Countries worldwide are increasingly viewing financial inclusion as a crucial part to economic development as it is significant for a sustainable economy. Since over 90 developing countries, representing more than 75% of the world’s unbanked population, signed the Maya Declaration (the Alliance for Financial Inclusion’s initiative to encourage national commitments to financial inclusion) in 2011 to achieve desirable socioeconomic outcome, financial inclusion has become a growing important concern for a vast number of governments worldwide. AHMED ALI SIDDIQUI and MUHAMMAD JUNAID explore.
As per the World Bank’s Global Financial Development Report on financial inclusion, more than two-thirds of regulatory and supervisory agencies have been tasked with encouraging financial inclusion, and more than 50 countries have set formal targets and ambitious goals for financial inclusion.
In addition to bank regulators in 143 jurisdictions, a recent survey found that 67% of them have a mandate to promote financial inclusion. It has also been informed that the World Bank Group and a broad coalition of partners have issued numeric commitments to promote financial inclusion and achieve universal financial access by the year 2020.
Apropos of Islamic finance, even though it has proliferated over the past years, further progress can be made to support the socioeconomic aspects. Moreover, the risk-sharing contracts inherent in Islamic finance complemented with the redistributive instruments such as Zakat, Sadaqah, Qard Hasan and Waqf can facilitate access to finance through Shariah compliant banking, microfinance and SME programs, thus creating an enabling environment for economic and social development.
The IMF also highlighted that for Islamic finance sectors to facilitate financial inclusion, access to banking services for underserved Muslims must increase. Islamic finance is a more equitable and just financial system designed to support growth and the betterment of society. Hence, with proper infrastructure and regulations in place to support the potential of Islamic finance, this will eventually contribute to more inclusive economic growth.
Financial inclusion is broadly defined as a measure of the proportion of individuals and firms that use financial services. The benefits go beyond individuals and firms as greater access to financial services for both individuals and firms may help to reduce income inequality and accelerate economic growth. It enables a wider array of individuals and enterprises to access financial services and help to reach the economically and socially underprivileged group of people who have been excluded from the formal financial sector due to various factors such as socioeconomic deficiencies that include, inter alia, financial capability and literacy, geographical inconvenience and a religious concern of prohibited elements such as interest.
In the context of developing countries like Pakistan, financial inclusion is generally considered to be more about broadening the access of formal financial services (payments, savings, loans, Takaful products and such) to individuals and SMEs that are currently out of the banking system. However, the first step is access; the quality of access to affordable products and services that meet different segments’ unique needs would be the driving force for the uptake and usage of these services. Without offering any value to the masses, access might create a new problem in the form of inactive banking accounts.
As per the Financial Inclusion Insight report of the Bill & Melinda Gates Foundation (US), in 2017, one in five Pakistani adults (20%) reported ever using a full-service financial institution, up from 16% in 2016. Mobile money was accessed by 13% of adults, 11% accessed banks and 2% used non-bank financial institutions.
According to the Knowledge, Attitude and Practices of Islamic Banking in Pakistan study done by the State Bank of Pakistan (SBP) with the support of the UK Department for International Development, it clearly indicates that there is an overwhelming demand for Islamic banking in Pakistan. Keeping that in view, there is a huge potential for Islamic finance and a significant portion of this demand lies among those who are still financially excluded. About 94.5% of banked and 98% of non-banked respondents of the study consider bank interest as Haram and prohibited in Islam.
In 2017, the SBP continued to prioritize financial inclusion as a key element of its national development program through the National Financial Inclusion Strategy 2015, supported by the World Bank. The SBP published the national telecoms policy to address the existing gap in 2017 by issuing branchless banking regulations, launched the Asaan Remittance Account and is planning to launch the Asaan Mobile Account.
In April 2017, the government of Pakistan launched a US$130 million financial inclusion and infrastructure project focused on improving access to digital payment and advancing access to credit for SMEs. Pakistan Post and Karandaaz have also partnered to digitize money order services in Pakistan.
Overwhelming demand for Islamic finance
One of the most successful examples of financial inclusion is Tabung Haji, a Malaysian Islamic institution that provides various facilities for Hajj pilgrimage. It was established in 1963 with 9.3 million depositors from a total population of 30 million, half of which are Muslims. Tabung Haji is recognized as an approved investment institution under the Malaysian government’s national development policy. As such, it is invited by companies to participate in their restructuring exercises to reflect local equity participation.
As per a study by Yale University, Muslim-majority countries like Jordan which offer Shariah compliant financing boosted application rates from 18% to 22%. According to a recent study, when both conventional financing and Shariah compliant financing were offered, interestingly, 90% of those that applied for conventional financing ended up applying for the Shariah compliant financing as opposed to the conventional financing when both were priced the same.
Bangladesh has also established a notable Shariah-based model — a poverty alleviation program through Muslim Aid Bangladesh. The program is purely a social mission geared to empower the underprivileged and marginalized people in Bangladesh and benefits millions of people.
The way forward for financial inclusion in Pakistan
Based on the foregoing discussion, it is very clear that in order to promote financial inclusion among the masses in Pakistan, financial services must be offered to customers and the public by keeping in view the religious preference and cultural norms. That is why it is suggested that the policymakers must ensure that they promote the Shariah compliant practice of deposits as well as financing so that the maximum number of people can utilize bank services which will result in the economic development of the country.
In this regard, all the financing facilities like student financing, the Naya Pakistan Housing Scheme, Asaan accounts and mobile accounts should be based on the Islamic mode of finance. Shariah compliant organizations, policies and procedures and the right intentions of the government can attract people toward financial inclusion and lead to economic growth and development.
Ahmed Ali Siddiqui is the director and Muhammad Junaid is the research associate at IBA-CEIF. They can be contacted at [email protected] and [email protected] respectively.