How does the Islamic banking development spur financial inclusion in OIC member countries?

Wan Hakimah, Wan Ibrahim and Kabiru, Kamalu (2020) How does the Islamic banking development spur financial inclusion in OIC member countries? Asian People Journal, 3 (1). pp. 170-185. ISSN 26008971

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Abstract

Islamic financial instruments of profit-loss-sharing and redistributions are capable of including people hitherto outside the formal financial system into mainstream formal finance thereby increasing the level of financial inclusion. Globally, OIC member countries have the highest number of adult age 15 and above without access to a formal bank account (53.7%). The primary purpose of this study is to investigate how does Islamic banking can increases the level of financial inclusion in OIC member countries. The work employed the use of system GMM, second-generation cointegration test and causality test to achieve this objective. The data used in this study were obtained from world development indicators, GLOBAL Findex and OIC statistical database from 2013 to 2018. The result found that Islamic banking significantly affects the level of financial inclusion in OIC member countries, and the impact found to be positive and significant when the interaction of Islamic banking and institution were used. Moreover, Islamic banking is found to cause financial inclusion, with no bidirectional causality. Other independent variables, GDP per capita, Institution and domestic to private sector are found to have positive impact on financial inclusion. The results confirmed that, Islamic banking has positive impact on financial inclusion in OIC member countries. In order to promote financial inclusion the policymakers in OIC member countries should consider improving the level of Islamic banking development, so that more people outside the formal financial system will be included.

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