Inclusive Economic Growth: Unlocking the potential of Islamic finance

Md. Touhidul Alam Khan, PhD :

Despite the remarkable growth of Islamic finance as one of the world’s fastest-expanding financial sectors, a striking paradox persists: approximately 86% of Muslims worldwide remain financially excluded – a rate twice that of non-Muslim populations. This division signifies a critical challenge in determining the full potential of Islamic financial services to promote economic development and social equity within Muslim-majority regions and beyond.

Islamic finance recorded a robust 14.9% growth in assets last year, reflecting increasing global interest and investment. However, this impressive expansion is concentrated in a handful of countries – primarily the Gulf Cooperation Council (GCC) nations and some Southeast Asian countries including Bangladesh – leaving most Muslim-majority countries and their populations underserved.

The Middle East and North Africa (MENA) region, considered the birthplace of modern Islamic finance, exhibits the lowest levels of financial inclusion globally, despite its historical significance. This stark contrast highlights a paradox: the very regions that pioneered Islamic finance are often the most excluded from even basic financial services.

One might assume that religious considerations are the primary barrier to financial inclusion among Muslims, and data indicates that around 9% of adults in Muslim-majority countries actively avoid financial services for religious reasons-most notably due to perceptions of interest (riba) and non-compliance with Islamic principles.

Yet, religious doctrine is just one piece of a larger puzzle. The core challenges impeding financial inclusion are multifaceted. Geographic access remains a significant obstacle, particularly in rural and remote areas where banking infrastructure is sparse.

Digital infrastructure gaps further hinder the adoption of fintech solutions that could greatly enhance access and convenience. Additionally, financial literacy tailored to Islamic financial products often lags, leaving many potential users unaware of or ill-equipped to navigate these alternatives.

Trust deficits, both in modern banks and traditional community-based financial institutions, exacerbate reluctance among consumers who may fear fraud, exploitation, or religious non-compliance. Addressing these challenges requires innovative and coordinated approaches that blend traditional banking, fintech innovation, and community engagement.

Successful models illustrate the potential for such integration. Microfinance institutions and agent banking solutions rooted in local communities, coupled with digital platforms that extend reach, have shown promise in increasing financial access. Moreover, targeted financial literacy programs can demystify Islamic financial products, clarifying misconceptions and building confidence.

Empirical research underscores the strategic importance of expanding Islamic financial inclusion. Every 1% increase in Islamic financial services correlates with approximately 0.669% GDP growth-an indicator of the sector’s capacity to stimulate economic activity. During periods of economic shocks, such as crises or downturns, increased financial inclusion has demonstrated substantial poverty reduction effects, fostering resilience at the community level. Globally, the demographic outlook presents a compelling case for action.

By 2060, Muslim populations are projected to reach around 3 billion, representing one of the largest underserved markets in the financial sector. Unlocking this market’s potential could not only accelerate economic growth in Muslim-majority countries but also contribute to global efforts to reduce poverty and promote sustainable development.

The pathway forward demands a holistic strategy. Traditional banks must innovate to offer sharia-compliant products accessible to all, including rural and underserved populations. Fintech companies, leveraging mobile technology and digital wallets, can bridge geographical and informational gaps. Community-based institutions-such as local mosques, cooperatives, and social enterprises-play a pivotal role in building trust, delivering financial education, and tailoring services to cultural contexts.

Furthermore, regulatory frameworks must evolve to support innovative solutions, ensure consumer protection, and encourage inclusive growth. International cooperation and knowledge sharing can facilitate the transfer of best practices, ensuring that the expansion of Islamic finance benefits all segments of society.

The broader societal implication of this push for financial inclusion is vital. It is not merely a matter of serving Muslim communities but developing more resilient, inclusive, and equitable financial systems worldwide. Such systems must prioritize transparency, ethical standards, and community well-being-principles fundamental to Islamic finance but equally vital for sustainable economic development.

In conclusion, the growth of Islamic finance presents a tremendous opportunity to tackle persistent financial exclusion and catalyze economic resilience among Muslim populations.

Bridging the gap requires deliberate, innovative, and coordinated efforts that transcend traditional financial boundaries. By doing so, we can unlock the transformative power of Islamic finance – empowering individuals, strengthening communities, and fostering inclusive growth across the global economy.

[Dr. Md Touhidul Alam Khan is the Managing Director & CEO of NRBC Bank PLC and fellow cost & management accountant from Institute of Cost & Management Accountants of Bangladesh (ICMAB). He is also the first certified sustainability reporting assurer (CSRA) in Bangladesh].