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Empowering Communities: The Nexus of Islamic Finance and Financial Inclusion

Empowering Communities: The Nexus of Islamic Finance and Financial Inclusion

Shama Mushtaq (University of Agriculture, Faisalabad, Pakistan), Muhammad Idrees (University of Agriculture, Faisalabad, Pakistan), Laraib Manzoor (International Islamic University, Islamabad, Pakistan), Noreen Akhtar (University of Agriculture, Faisalabad, Pakistan), Basharat Ali (Government College, Faisalabad, Pakistan), Muhammad Roman (University of Jhang, Pakistan), and Sara Akram (School of Sociology and Anthropology, Guangzhou, China)
Copyright: © 2024 |Pages: 24
DOI: 10.4018/979-8-3693-1475-3.ch003
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Abstract

This chapter offers a comprehensive examination of the intersection of Islamic finance and financial inclusion, shedding light on how Islamic financial principles can contribute to expanding financial access and promoting economic inclusivity. Examining the fundamental principles of Islamic finance reveals the inclusive foundations upon which this financial system is constructed. It has also examined the case studies and real-world examples to illustrate the tangible effects of Islamic finance on marginalised populations and economies. This chapter investigates the impact of financial technology (Fintech) and Islamic microfinance institutions on the availability of Islamic financial products. The chapter discussed the limitations of Islamic finance, which include a prohibition on interest, restrictions on loans and investments, and sector limits. Innovative products provide financing alternatives. In addition, the chapter discuss how the challenges of standardisation, regulatory compliance, and consumer awareness impede the widespread adoption of Islamic finance in practise. For Islamic financial services to contribute more effectively to financial inclusion, addressing these issues requires industry cooperation, regulatory support, and consumer education.
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Introduction

The Islamic finance industry has grown substantially in Asia over the last 2 decades. The Muslim populations in different Asian countries, especially in Southeast Asia, are increasing. Rapid Muslim population growth and improving living standards may enhance the popularity of Islamic finance as a keen alternative to conventional financing mechanisms. In addition, investors from the Middle East and Asia are increasingly seeking to invest in products that are in line with their religious beliefs.

Understanding the Significance of Financial Inclusion

Financial inclusion, defined as universal access to affordable and effective financial services, has emerged as a pivotal driver of economic growth and poverty reduction. According to Asli (2017) Financial inclusion means that adults have access to and can effectively use a range of appropriate financial services. In an increasingly interconnected world, the ability to participate in the formal financial system is fundamental to an individual's or a community's socioeconomic progress. This section will delve into the multifaceted importance of financial inclusion, elucidating its impact on economic stability, wealth distribution, and individual prosperity. Financial inclusion affects, and is influenced by, the level of financial innovation, poverty levels, the stability of the financial sector, the state of the economy, financial literacy, and regulatory frameworks which differ across countries (Ozili, P. 2020).

In particular, we will emphasize the role of financial inclusion as a linchpin for achieving the United Nations' Sustainable Development Goals (SDGs), with a particular focus on SDG 1 (No Poverty), SDG 5 (Gender Equality), and SDG 8 (Decent Work and Economic Growth). Ozili (2022) explained that financial inclusion improves the economic aspect and social aspect of sustainable development as it allows providers of financial services to put social considerations first before profit. Financial inclusion acts as an enabler for these goals, facilitating poverty alleviation, empowering women, and fostering economic growth, ultimately contributing to a more equitable society.

Islamic Finance as a Catalyst for Financial Inclusion

Islamic finance, rooted in ethical and Sharia-compliant principles, has gained global recognition not only for its ethical foundations but also for its potential to enhance financial inclusion. Mohieldin et al (2015) defines financial inclusion as the concept initially referred to the delivery of financial services to low-income segments of society at affordable cost. During the past decade, the concept of financial inclusion has evolved into four dimensions: easy access to finance for all households and enterprises, sound institutions guided by prudential regulation and supervision, financial and institutional sustainability of financial institutions, and competition between service providers to bring alternatives to customers. This section will elucidate the core tenets of Islamic finance, emphasizing its prohibition of usury (Riba), endorsement of risk-sharing, and asset-backed financing. By doing so, we will highlight the inherent inclusivity embedded within Islamic finance.

Furthermore, we will explore how Islamic microfinance institutions, by offering benevolent loans (Qard al-Hasan) and microinsurance (Micro Takaful), have become powerful tools for promoting financial inclusion, especially among marginalized and underserved populations. These institutions prioritize the provision of financial services to those who have traditionally been excluded from the formal financial system.

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