This paper aims to analyze the potential role of Islamic finance in promoting financial inclusion within organization of Islamic cooperation (OIC) countries by testing the empirical relationship between key indicators of Islamic finance and a multidimensional composite index of financial inclusion. Despite the growing interest in Islamic finance as an option compatible with ethical and religious values, its contribution to improving access to formal financial services is still a matter of debate and scientific investigation.
Based on a binary index of financial inclusion as a dependent variable and five independent variables representing indicators of Islamic finance – the number of Islamic banks, asset size, takaful assets, sukuk issuances and the Islamic Finance Development Index (SFDI) – and data for ten OIC countries during the period 2011–2021. The fixed effects panel logit model was estimated and selected based on the Hausman test, which supported using fixed effects to control for country-specific unobserved heterogeneity. The robustness of the results was tested using Jackknife and Bootstrap techniques.
The results demonstrate that the number of Islamic banks and the size of their assets are significantly associated with increased odds ratios (ORs) for improved financial inclusion (e.g. OR = 1.17 and 1.03, p < 0.01). Takaful assets showed a slight positive and statistically significant effect, while Sukuk issuance was associated with a slight decrease in ORs, without statistical significance. The SFDI showed a positive association with financial inclusion, without statistical significance. The results indicate that the average probability of improving financial inclusion is about 9% per year under the current values of the independent variables combined.
The findings suggest that Islamic finance can effectively help reduce financial exclusion, especially among individuals who avoid the conventional financial system for religious reasons. Instrument-oriented reforms – such as expanding the infrastructure of Islamic banks and restructuring sukuk toward inclusive goals – may effectively contribute to expanding financial access.
Islamic finance addresses aspects of financial exclusion that have a value and religious dimension. Realizing this social impact requires a functional tailoring of each instrument: Islamic banks are a direct tool for expanding access to basic financial services, Takaful provides a framework for social protection for vulnerable groups and Sukuk contributes to financing infrastructure and public services in deprived areas. Thus, the effectiveness of Islamic finance in expanding financial inclusion depends on the extent to which the design of each instrument is tailored to the needs of excluded groups and social contexts in each OIC country.
To the best of the authors’ knowledge, this study is one of the few empirical contributions that combines a multidimensional composite index of financial inclusion with a set of Islamic finance indicators, using a panel logistic model to measure the differences in ORs associated with each indicator. This approach provides precise quantitative insights into the ability of Islamic finance instruments to promote financial inclusion in Muslim-majority countries, taking into account the institutional and contextual differences between these countries.
