IMF paper finds weak link between Islamic banking and financial inclusion

The link between Islamic banking and financial inclusion is weak and only holds for some measures of inclusiveness, research published by the International Monetary Fund has found.

The working paper, Can Islamic banking increase financial inclusion?, by Sami Ben Naceur, Adolfo Barajas and Alexander Massara, seeks an empirical relationship between the growth of Islamic banking and financial inclusion, but struggles to do so. The researchers find "weak and tentative" evidence of a link for some kinds of inclusion.

"We found some evidence that Islamic banking presence and activity were associated with greater inclusion with regard to bank credit by households and by firms as a means to finance investment," the authors say.

Islamic banks could take steps to increase their financial inclusion potential, the researchers add. Banks could add units to target small businesses, improve staff training, set up sharia-compliant microfinance, upgrade infrastructure and increase competition.