Paper

The Role of Islamic Finance in Enhancing Financial Inclusion in Organization of Islamic Cooperation (OIC) Countries

Understanding the potential of Islamic finance in improving financial inclusion
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World Bank’'s Policy Research Working Paper 5920 identifies gaps that currently exist in Organisation of Islamic Cooperation (OIC) countries in the provision of Shariah-compliant microfinance, financing for small and medium enterprises (SMEs), and the state of traditional redistributive instruments. The paper states that the core principles of Islam emphasize social justice, inclusion, and sharing of resources in society. Islamic finance addresses financial inclusion by promoting risk-sharing contracts and through specific instruments to redistribute wealth. These instruments can lead to reduced poverty and inequality in Muslim countries if they are properly implemented. Policy makers in Muslim countries who are interested in increasing financial inclusion should exploit the potential of Islamic instruments. They should also improve the regulatory and financial infrastructure to promote an enabling environment. The paper recommends that policymakers in OIC countries should:

  • Develop a regulatory and supervisory framework that supports financial inclusion based on sound risk management and sufficient consumer protection;
  • Improve credit information system;
  • Ensure a level playing field for Islamic microfinance, SMEs, and micro-takaful;
  • Institutionalize Islamic redistributive mechanisms designed to empower economically weak segments of society;
  • Use financial engineering to enhance financial access.