Journal Islamic finance: financial inclusion or migration?

Year 2022

Writer Ahmed Tahiri Jouti (18 September 2018)

Reviewer Ananda Sulistio (191011)

Date 09 Agustus 2022

Gap Of Islamic finance covers a wide range of mechanisms and

Research/Celah institutions delivering high added value services to clients in
Penelitian accordance with Sharīʿah (Islamic law) principles. It covers banking
and microfinance, capital markets, insurance and all the recent
financial innovations such as crowdfunding, cryptocurrencies and
others. Indeed, Islamic finance continues evolving to compete with
conventional finance in attracting customers from different faiths
(Abdullah et al., 2012), and this is in it self an achievement for this
young industry.
Assessing the impact of introducing Islamic finance is a real
issue in terms of financial inclusion and competition with
incumbents. Strategies and approaches to be adopted will depend
strongly on the expected impact of such an introduction. This paper
aims at drafting a methodology to assess the impact of introducing
Islamic finance. To do so, it first starts with providing a definition of
the concept of financial inclusion and describes its different levels
from theconventional finance perspective. Then, it presents the
different profiles of customers interested in Sharīʿah-compliant
financial products and defines the levels of financial inclusion from
the Islamic finance perspective.

Formulation Of  Introducing Islamic finance would cause a hard financial

The Problem / migration
Rumusan  What Islamic finance not exclusively a way to increase
Masalah financial inclusion?
 What is the impact of introducing Islamic finance on
financial inclusion?
 what Islamic finance can use Islamic institutions such as
waqf or zak ah?
 What Islamic finance should contribute to financial inclusion
efforts?

The Theory From a theoretical perspective, Islamic finance can play a

Presented By significant role in enhancing financial inclusion incountries with
The Researcher dominant Muslim populations Nevertheless, the Global Financial
/ Teori Yang Inclusion Database (Global Findex) shows that religious beliefs seem
Dipaparkan to be the least relevant reason for not having a bank account.
Oleh Peneliti Globally, only 6 per cent of the unbanked people, as per The World
Bank (2018), cited religious concerns as their main reason for not
having a bank account.

Financial inclusion is globally defined as the proportion of

individuals and firms that use financial services (The World Bank,
2018). This concept covers both lack of access to financial services
and the self-exclusion phenomenon. Lack of access means that
people are not able to use financial services because of the following
reasons:
 People do not own enough money to use financial services;
 people find the maintenance of bank accounts expensive;and
 financial institutions are not available in their regions or
zones.

A methodology to assess the impact of introducing Islamic

finance. To do so, it first starts with providing a definition of the
concept of financial inclusion anddescribesitsdifferent levels from
theconventional finance perspective. Then, it presents the different
profiles of customers interested in Sharīʿah-compliant financial
products and defines the levels of financial inclusion from the Islamic
finance perspective. Based on the elements above, the paper presents
a methodology to define the impact of introducing Islamic finance on
incumbents and on financial inclusion and the strategies that both
financial authorities and incumbents can adopt. When talking about
financial inclusion, the main focus is on account ownership data,
including key aspects such as savings, accessing credit and managing
financial risk. Nevertheless, in conventional banking, the first step to
access other financial services is to have a bank account, otherwise
the customeris excluded from the whole system.

Research  Modeling consumers’ behaviour in new dual banking

Reference / markets: the case of Morocco”, Review of Pacific Basin
Rujukan Financial Markets and Policies (17 August 2018). Aaminou,
M.W. and Aboulaich, R. (2017).
Penelitian (research result)
his paper aims to model the impact of retail consumers’
behavior on a new banking dual market featuring both
conventional and Islamic banking products. To build the
model, we conduct an empirical qualitative and quantitative
 survey on Moroccan market consumers in order to appraise
their preferences with regard to banking products’ attributes.
Then, we use conjoint analysis method to determine the
consumers’ decision function. We run market simulations on
a Multi-Agents Simulation platform and analyze the results.
Our findings indicate that in new dual markets, and under a
range of assumptions, it is predicted that Islamic banks will
face excess liquidity while conventional banks will be
exposed to liquidity shortage.

 Digital Financial Inclusion, Islamic Banking Stability and

Sustainable Economic Growth. (2017) Hasanul Banna,
Mohammed Kabir Hassan, Md Rabiul Alam.
(research result)
In the current 4th industrial revolution, digital finance is at
the forefront of banking infrastructure and sustainable
economic growth. It is becoming the baseline in conventional
and Islamic banks alike. However, both the negative and
positive effects of financial inclusion bring the question of
whether digital finance can be the solution. This study
intends to examine the role of digital financial inclusion
(DFI) in promoting sustainable economic growth through
Islamic banking stability using the unbalanced panel data by
deploying panel corrected standard errors and two-stage least
square-instrument variable techniques. The study also aims to
focus on the impact, prospect, and the challenges of DFI and
how the proper application of DFI can bring sustainable
financial growth to achieve the SDGs. Our results suggest
that DFI endorsement may ensure sustainable economic
growth and stability within banks, specifically Islamic banks,
which is a step towards SDGs achievement.

 Effect of Financial Inclusion on Poverty and Vulnerability to

Poverty: Evidence Using a Multidimensional Measure of
Financial Inclusion (2020). Isaac Koomson, Renato A.
Villano & David Hadley.
(research result)
This study examines the effect of financial inclusion on
poverty and vulnerability to poverty of Ghanaian households.
Using data extracted from the seventh round of the Ghana
Living Standards Survey in 2016/17, a multiple
correspondence analysis is employed to generate a financial
inclusion index, and three-stage feasible least squares is used
to estimate households’ vulnerability to poverty. Endogeneity
associated with financial inclusion is resolved using distance to
the nearest bank as an instrument in an instrumental variables
probit technique. Results showed that while 23.4% of
Ghanaians are considered poor, about 51% are vulnerable to
poverty. We found that an increase in financial inclusion has
two effects on household poverty.
Research The paper brings an insight on the impact to introducing Islamic
Framework / finance. Indeed,it could cause a financial migration to Islamic banks
Kerangka that can take many forms and depends on many factors that call for
Penelitian deep analysis. Depicts the analysis of unbanked people with religious
concerns from the perspectives of Islamic finance (whether they are
interested in Islamic finance) and IFIs (whether IFIs find them
interesting). For the self-exclusion issue, Islamic finance and
financial literacy seem to be the main solutions to bring more people
to the financial system (Ramakrishnan, 2012). Nevertheless, self-
exclusion can take a different form, which is informal finance
(Mauri, 2000). In some contexts, businesses try to use cash rather
than their bank accounts to escape tax control. People are under
using banking services because they are looking for more privacy
andless control. Describes the mapping of the unbanked people and
the associated reasons for financial exclusion.
From this perspective, financial inclusion consists of three
different levels:
(1) Account ownership: Holding an account means access to
payment systems and other financial services. For financial
institutions, if someone does not have a bank account, the person will
not have a track record and will not even exist. Therefore, from this
perspective, everything starts with a bank account and the rule here is
“I have a bank account,
(2) Access to credit and savings: If someone does not have an
account, the person will not have a credit record and the bank will
not grant him/her a loan easily. Thus, borrowing is a second layer of
financial inclusion. Otherwise, people have to deal with informal
borrowing systems such as rotating savings and credit associations
commonly known as ROSCAs (Fang et al., 2015). Similarly, to save
money in the formal system, a person needs to have a bank account.
However, owning a bank account does not necessarily mean that
people will use the formal system for their saving. From the financial
institutions’ perspective, if saving is done through non formal
practices, it will limit the size of financing through the formal
system.
(3) Accessto insurance services: In developing countries,
peoplesubscribe to insurance products only when they are obliged.
Indeed, the lack of compulsory insurance slows the pace of the
insurance sector development (Lester,2011).When granting a loan,
banks usually require insurance coverage for death, incapacity and
risks related to the underlying assets. Thus, if someone does not take
a loan, the person will not be subscribing to an insurance product.
Data Type / This paper use the type of secondary data. Secondary data is the
Jenis Data retrieval of data objects that are carried out indirectly. Generally,
secondary data is obtained through data that has been collected from
other parties. For example, retrieval of reported data from research
journals, from newspapers or from research.
And also this paper used ratio data is the data obtained by
measuring. For example measuring distance, scale and much more
Data is numeric in the truest sense, Has absolute zero, Has the
"highest" position in the data measurement level, Can be operated
mathematically.

Research  Most of the time, researchers and analysts link the

Result / Hasil introduction of Islamic finance to financial inclusion.
Penelitian Nevertheless, from the perspective of Islamic finance, the
issue of financial inclusion needs to be tackled in a different
manner. Customers dealing with IFIs can be categorized into
different profiles, starting with people that are self-excluded
for religious reasons and thus do not use conventional finance
products, and ending with people who use all conventional
instruments but would prefer to convert their commitments to
Sharīʿah-compliant ones once available. Inpractice,
introducing Islamic finance is not limited to financial
inclusion.
 It could cause a financial migration from conventional to
Islamic banks, but even this migration can take many
formsanddepends onmany factorsthat need to be analysed
deeply and carefully. In real experiences, people interested in
Islamic financial products can have different profiles and the
proportion of each profile can define whether Islamic finance
enhances inclusion or creates migration. Finally, Islamic
finance has to contribute to the efforts of financial inclusion.
Indeed, it has to adopt the same mechanisms of conventional
finance and adapt them to Sharīʿah principles. Moreover,
Islamic finance can use Islamic institutions such as waqf to
have a wide impact on financial inclusion.

Population and The self-exclusion phenomenon refers to people who have access to
Sampling / financial services but choose not to use them for the following
populasi dan reasons and the population and sampling is:
sampling  One of the family members already has an account;
 Muslim community. religious beliefs, especially within the
Muslim community that the usurious practicesofconventional
financial institutions are prohibited
  Observation people
collection This paper is using collection method of observation This method
method / can be said to be the most frequently used in various research topics,
metode and it is not uncommon for observation to be combined with other
penelitiaan methods in one study. Researchers who use this method will make
observations within a certain period of time to obtain primary data or
secondary data. For researchers who use other methods as the main
research method, the results or data obtained from observation are
secondary.
And also used document study researchers who use the
document study research method prefer to collect documents that are
relevant to the research. It should be noted that the documents
referred to here are not only text documents that contain writing on
sheets of paper, but documents can also be photos, videos, and digital
sources. For example, interviews are still needed to test the results
obtained from this technique in the form of recommendations only.
For example:
 Most analysts and researchers adopt the approach of
conventional finance regarding financial inclusion and
consider Islamic finance as a complementary tool to attract
self excluded people with religious concerns (TheWorld
Bank, 2018). Nevertheless, the levels of financial inclusion in
Islamic finance are not organized in the same way.
 Islamic finance represents a suitable alternative to
conventional finance. Indeed, people are already using
conventional financial instruments but would prefer moving
to Islamic financial instruments for their futur eneeds
(Ahmadetal, 2011).This case happens in the absence of
financial mechanisms to immediately convert financing
commitments to Islamic ones.
Analysis This paper uses a qualitative analysis technique which uses
Technique / document data and observations through previous research.
Teknik Analisis For example:
For such a context, introducing Islamic finance seems to present
a real opportunity to include more people and to attract more
customers. The appropriate strategy would be to recommend the
introduction ofI slamic finance to financial authorities and investors.
In practice, this scenario is not realistic and the situation has to be
analysed carefully. If we analyze the results of the survey in the
Findex report, we find that countries with high proportions of people
that are self-excluded for religious reasons already have Islamic
banks. Examples include Tunisia (3 Islamic banks, 10 per cent of
people unbanked), Jordan (3 Islamic banks, 11 per cent of people
unbanked) and Iraq (18 Islamic banks, 12 percent of people
unbanked).Thus, having Islamic banks does notensure financial
inclusion of all the people have self-excluded for religious concerns.