Islamic Finance and Financial Inclusion: Who Includes Whom, in What, and on Whose Terms?


By Lena Rethel, University of Warwick.

With the rise of financial inclusion as the new buzzword in global development circles, it has replaced earlier items on the reform agenda such as financial modernisation or financial deepening. By their very nature financial inclusion projects are inherently political – their underlying rationale is to change who has access to what forms of credit and at what conditions. Financial inclusion is both a multi-scalar and multi-faceted phenomenon. Needless to say that its dynamics play out differently in different countries and regions. However, before uncritically embracing the financial inclusion agenda as a means to achieving a more equitable economic order, more attention should be paid to what constitutes a fundamental set of questions: who includes whom, in what and on whose terms? In this blog entry, I want to highlight some of the key issues that have emerged in relation to Islamic finance.

Islamic finance proposes an alternative financial system. It represents a principled approach to finance, drawing on the teachings of Islam. It consists of both prohibitions and requirements, aimed to promote the maqasid al-sharia, the foundational goals of Islamic jurisprudence: protection of faith, life, progeny, intellect and property. Thus, Islamic prohibitions include: the paying and receiving of riba (interest) and engaging in maisir (gambling) and gharar (contractual ambiguity). In so doing, Islamic finance takes issue with the asymmetric transfer of risk, where one party gains at the cost of another, often through speculative activities. Instead, Islamic finance emphasizes risk-sharing and the need for economic reward to be associated with tangible contributions to the economy. This is promoted by the requirement of linking financial transaction to real assets and/or economic effort.  Furthermore, the more commercial, transaction-focused aspects of Islamic finance cannot be disassociated from its charitable side, such as the requirements to contribute zakat (mandatory alms) and to show forbearance with borrowers in distress. Both these prohibitions and requirements ostensibly set Islamic finance apart from the current global financial order, rooted in interest and highly speculative in nature. Since its inception in the late 1960s and early 1970s, modern Islamic finance has reached a market size of US$2.438 trillion, a share of roughly 1.8 per cent of global financial assets.

At first glance, Islamic finance seems a straightforward way to include Muslim communities and Muslim-majority countries in the global financial system without contradicting their religious beliefs. And indeed, World Bank research points to a Muslim ‘finance gap’ when it comes to owning “a formal account or save at a formal financial institution”. Nevertheless, as some of the papers presented at the recent IGDC workshop in York have pointed out, the promotion of the financial inclusion agenda rather paradoxically relies on several sleigh of hands to create financial exclusion in the first place, as a problem that can be addressed. Importantly, it is underpinned by normative assumptions about what counts as ‘proper’ finance. Predominantly, this seems to be formal financial services – as profit making opportunities for domestic and international corporations and as a means for states to promote financial citizenship (and incidentally, broaden the tax base). However, this approach then serves to erase different, possibly more social ways of being financial – of which Islamic finance also has been a part.  

Moreover, although it potentially offers resources and strategies to mitigate and resist it, Islamic finance has not been immune to precisely those financialisation dynamics that have provoked scepticism about the financial inclusion agenda more broadly. For example, the requirement of linking financial transactions to the real economy is meant to prevent speculative financial activity, but it has led to a significant exposure to real estate. This can be deeply problematic given the proneness especially of many more financialised financial systems to property bubbles. There is also a tendency in Islamic finance to design products that mirror existing conventional financial products, with a lot of emphasis on personal and consumer finance, the low hanging fruits of financial innovation. Yet, in countries such as Malaysia, the expansion of Islamic finance has coincided with a significant rise in levels of household debt.

Lena Rethel is Associate Professor of International Political Economy at the University of Warwick. She researches dynamics of finance and development with a special focus on Islamic finance. Lena is a co-editor of I-PEEL: The International Political Economy of Everyday Life. Photo: A Saba Islamic Bank branch in Djibouti City, by Panoramio.

This blog post is a part of the blog series Inclusive or Exclusive Global Development? Scrutinizing Financial Inclusionin which a new perspective on financial inclusion is published every #FinanceFriday of February, March and April 2019.

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