Financial Inclusion and Poverty Alleviation: Perspectives from Islamic Institutions and Instruments

  • Book Title:
 Financial Inclusion And Poverty Alleviation
  • Book Author:
Muhamed Zulkhibri,Abdul Ghafar Ismail
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Preface -Financial Inclusion and Inclusive Development:  Perspectives from Islamic Institutions and Instruments


A growing interest in inclusive growth arises from the realization that such gaps in productive potential and access are not good for development. The persistence of such gaps has raised interest in the concept of inclusive growth. Inclusive growth is defined as growth that is sustain-able and sufficiently broad based to incorporate a number of economic sectors and mobilize large shares of the local labour force (Commission on Growth and Development 2008; De Mello and Dutz 2012).

Unlike pro-poor growth, inclusive growth focuses on growth in equity and equality of opportunity across a wider range of firms and individuals. In the least-developed countries, sustainable patterns of pro-poor growth and inclusive development are still a major concern. On the other hand, inclusive development can be referred to a process of improving human well-being by involving all the segments of the society at all the stages

of production and sharing its benefits. Achieving this requires growth in productive potential and employment together with unfettered access to markets and unbiased regulatory environments. For policymakers, pro-moting inclusive growth includes balancing growth across sectors, i.e. between private stakeholders and the government and between tradable and non-tradable sectors (De Mello and Dutz 2012).

Promoting inclusive growth does not mean redistributing assets and opportunities from the rich to the poor or from large firms to small firms and from urban to rural areas. While much of the focus of the existing inclusive growth approaches is reaching segments at the Bottom of the Pyramid (BOP) and extending private-sector activity to disadvantaged groups (i.e. rural areas, SMEs, women, and unskilled workers), this is only part of the story.

In the process of economic growth, pat-terns of specialization and concentration of resources and talents across firms and individuals, cities and sectors naturally arise and are important engines of growth and dynamism. World top exporting countries, high-performing clusters and cities as well as top-notch institutions are an equally important part of the inclusive growth story. They are vital sources of dynamism and specialization, which make the diffusion and diversification of economic opportunities across broader groups possible and sustainable.

The book is about understanding financial inclusion and inclusive development in Muslim countries from three dimensions, namely Islamic theoretical perspectives, institutions and instruments. The book is organized into two parts: (i) Trends and Challenges Facing Financial Inclusion and Inclusive Development in an Muslim Countries; and (ii) Institutions and Instruments for Financial Inclusion and Inclusive Development in Muslim Countries. In Part I, Chap. 1 by Muhammad Tariq Majeed examines poverty effects of finance and institutions using a panel data for OIC developing countries.

Chapter 2 by Charilaos Mertzanis analyzes the impact of firm-specific and country-specific factors on the extent to which firms in Islamic countries face constraints to finance. Chapter 3 by Umi Yaumidin, Putri Irma Yuniarti, Diah Setiari Suhodo and Achsanah Hidayatina empirically examine the impact of Islamic micro-finance on women’s empowerment in Indonesia. Chapter 4 by Amin

Mohseni-Cheraghlou provides evidence that Islamic financial instru-ments can help reduce poverty and increase shared prosperity through enhancing financial inclusion among Muslim communities.

In Part II, Chap. 5 by Ishrat Hossain outlines a model to use Zakah as a tool to improve food security as well as fulfil the goal of taking care of the poor and needy of a rural locality. Chapter 6 by Muhammad Ayub and Abu Umar Faruq investigates how the Takaful system can be trans-lated as shared responsibility and cooperative risk and reward sharing vehicle. Chapter 7 by Mohammad Nurzaman examines the impact of productive-based Zakat program conducted by Zakat institution within the perspective of human development approach. Finally, Chap. 8 by Mustafa Omar Mohammed and Umar Ahmed examines the relation-ship between intention and actual support towards the construction of a modern Waqf-based hospital in Uganda.

Trends and Challenges Facing Financial Inclusion and Inclusive Development  in Muslim Countries

Financial inclusion has become an important global agenda and emerg-ing priority for policymakers and regulators in financial sector development in ensuring sustainable long-term economic growth. This significant development reflects the importance and global recognition of financial inclusion to socio-economic development and inclusive growth.

The Group of Twenty (G20) Summit in 2010 has recognized financial inclusion as one of the core pillars of the global development agenda. Financial inclusion has also become an integral part of many development institutions and multilateral development banks (MDBs) in efforts to promote inclusive growth.

Financial inclusion, within the broader context of inclusive development, is viewed as an important means to tackle poverty and inequality and to address the Sustainable Development Goals (SDGs). Financial inclusion is defined as a process that ‘ensures the ease of access, availability and usage of formal financial services’.1 It is a state in which all members of the society have access to a full set of financial services at an affordable price and in a convenient manner.

Despite the debate among specialists around the term of financial inclusion, there is no widely approved definition of financial inclusion, but the challenges associated with measuring financial inclusion are now being overcome.

Study on the evidence of poverty, finance and institutions from OIC member countries shows that financial development helps to increase the well-being of the poor; however, the liquidity effect is stronger than the private credit effect. The role of institution for the poor of Muslim world turns out to be more conducive than economic growth. Moreover, the role of finance is also important but it is not robust as it depends on the proxy of financial development.

The monetization effect is stronger than the credit effect. The stronghold of law and order and stable governments are the important dimensions of institutional frame-work, which help the poor, while corruption turns out to be one of the major causes of poverty in OIC countries. This study also shows that institutions are the basic prerequisite to help the poor in OIC countries.

Issues related to financial intermediation, development and access to finance in an Islamic environment broadly confirm relevant empirical evidence that access to finance to be one of the most binding constraints on firms’ growth. However, occasionally and in some important respects, the results also differ from those in other countries.

In line with the most relevant empirical findings, firms’ age, size and ownership predict its financing constraints in most of the models used. In contrast, sectoral origin, external audit of accounts, government ownership and investment funding through internal funds have less significant predictive power, and their prediction power is conditional upon the model specification.

On Islamic financial inclusion and poverty reduction in OIC and Arab MENA countries, the study suggests that percentage of unbanked adults due to religious reasons is positively correlated, while negatively correlated with the density of Shari’ah complaint financial assets in an economy. Moreover, Qard Hassan, which is more than simply being an interest-free loan (Qard), seems to be the most effective instrument in Islamic finance industry to address the financial needs of the poor and the vulnerable and pave the path for their inclusion in and access to for-mal financial services. However, as of now, genuine Qard Hassan is not being widely practiced by IFIs (Zulkhibri 2016).

Interesting finding on financial inclusion for women and the impact of Islamic microfinance on women’s empowerment in Indonesia show that microcredit programme by Islamic microfinance institutions do have an effect on the bargaining power of women within the household for a broad range of decisions including child related, health and eco-nomic and social mobility decisions.

On the other hand, the gender-specific approach for microcredit services may be overrated specifically in the context of urban people in Bandung, Indonesia. Zakat management organizations tend to be careful to utilize Zakah fund as a source of capital for economic empowerment. Distribution of this fund only for charity programme without any impact on empowering the poor.

Institutions and Instruments for Financial Inclusion and Inclusive Development  in Muslim Countries

Many studies in economic development and poverty reduction suggest that financial inclusion matters. For instance, many empirical evidences suggest that improved access to finance not only pro-growth, reduces income inequality and poverty, but it is also pro-poor (Beck et al. 2007, 2008).

On the conceptual level, a range of theoretical models has been used to demonstrate that lack of access to finance can lead to poverty traps and inequality (Banerjee and Newman 1993; Galor and Zeira 1993; Aghion and Bolton 1997). More recently, applied general equi-librium models provide new insights into the microeconomic underpin-nings of the relationships among financial inclusion, poverty reduction, income inequality and economic development (Buera et al. 2012).

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