The impact of Islamic banking on financial inclusion: A study on the effects of Islamic banking in Muslim-Majority countries

Abstract

Islamic banking has come forward as a strong instrument to foster financial inclusion in the Islamic countries as a halal financial system. In this study, cross-sectional quantitative survey data from six Muslim countries is complemented by qualitative data from various ISBI stakeholders to examine the link between the level of Islamic banking market and financial inclusion consisting of account penetration, savings with a financial institution, and banking service awareness. The results show a robust relationship between Islamic banking and financial access where countries with high market share of Islamic banking such as Malaysia and Saudi Arabia with strong regulatory structures and informed customers on the accessibility of financial services. However, recurring impediments like insignificant levels of demand for formal credit, weakness in financial media literacy, and the regularization of policies are some of the reasons why expansion happens systematically, especially in nations such as Bangladesh and Egypt. Policy interventions, technological improvement, and educational conduct for the enhancement of the scale and outreach of Islamic banking are emphasized by the study. Therefore, comparing these results with literature, this study underlines the importance of Islamic finance for inclusive economic growth and provides recommendations to eliminate the barriers, which have been identified.