Can Islamic Banking Increase Financial Inclusion?

The paper analyses existing country-level information on the relationship between thedevelopment of Islamic banking and financial inclusion. In Muslim countries—membersof the Organization for Islamic Cooperation (OIC)—various indicators of financialinclusion tend to be lower, and the share of excluded individuals citing religious reasonsfor not using bank accounts is noticeably greater than in other countries; Islamic bankingwould therefore seem to be an effective avenue for financial inclusion. We found,however, that although physical access to financial services has grown more rapidly in theOIC countries, the use of these services has not increased as quickly. Moreover, regressionanalyis shows evidence of a positive link to credit to households and to firms for financinginvestment, but this empirical link remains tentative and relatively weak. The paperexplores reasons that this might be the case and suggests several recommendations toenhance the ability of Islamic banking to promote financial inclusion.