Financial Inclusion: Islamic Finance Perspective

Abbas Mirakhor () and Zamir Iqbal

MPRA Paper from University Library of Munich, Germany

Abstract: Enhancing financial inclusion or access to finance can make critical contributions to the economic development. Conventional mechanisms such as micro-finance, small-medium-enterprises (SME), and micro-insurance to enhance financial inclusion have been partially successful in enhancing the access and are not without challenges. Islamic finance, based on the concept of risk-sharing offers set of financial instruments promoting risk-sharing rather than risk-transfer in the financial system. In addition, Islam advocates redistributive risk-sharing instruments such as Zakah, Sadaqat, Qard-al Hassan, etc, through which the economically more able segment of the society shares the risks facing the less able segment of the population. These are not instruments of charity, altruism or beneficence but are instruments of redemption of rights and repayment of obligations. In addition, the inheritance rules specify how the wealth of a person is distributed among present and future generations of inheritors. This paper argues that conventional modes of enhancing financial inclusion can be replicated through instruments of Islamic finance allowing risk sharing and risk diversification. However, even after availability of micro-finance and SME financing, financial exclusion may not be fully overcome. Therefore, one needs to utilize, Islam’s instruments of redistribution where mandated levies and recommended avenue of spending may play their role. They help reduce the poor’s income – consumption correlation. The paper concludes that Islamic finance provides a comprehensive framework to enhance financial inclusion through the principle of risk-sharing and through Islam’s redistributive channels which are grossly under-utilized in Muslim countries. The redistributive instruments may be developed as proper institutions to optimize the function of such instruments. Applications of financial engineering can device innovative ways to develop hybrids of risk-sharing and redistributive instruments to enhance access to finance to promote economic development.

Keywords: Financial inclusion; redistributive risk-sharing; Risk transfer; Zakah; Inheritance rules; Zakah; Sadaqat; Qard-al Hassan (search for similar items in EconPapers)
JEL-codes: G23 P40 (search for similar items in EconPapers)
Date: 2012, Revised 2012
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

Published in Journal of Islamic Business and Management 1.2(2012): pp. 35-64

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