Financial Exclusion Due to Religious Reasons: Examining Sociodemographic Factors

By adopting the Sustainable Development Goals, the global community has tasked itself with the goal of attaining inclusive societies. Arguably, financial inclusion is central to the realization of these noble objectives. It, therefore, underscores the reason it has received consideration focus in the last decade or so. Different dimensions of the inclusion paradigm have been identified with various underlying factors of causality. In this study, we focus on one of those factors of exclusion: religion. We used the Findex data for 2011, 2012 and 2017 to examine the socio-demographic factors that determine an individual’s decision not to indulge in the financial system due to religious constraint. Using the 2017 data, we further examine the possibility of using Islamic finance as a tool to reduce financial exclusion and to promote sustainable development.

Originality

Most studies in this area investigate broadly the determinants of financial inclusion in specific geographical locations. Others focus on the gender gap. Yet still there are other theoretical studies that suggest, without empirically testing, that the promotion of Islamic Finance could possibly reduce financial exclusion. However, to the best of our knowledge, there is no study yet that examined the effects of demographic characteristics on the individual’s likelihood of saying they do not have accounts at a financial institution because of religious reason. Therefore, the uniqueness of this study stems from two points: 1. It covers a global sample and uses three years of Findex survey and 2. It attempts to test empirically the possibility of using Islamic Finance to promote financial inclusion.

Findings

The results of the study show that socio-demographic attributes such as age, gender, income as well as education have significant impact on a person’s decision to stay unbanked because of religious commitments. Specifically, it shows that being female as compared to male, reduces the possibility of self-reporting religious reasons for not banking. The same is applicable to educational attainment of a person. However, we found that the rich and the poor individuals, compared to middle-income people, are more likely to say religion is the reason they do not have accounts at a formal financial institution. The opposite is true for richer nations. Regarding the second question, whether Islamic finance can reduce exclusion, we found overwhelming empirical support to accept such a hypothesis.

Practical Implications

The findings of the study will be of crucial import to policy makers, development agencies, financial institutions, and researchers. It is suggested that financial institutions take into consideration the design of appropriate products in order to ensure the attainment of inclusive financial systems. In addition, the adoption of novel Islamic financial products such as Value-Based Intermediation will go a long way in facilitating the realization of the sustainable development goals.