Financial Inclusion Through Islamic Finance: Measurement Framework

Abstract

The promotion of achieving financial inclusion through Islamic finance is considered an agenda priority in many countries especially where Muslims
population is dominant. While the importance of financial inclusion index is widely recognized, the literature lacks a constructive discussion on its measurement in the light of Islamic finance. Building on the recent papers on financial inclusion index, this paper addresses the dimensions and indicators related to the
computation of financial inclusion index based on Islamic finance. Some evidences suggest that the measurement of index needs to take into consideration as many dimensions as possible that impact the factor studied. Hence, incorporating as many dimensions as possible will result in a more holistic of financial inclusion index in the light of Islamic finance’s core objectives. This paper attempts to fill this gap by proposing the founding principles in financial inclusion index based on Islamic finance. The principles incorporate the two-pillar approach (i.e. risksharing/ risk taking and wealth distribution) in determining the basic dimensions and indicators within the ambit of Islamic finance. By doing so, we hope to shed light on the parameters that are crucial in the index computation.As far as financial inclusion index is concerned, the issue of data limitation is expected in building this Islamic finance based index. With regard to the computation of financial inclusion index, while numerous amounts of data are available on many aspects of the financial sector, systematic indicators of inclusiveness of the financial sector are not. As a consequence, the second purpose of the paper is to examine the data available for the computation of financial inclusion index based on Islamic finance as well as issues pertaining to it.