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Islamic Banking – a new approach for financial inclusion

There are different barriers to financial inclusion, one of these is the voluntary exclusion due to religious reasons and the other is the high cost of interest charged to small borrowers. Islamic banking seems to offer reasonable solution to these challenges where the interest is replaced with other tools based on partnerships and social cooperation. However, banks might be facing different type of challenges such as the regulation and customer reach in absence of profitable margins. The other factors impacting adoption will be to offer an economic access to the service without heavy investments from the banks, and maintain high service standard to create trust and drive adoption.

There is no doubt that access to financial services is becoming more important than ever to help in building sustainable and quality livelihood for the people and ensure the stability of socio-economical system. The majority of population of Muslims lives in the least financially inclusive part of the world. The term financial inclusion refers to providing both individuals and businesses responsible and sustainable access to financial products. Although there are some critics to the financial inclusion, yet it is being directly linked to reducing poverty and improving the wellbeing. There are different initiatives taken towards building a cost effective banking for the mass through technology to reduce the cost of banking operational expenses. Financial inclusion is all about offering a safe, secure and affordable financial services.

Barriers to Financial Inclusion

  • Lack of documentation
  • Lack of trust in financial institutions
  • Religion
  • A family member having an account
  • Having no need for financial services


The Islamic banking industry continues to grow exponentially, faster than their commercial banking peers and seems to be appealing to the industry with many of international banking giants tapping into this market. Performance and efficiency of Islamic banks during the global financial crisis 2008 was also better than the conventional banks counterparts; the mechanism Islamic Shariah provided better resilience to negative profitability and speculation, which impacted conventional banks. This led to the exceptional adoption of Islamic banking principles to stabilize the financial systems and regain investors’ confidence in the banking industry.

Islamic banking can drive the economic growth similar to conventional banking. There is an emerging need to develop more cohesive financial products designed to the low income poor. Banking clients are willing to pay a premium for Islamic banking services, and a majority of Muslim customers who currently use conventional banking products claim that they would switch if Islamic products were available. However, there is a need to build the right balance when setting the pricing structure to serve two objectives, follow the Islamic finance guide lines and ensure customers are not excessively charged for the service, and maintain profitable margins to the banks. The banks can offer modern products using Shariah principles in a way that can promote financial stability and growth to millions of Muslims who abstain from using banking products for religious reasons, a good example for that can be seen in Ijarah and Murabaha primarily in mortgage and financing.

Islamic banking is getting momentum globally with conventional banks offering Islamic compliant products. However, there is still a gap between demand for financial products that are secure, safe, sustainable and reasonable fees and what is being offered by Islamic banks to people with medium to low income. Customers need to have transparent product and pricing structure, availability of access channels, and service quality which comes at a price for banks that are not able to offer that to mass public. When Islamic banks partner with mobile operators to deliver the service it may solve two challenges (reduce the cost of operation for the bank, offer social responsible banking services) and that will help customers to overcome the voluntary exclusion for religious reasons and promote economic development. Any products offered must consist of transparent product and pricing structure, easy to use, offered through different digital channels and the service quality should match that offered to affluent segments. Banks can charge a premium to reduce the risk factors and increase the profit margins.

The writer is a Karachi based freelance columnist and is a banker by profession. He could be reached on Twitter @ReluctantAhsan

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