Financial Inclusiveness in Islamic Banking in Pakistan: A Comparison of Ideas and Practices

Salman Ahmed Shaikh

doi:10.33102/jmifr.v15i1.100

Authors

Salman Ahmed Shaikh Faculty of Economics and Management, Universiti Kebangsaan Malaysia, 43600 UKM, Bangi Selangor, Malaysia

DOI:

https://doi.org/10.33102/jmifr.v15i1.100

Keywords:

Islamic banking, Islamic finance, Financial inclusion, Microfinance

Abstract

This study attempts to document the progress in Islamic banking industry of Pakistan towards fostering an egalitarian and equitable financial intermediation. It
evaluates the progress of Islamic banking in enhancing socio-economic mobility, financial inclusiveness and fostering equitable distribution of income. This study uses a set of quantitative indicators to objectively assess the performance of Islamic banks towards fostering a participative, inclusive, cost-effective and real sector oriented financial intermediation. The results highlight that currently, the performance of Islamic banks on these fronts leaves much to be desired. This study highlights that high average cost of financing and limited focus on agriculture and small and medium enterprises requires improvement to achieve the goal of circulation of wealth and equitable distribution of income. It also identifies that various categories of poor people who need finance for their health, education and small business working capital needs cannot be served by Islamic banks by using the available product structures. This study gives a geographical presence of Islamic banks which shows that they are mainly based in big urban cities. It argues that most of the Islamic banking debt-based products are close, but relatively expensive substitutes. The study will help the industry to review its performance in contributing towards financial inclusiveness, social mobility, need fulfillment and equitable income distribution.

Downloads

Download data is not yet available.

References

Ahmed, A. (2010). Global financial crisis: An Islamic finance perspective. International Journal of Islamic and Middle Eastern Finance and Management, 3(4), 306 – 320.

Ahmad, K. (1986). Keynote Address. In Z. Ahmed, M. 22. Chapra, M.U., 1985. Towards a Just Monetary System. Iqbal & M.F. Khan, Eds. Fiscal policy and resource allocation in Islam. IPS, Islamabad.

Asutay, M. (2008). Islamic banking and finance: Social failure. New Horizon, 1–4. Retrieved from: SSRN: https://ssrn.com/abstract=1735674 or http://dx.doi.org/10.2139/ssrn.1735674.

Berloffa, G. & Modena, F. (2009). Income Shocks, Coping Strategies & Consumption Smoothing: An Application to Indonesian Data, Dipartimento Di Economia, Discussion Paper No. 1.

Balz, K. (2008). Sharia risk? How Islamic finance has transformed Islamic contract law, Islamic Legal Studies Program, Harvard Law School.

Besley, T. (1995). Nonmarket institutions for credit & risk sharing in low-income countries. The Journal of Economic Perspectives, 9(3), 115 – 127.

Chapra, M. U. (1979). Objectives of the Islamic economic order. Leicester, UK: The Islamic Foundation.

Chapra, M. U. (2007). The case against interest: Is it compelling?. Thunderbird International Business Review, 49(2), 161 – 186.

Chaudhry, M. S. (1999). Fundamentals of Islamic Economic System. Burhan Education and Welfare Trust Lahore.

Choudhury, M. A. (2012). The ‘impossibility’ theorems of Islamic economics. International Journal of Islamic and Middle Eastern Finance and Management, 5(3), 179 – 202.

Council of Islamic Ideology. (1980). Report of the Council of Islamic Ideology on the Elimination of Interest from the Economy, CII, Pakistan.

Diamond, D.W. (1984). Financial intermediation as delegated monitoring: A simple example. Review of Economic Studies, 51(3), 393 – 414.

Demirgüç-Kunt, Asli, Klapper, L. & Douglas, R. (2013). Islamic finance and financial inclusion: Measuring use of & demand for formal financial services among Muslim adults. Policy Research Working Paper No. 6642. Washington, DC: World Bank.

Dubois, P. (2000). Consumption insurance with heterogeneous preferences: Can sharecropping help complete markets?. Econometric Society World Congress 2000 Contributed Papers 1597, Econometric Society.

Dusuki, A. W. & Abozaid, A. (2007). A Critical appraisal on the challenges of realizing maqasid alshari’ah in Islamic banking and finance. IIUM Journal of Economics and Management, 15(2), 143 – 165.

El-Gamal, M. A. (2005). Limits and Dangers of Shariah Arbitrage, in S. Nazim Ali (Ed), Islamic finance: Current legal and regulatory issues, Cambridge, MA: Islamic Finance Project, Islamic Legal Studies, Harvard Law School, 117 – 131.

El‐Gamal, M. A. (2007). Mutuality as an antidote to rent‐seeking shari’ah arbitrage in Islamic finance. Thunderbird International Business Review, 49(2), 187 – 202.

Haniffa, R. & Hudaib, M. (2010). Islamic finance: From sacred intentions to secular goals? Journal of Islamic Accounting and Business Research, 1(2), 85 – 91.

Hassan, M. K. & Bashir, A. H. (2003). Determinants of Islamic Banking Profitability, ERF Paper, 10, 3 – 31.

Hassan, M. K., Sanchez, B. & Yu, J. S. (2011). Financial development & economic growth in the organization of Islamic conference countries. Journal of King Abdul Aziz University: Islamic Economics, 24(1), 145 – 172.

Ibrahim, A. A., Elatrash, R. J. & Farooq, M. O. (2014). Hoarding versus circulation of wealth from the perspective of maqasid al-shari’ah. International Journal of Islamic and Middle Eastern Finance and Management, 7(1), 6 – 21.

Iqbal, Z. (1997). Islamic financial systems. World Bank Publications, 42 – 43.

Janzen, S. A. & Carter, M. R. (2013). The impact of micro insurance on consumption smoothing & asset protection: Evidence from a Drought in Kenya, University of California at Davis.

Kayed, Rasem N. (2012). The entrepreneurial role of profit & loss sharing modes of finance: Theory & practice, International Journal of Islamic and Middle Eastern Finance and Management, 5(3), 203 – 228.

Kazianga, H. & Udry, C. (2006). Consumption smoothing? livestock, insurance & drought in rural Burkina Faso. Journal of Development Economics, 79(2), 413 – 446.

Khan, M. Mansoor & Bhatti, M. Ishaq. (2006). Why interest-free banking and finance movement failed in Pakistan. Humanomics, 22(3), 145 – 161.

Khan, T. (2014). Comment on: Islamic economics: where from, where to? Journal of King Abdul Aziz University: Islamic Economics, 27(2), 95 – 103.

Khan, W. M. (1989). Towards an interest-free Islamic economic system. Journal of King Abdul Aziz University: Islamic Economics, 1(1), 3 – 38.

Khir, M. F. A. (2013). The concept of the time value of money: A shari‘ah viewpoint. International Journal of Islamic Banking & Finance, 3(2), 1 – 15.

Laldin, M. A. & Furqani, H. (2013). Developing Islamic finance in the framework of maqasid alshari’ah: Understanding the ends (maqasid) and the means (wasa’il). International Journal of Islamic and Middle Eastern Finance and Management, 6(4), 278 – 289.

Levine, R. (2002). Bank-based versus market-based financial systems: Which is better?. Journal of Financial Intermediation,11(4), 398 – 428.

Mohieldin, M., Iqbal, Z., Rostom, A. M. & Fu, X. (2011). The role of Islamic finance in enhancing financial inclusion in Organization of Islamic Cooperation (OIC) Countries, Policy Research Working Paper 5920. Washington, DC: World Bank.

Morduch, J. (1995). Income smoothing & consumption smoothing. The Journal of Economic Perspectives, 9(3), 103 – 114.

Naceur, S. B., Barajas, A. & Massara, A. (2015). Can Islamic banking increase financial inclusion?, IMF Working Paper, WP/15/31.

Naveed, A. & Ali, N. (2012). Clustered deprivation: District profile of poverty in Pakistan. Islamabad: Social Development Policy Institute.

Neal, L. D. (1990). The rise of financial capitalism: International capital markets in the age of reason. Cambridge, UK: Cambridge University Press.

North, D. (1990). Institutions, institutional change, and economic performance. Cambridge, UK: Cambridge University Press.

Odedokun, M. O. (1998). Financial intermediation & economic growth in developing countries. Journal of Economic Studies, 25(3), 203 – 224.

Rosenzweig, M. R. (2001). Savings behavior in low-income countries. Oxford Review of Economic Policy, 17(1), 40 – 54.

Rosenzweig, M. R. & Wolpin, K. I. (1993). Credit market constraints, consumption smoothing, and the accumulation of durable production assets in low-income countries: Investments in bullocks in India. Journal of Political Economy, 101(2), 223 – 244.

Siddiqi, M. N. (2014). Islamic economics: Where from, where to? Journal of King Abdul Aziz University: Islamic Economics, 27(2), 59 – 68.

Siddiqi, S. A. (2007). Establishing the need and suggesting a strategy to develop profit and loss Sharing Islamic banking. Paper presented at the IIU Malaysia Conference on Islamic Banking and Finance, Kuala Lumpur.

World Bank (2014). Global Financial Inclusion (Global Findex) Database. World Bank Data Division.