Mugawala, mobile networks, and relationship-driven information does enhance financial inclusion that decreases default rates. The chapter recommends Islamic microfinance institutions to diversify and adopt Islamic financial innovations in the agricultural sector. Microfinance institutions do well if areas of concern where weaknesses arise that limit the attainment of reduced default rates for institutions and farmers are identified. Alfal Microfinance Institution also needs to ensure that their employees and customers attain the necessary skills required to enhance its performance.

Significant numbers live below the poverty line in Pakistan where the incidence of poverty in the rural areas is twice that of the urban areas. A lack of focus on the development of the youth leaves one-third of the population vulnerable to violence and conflict. Women access to economic opportunities is also quite low. The interest-based models of conventional microfinance institutions that lend at exorbitant rates also perpetuate exclusion. There is a high demand for Islamic financial services but only a few Islamic microfinance institutions (IMFIs) exist that are subject to sustainability challenges such as Murabahah product concentration, paucity of funds, absence of Shariah structuring capacity, and ineligibility for financing from Islamic commercial banks. This research concludes that a gradual shift toward participatory modes of financing and the use of Waqf and Solidarity Groups to provide cheaper financing safeguard against adverse selection and agency problem is required.

Sudan is a country with rich endowment of natural resources yet remains a low-income and food-deficit country, and despite the efforts exerted by the government to reduce poverty, the country is still unable to mitigate poverty. Today the infrastructure gap in developing countries is large and continues to hinder efforts for poverty alleviation. Technology advance on the other hand has dramatically linked the world, increased communication is making the world without barriers or boundaries and information spread freely. This international interconnectedness has revolutionized countless industries, including microfinance. This chapter studies the challenges and opportunities in Sudan’s microfinance system in its attempt to achieve a pro-poor allocation of financing that is expected to lead to a more inclusive pattern of growth. The study looks at the setting of access to microfinance in Sudan, assesses the demand and supply, and highlights the main constraints and opportunities for the future. The study used structured survey to collect primary data. The highest ranked opportunities cited for mobile banking are provision of an efficient electronic channel for cross-selling, reduction of operational costs, increase in customer outreach, and most importantly financial inclusion of the poor. The challenges include internal technological constraints, lack of adequate staff capabilities, and complicated regulations. These results give strong implication for policy and microfinance providers to exert more efforts to adopt mobile microfinance to enhance the financial inclusion and alleviate poverty.

Islamic finance supports sustainable development goals (SDGs) recommended by the United Nations (UN) as a new global development agenda. A chain of research papers about the dynamics of financial development and growth of an economy is found. Yet, the same research agenda is less explored from the perspective of the impact of Islamic finance on economic growth for the countries with concentration of Islamic finance. Moreover, Islamic finance is the best source of financial inclusion for the interest-sensitive people due to divine instructions. The financial capital has productive role when it delivers to economic agents, facing shortage or excess of funds. Therefore, this study explores the linkages among Islamic financial arrangements and economic growth in Pakistan, by using time series data of Pakistan over 2005–2015. Islamic banks’ financing is used as a proxy of Islamic financing, gross fixed capital formation (GFCF), labor force (LF), broad money (M), gross domestic product (GDP), and trade openness (TO) to present the real sector of an economy. For the exploration, the unit root test, ordinary least square (OLS) method, and Granger causality test are applied. The results validate a substantial causal relationship between Islamic financing and economic growth, but the antipodal is not more valid, which is consistent with the supply-leading view of Schumpeter. The results indicate that Islamic finance contributed toward economic growth that is one of the 17 objectives of SDGs. We recommend policy interventions to unlock the potential of Islamic finance for sustainable growth and development in countries where people are interest sensitive.

Pakistan’s banking sector has been under Islamic financial paradigm since 2004. According to various studies, it is performing well in terms of efficiency, profitability, and growth. Limited focus is placed on its role in achieving Sustainable Development Goals (SDGs) of poverty eradication and economic growth—the basis for this chapter. The study uses Salam, Murabaha, Diminishing Musharakah (DM), Ijarah, and Istisna as dependent variables. Four fully fledged and five standalone branches of conventional banks were selected. It employs annual unbalanced panel data for 2004 to 2017. Based on the findings for Im, Pesaran, and Shin panel unit root test, Breusch-Pagan LM test, and Hausman test, random-effect (RE) estimation technique is applied. The results show that Islamic bank-specific and macroeconomic variables have significant impact on poverty reduction and economic growth implying that Islamic Banking Industry (IBI) has potential in the achievement of SDGs and therefore recommends for its promotion.

Indonesian Islamic Microfinance Institutions (IMFIs) are estimated to be 5000—an effective poverty alleviation tool for approximately 22.8 million Indonesians or 8.77% of the 260 million population (National Statistic Board, 2018), living on less than USD 1.90/day. Without collateral and steady income, the poor are considered risky by formal financial service providers. Living in remote areas also limits their access to formal financial services. This study examines poverty alleviation from the perspective of the IMFIs in view of their direct involvement, access to information on borrowers’ financial issues, understanding of financial inclusion agenda, guidelines and regulations. Thirty-four Baitulmaal Wa Tamwil (BMT) (registered under the Sharia Cooperative Centre (INKOPSYAH)) managers from Jakarta, Bogor, Depok, Tangerang and Bekasi (JABODETABEK) were taken through a questionnaire survey and in-depth interviews. The findings are expected to contribute to better BMT decision-making and elaborate dimensions/strategies for improving financial inclusion of the poor, thus cementing BMT role in poverty alleviation.

This study attempts to apply significant knowledge economy drivers of information and communications technology (ICT) to the implementation of mobile banking (M-bank) in order to increase the outreach for Sudanese microfinance. Access to financial service is key for economic development and poverty alleviation. Microfinance is one way of fighting poverty in Sudan. Despite initial results showing the positive impact of microfinance on livelihoods of low-income people, around 8 million Sudanese remain excluded from microfinance services. One potential remedy for the limited outreach of microfinance lies in the utilization of modern technology such as the use of M-banking technology by microfinance service providers (MFPs). This chapter examines the factors that influence the adoption of M-banking by the microfinance sector in Sudan. Hypotheses are guided by the unified theory of acceptance and use of technology (UTAUT) and technology-organization-environment (TOE) models. Primary data was collected from MFPs and microfinance customers using questionnaires and interviews.

There has been increasing interest in Islamic financial inclusion from scholars as well as from practitioners in the industry. Several models have been proposed for empowering the poor, particularly women. The recent FinTech revolution has created more opportunities for financial inclusion of the youth. The roles of universities in the development of financial inclusion have largely been theoretical with few exceptions like the University of Houston in Texas and Gontor University in Indonesia. The former has a microfinance unit that offers zero interest loans, while the latter creates businesses on the campus exclusively for its students and staff. This chapter focuses on the i-Taajir program, which began operations in 2018, whose uniqueness and rich experience has not been documented. Firstly, it is a synergy between CIMB Islamic CSR funding and expertise from the International Islamic University Malaysia (IIUM) Centre for Islamic Economics. Secondly, it involves IIUM students as field trainers, monitors and project evaluators as a cost-cutting measure and risk-mitigating strategy. Thirdly, i-Taajir offers four financing modes: Qard Hasan embedded with Tabarru’ Fund for sustainability, Murabahah to the purchase orderer, Musharakah Mutanaqisah working capital and Mudarabah. Fourthly, its success factors are benchmarked against its grassroot approach; value loaded training programs; over 95% repayment rate; cheap pricing on the asset side, which does not vary with time; clear graduation target and bridging the gap between theory and practice.

The objective of this study is to empirically examine the role of Islamic microfinance in the enhancement of financial inclusion of customers of the pioneer Islamic microfinance bank in Nigeria—Tijarah Microfinance Bank, in Bauchi State. The study examines the level of customer awareness and level of use and quality of products/services offered. A questionnaire was administered on a sample of 397 based on convenience sampling. Descriptive and inferential statistics were employed to analyse the responses, interpret the relationship between the variables and draw conclusion. The study concludes that the operation of Tijarah Microfinance Bank Ltd does enhance financial inclusion among the respondents. It recommends that the providers of financial services particularly banks need to explore the alternatives provided by Islamic microfinance so as to engender wider access to banking services. Policymakers should also facilitate competition among Islamic microfinance banks so as to enhance sustainable financial inclusion.