Islamic Finance and Financial Exclusion in Minority Muslim Countries: The Case of India

Abstract

Financial inclusion can contribute to poverty alleviation, increased employment and prosperity and thus promotes growth and strengthen resilience. In the literature, Islamic financial system has track records in tackling the financial exclusion in Muslim majority countries. However, the role of this system in enhancing the financial inclusion in non-Muslim majority countries is still unexplored. This chapter, using India as a case study, examines whether the Islamic financial system is a good tool to tackle the issue of financial exclusion and promotes growth in non-Muslim majority countries. By using discriminant analysis, this study collects data from more than 1000 customers, who are customers of Islamic and conventional banks. The study finds that discriminating factors for selecting the banks (Islamic or conventional), in descending order of their importance are employment, religion, income and gender. The results demonstrate that Islamic financial system is preferred by those, who do not have good employment, particularly, Muslims and those who are poor. Thus, the use of Islamic finance as an alternative finance may lead to higher financial inclusion as the financially excluded people mainly come from the bottom of the society.