The Role of Islamic Finance in Enhancing Financial Inclusion in Organization of Islamic Cooperation (OIC) Countries

66 Pages Posted: 9 Apr 2018

See all articles by Mahmoud Mohieldin

Mahmoud Mohieldin

World Bank

Zamir Iqbal

Islamic Development Bank

Ahmed Rostom

World Bank - Financial and Private Sector Development

Xiaochen Fu

Harvard University - Harvard Kennedy School (HKS)

Multiple version iconThere are 2 versions of this paper

Date Written: December 1, 2012

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 Shar ahcompliant microfinance, financing for small and medium enterprises, and micro-insurance to enhance access to finance. And redistributive instruments such as Zak h, adaqat, Waqf, and Qar -al- asan 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 Organization of Islamic Cooperation (OIC) countries on each front, that is, Shar ah-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

Keywords: Islamic finance, financial inclusion, access to finance, risk sharing

JEL Classification: G21, G22, G32

Suggested Citation

Mohieldin, Mahmoud and Iqbal, Zamir and Rostom, Ahmed and Fu, Xiaochen, The Role of Islamic Finance in Enhancing Financial Inclusion in Organization of Islamic Cooperation (OIC) Countries (December 1, 2012). Islamic Economic Studies, Vol. 20, No. 2, 2015, Available at SSRN: https://ssrn.com/abstract=3158639

Mahmoud Mohieldin (Contact Author)

World Bank ( email )

1818 H Street, NW
Washington, DC 20433
United States

Zamir Iqbal

Islamic Development Bank ( email )

P. Box. 5925
Private Sector
Jeddah, 21432
Saudi Arabia

Ahmed Rostom

World Bank - Financial and Private Sector Development ( email )

United States

Xiaochen Fu

Harvard University - Harvard Kennedy School (HKS)

79 John F. Kennedy Street
Cambridge, MA 02138
United States

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