By Nik Kamarun Nik Kamil, Policy Manager, SME Finance

Estimated 40 million people could stand to access formal financial services through Islamic Finance

The 2017 Global Findex reveals that religious belief is one of the top 10 reasons for financial exclusion, attributing to 6 percent of the statistics — a small percentage. However, Islamic finance could potentially address one of the impediments of financial inclusion and bring approximately 40 million individuals or more into the formal financial system.

Voluntary financial exclusion on faith-based reasons is a scenario where the financially excluded are not necessarily ‘unbankable’ or ‘uninformed’ — rather, they choose not to take advantage of existing financial facilities because its mechanisms contradict with their religious beliefs. The absence of Shari’ah-compliant products[1] further fuels this financial inclusion gap.

According to recent estimates by the Islamic Development Bank, on average, approximately 9 percent of the population across selected 35 Muslim-majority countries, financially exclude themselves from the formal financial sector due to religious reasons.

Financial Inclusion and Islamic Finance

From the perspective of Islamic finance, IFSB defines financial inclusion as a “state where individuals and businesses in a society have access to, and usage of, a range of affordable and quality Shari’ah-compliant financial products and services that appropriately meet their needs; and are delivered by formal financial service providers in a transparent, and simple manner while duly complying with the rules of Shari’ah, thus enabling an informed understanding by the customer.”

The concept of financial inclusion is well grounded with the foundation of the Islamic economic system: Justice, Transparency and Equality.

Policymakers are recognizing that financial inclusion activities in Islamic finance should not only be restricted to the low-income segments of society but also include the ‘bankable’ segments of society that financially exclude themselves due to religious reasons. The barriers to financial inclusion go beyond access to financial services — usage and quality of financial services make a difference.

The concept of financial inclusion and microfinance are in full harmony with the objectives of Shari’ah (Islamic Law). In fact, financial inclusiveness is the underlying concept of Islamic banks. Islamic banking is not merely an idea of being interest-free; it is a system pursuing the fundamental philosophy of helping deprived and neglected people to be self-sufficient, and productive members of society.

What can Islamic Finance offer?

Leveraging on Islamic financial products to increase inclusion could transform the nature, and level of risks due to different target markets (excluded group), nature of products and services as well as the reach of financial service providers. Thus, the concepts of proportionality, interagency coordination and risks of regulatory arbitrage are closely interlinked.

In addition, Shari’ah-compliant financial products must adhere specific specifications and commonly based on:

  • sales-based contracts for financing (murabahah, salam, istisna and commodity murabahah)
  • lease-based contracts or ijarah (Shari’ah compliant contract of leasing with some variations including transferring ownership of the leased asset to the borrowing party)
  • fee-based contract (wakalah, kafalah, rahn)
  • equity-based types (mudarabah and musharakah)

AFI’s work with Islamic finance mandate agencies

AFI, as the leader in financial inclusion policies, collaborates with agencies with an Islamic finance mandate to bridge the financial inclusion gap for individuals and MSMEs.

Islamic finance can open vast opportunities for financial inclusion through risk-sharing contracts that provide a viable alternative to conventional debt-based financing, giving the option for usage and quality of financial services; and instruments of wealth redistribution (zakat, sadaqah, qard al-hassan and waqf) that utilize wealth for better inclusion. 

AFI collaborates with different stakeholders to ensure that its members garner the best alternatives for financial inclusion. Some of the ways in which AFI is currently involved in Islamic Finance include:

  • Islamic Financial Services Board (IFSB): Contribute technical inputs for Technical Note on Financial Inclusion and Islamic Finance
  • Organisation of Islamic Cooperation (OIC) Financial Inclusion Working Group: Participate in the sub-group focused on Access to Financial Services with Special Focus to Islamic Finance
  • Arab Financial Inclusion Task Force (FITF): Arab Monetary Fund (AMF) invited AFI to join FITF as an observer to discuss on financial inclusion initiatives in the Arab region

Untapped potential

Islamic finance has the potential to bring approximately 40 million individuals or more into the formal financial system. Financial regulators and policymakers globally should take into account that access to financial services is not the sole barrier faced by the financially excluded. Religious belief that falls under the parameter of usage and quality is another barrier that prevents people from financial services.

The fundamentals of Islamic finance based on Justice, Transparency and Equality are not only skewed towards religious belief but also economic values through competitive Islamic financial products.



[1] Shari’ah-compliant products are financial products that are based on Shari’ah law. Shari’ah law: The practical divine law deduced from its legitimate sources: the Qurʼān, Sunnah, consensus (ijmāʻ), analogy (qiyās) and other approved sources of the Sharīʻah.

Exposure Draft TN-3: Technical Note on Financial Inclusion and Islamic Finance, https://www.ifsb.org/exposure.php