Islamic Finance and Poverty Reduction in African Countries: An Empirical Analysis
DOI:
https://doi.org/10.31436/ijema.v33i1.1299Keywords:
Islamic finance, Poverty reduction, African countries, Maqasid (higher objectives) of Shariah (Islamic law), System Generalized Method of Moments (SGMM)Abstract
This paper examined the effect of Islamic finance on poverty reduction in 53 African countries over the period 2013 to 2022. Islamic finance, based on Islamic principles and values, emphasizes ethical conduct, social responsibility, and promotion of social welfare. Poverty remains a pressing issue in many African countries, and traditional financial systems have for long struggled to effectively address this challenge. Islamic finance offers unique features and mechanisms that can contribute to poverty reduction efforts. This study employs a panel System Generalized Method of Moments (SGMM) estimation technique and explores the empirical evidence on the relationship between Islamic finance development and poverty reduction, while controlling for other variables such as foreign aid, government budgets, and government effectiveness. The findings indicate that Islamic finance development, foreign aid, and government budgets have significant positive effects on poverty reduction, while government effectiveness has a negative effect. Thus, the findings highlight the potential of Islamic finance in poverty reduction in African countries and provide valuable insights for policymakers, practitioners, and researchers in harnessing the benefits of Islamic finance for inclusive and sustainable development.
References
Abere, S.S., and T.O. Akinbobola. “An Empirical Investigation of the Institutions’ Hypotheses in Nigeria.” Journal of Economics and Development Studies 4, no. 7 (2019): 110-19.
Abu Bakar, M., and A.K. Abdul Rahim. “Maqasid Al-Shari'ah Theory: A Comparative Analysis Between the Thoughts of Al-Shatibi and ‘Izz Al-Din Ibn ‘Abd Al-Salam.” International Journal of Academic Research in Business and Social Sciences 11, no. 8 (2021): 1038-051.
Ahmed, H., M. Mohieldin, J. Verbeek, and F.W. Aboulmagd. “On the Sustainable Development Goals and the Role of Islamic Finance.” Working Paper, World Bank Group (2015). https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2606839
Alhammadi, S. “Analyzing the Role of Islamic Finance in Kuwait regarding Sustainable Economic Development in Covid-19 Era.” Sustainability 14, no. 2 (2022): 701.
Ali, S., N. Shirazi, and M. Nabi. “The Role of Islamic Finance in the Development of the IDB Member Countries: A Case Study of the Kyrgyz Republic and Tajikistan.” Islamic Economic Studies 21, no. 2 (2013): 121-30.
Alvi, E., and A. Senbeta. “Does Foreign Aid Reduce Poverty.” Journal of International Development 24 (2012): 955-76.
Aracil, E. “Corporate Social Responsibility of Islamic and Conventional Banks.” International Journal of Emerging Markets 14, no. 4 (2019): 582-600.
Arellano, M., and S. Bond. “Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations.” Review of Economic Studies 58, no. 2 (1991): 277–97.
Asearya, A. “The Role of Islamic Social Finance During Covid-10 Pandemic in Indonesia’s Economic Recovery.” International Journal of Islamic and Middle Eastern Finance and Management 15, no. 2 (2023): 386-405.
Asghar, N., Z. Hussain, and H. Rehman. “The Impact of Government Spending on Poverty Reduction: Evidence from Pakistan 1972 to 2008.” African Journal of Business Management 6 (2012): 845-53.
Auda, J. “Maqasid Al-Shariah as Philosophy of Islamic Law: A Systems Approach.” Islamic Studies 47, no. 3 (2008): 371-96.
Azman, S.M.M.S., and E.R.A.E. Ali. “Islamic Social Finance and the Imperative for Social Impact Measurement.” Al-Shajarah: Journal of the International Institute of Islamic Thought and Civilization (ISTAC), (2019). https://journals.iium.edu.my/shajarah/index.php/shaj/article/view/896/387
Bond, S.R. “Dynamic Panel Data Models: A Guide to Microdata Methods and Practice.” CEMMAP Working Paper, No. CWP09/02, Centre for Microdata Methods and Practice (CEMMAP), (2002). https://doi.org/10.1920/wp.cem.2002.0902
Bougatef, K. “The Impact of Corruption on the Soundness of Islamic Banks.” Borsa Istanbul Review 15, no. 4 (2015): 283-95.
Dahmardeh, N., and M.H. Tabar. “Government Expenditures and its Impact on Poverty Reduction: Empirical from Sistan and Baluchestan Province of Iran.” International Journal of Academic Research in Economics and Management Sciences 2, no. 1 (2013): 251.
Daly, S., and M. Frikha. “Islamic Finance in Favor to Development and Economic Growth: An Illustration of the Principle of “Zakat”.” Arabian Journal of Business and Management Review 5, no. 5 (2015): 2-10.
Danlami, M., M. Abduh, and L. Razak. “Social Finance, Institutional Quality and Stability of Islamic Banks: Evidence from four Countries.” International Journal of Social Economics 50, no. 8 (2023): 1186-216.
Franzoni, S., and A.A. Allali. “Principles of Islamic Finance and Principles of Corporate Social Responsibility: What Convergence?” Sustainability 10, no. 3 (2018): 1-11.
Guled, A.A. “The Effects of Islamic Finance Practices on Social Development in Mogadishu, Somalia.” EPRA International Journal of Economics, Business and Management Studies 9, no. 4 (2022): 15-24.
Hamoudi, H., Z. Hadi, and S. Abdul Rahman. “The Impact of Islamic Finance in Promoting Education for Sustainable Development.” Iraqi Administrative Sciences Journal 2, no. 4 (2018): 20-45.
Iannaci, D., and Gideon, M.J. “Islamic Finance and Social Finance, an Opportunity for Social Enterprises.” European Journal of Islamic Finance, 1 (2020): 1-12.
Islam, Md. K., S.T. Mitu, R. Munshi, and R. Khanam. Perceptions about the Common Malpractice of Zakat Paying in Bangladesh during Covid-19 Pandemic: Evidence from the Supply Side. Journal of Islamic Accounting and Business Research 14, no. 3 (2023): 361-78.
Jan, A., M.N. Mata, P.A. Albinsson, J.M. Martins, R. Hassan, and P.N. Mata. “Alignment of Islamic Banking Sustainability Indicators with Sustainable Development Goals: Policy Recommendations for Addressing the Covid-19 Pandemic.” Sustainability 13, no. 5 (2021): 2607.
Jatmiko, W., A. Iqbal, and M. Ebrahim. “On the Ethicality of Islamic Banks’ Business Model.” British Journal of Management 35 no. 1 (2023): 115-36.
Kassim, S. “Islamic Finance and Economic Growth: The Malaysian Experience.” Global Finance Journal 30 (2016): 66-76.
Kedir, A., A. Elhiraika, Z. Chinzara, and D. Sandjong. “Growth and Development Finance Required for Achieving Sustainable Development Goals (SDGS) in Africa.” African Development Review 29, S. 1 (2017):15-26.
Khan, Q., A. Zafar, S. Shabbir, and R. Kouser. “Islamic Finance: A Catalyst for Sustainable Development of Developed and Developing Countries.” Sustainable Business and Society in Emerging Economies 4, no. 1 (2022): 205-18.
Khavarinezhad, S., P. Biancone, and V. Jafari?Sadeghi. “Financing in the Islamic System and Sustainable Economic Development of Selected Islamic Countries.” European Journal of Islamic Finance, no. 19 (2021): 18-23.
Litardi, I., G. Fiorani, and D. Harb. “Corporate Social Responsibility in Islamic Culture. Comparison between Western CSR and Islamic CSR: Focus on Islamic Reporting Initiative and Islamic Financial Institution.” European Journal of Islamic Finance, (2019): 1-8.
Maddala, Gangadharrao S., and Kajal Lahiri. Introduction to Econometrics (4th Edition). Hoboken, NJ: Wiley, 2009.
Mahembe, E., and N.M. Odhiambo. “Foreign Aid and Poverty Reduction: A Review of International Literature.” Cogent Social Sciences 5 (2019): 1-15.
Musiba, C. “The Impact of Government Expenditure on Pro Poor Sectors in Reducing Poverty: The Case of Kibaha District.” A Thesis for Master of Science in Economics, Mzumbe University, (2013).
Nyamboga, T.O., B.O. Nyamweya, A. Sisia, and G.E. George. “The effectiveness of Poverty Reduction Efforts in Kenya: An Evaluation of Kenyan Government's Policy Initiatives on Poverty Alleviation.” International Affairs and Global Strategy 23 (2014): 30-40.
Oriavwote, V.E. and A. Ukawe. “Government Expenditure and Poverty Reduction in Nigeria.” Journal of Economics and Public Finance 4, no. 2 (2018).
Pericoli, A. “Islamic Finance and Charity in the Muslim World: The Role of the Islamic Development Bank in Financing Aid.” Eurasian Business & Economics Journal 5, no. 2 (2020): 113-33.
Prasetyo, A., J. Effendi,and T. Nursyamsiah, “The Effectiveness of Islamic Microfinance Distribution on Microbusiness Owner’s Poverty Alleviation (Case Study: BMT Bina Masyarakat Purworejo).” Afkaruna 14, no. 1, (2018): 1-26.
Rahman, A., and S.N. Asyifaa. “The Role of Islamic Social Finance on Community Welfare in Indonesia.” Proceedings of the International Conference on Research and Education Development (ICRED) (2021): 476-84.
Raimi, L., P. Ashok, and A. Ismail. “Corporate Social Responsibility, Waqf System and Zakat System as Faith-Based Model for Poverty Reduction.” World Journal of Entrepreneurship, Management and Sustainable Development 3, no. 10 (2014): 228-42.
Roodman, D. “How to do xtabond2: An Introduction to Difference and System GMM in Stata.” Stata Journal 9, no. 1 (2009): 86-136.
Rusydiana, A.S. “Islamic Finance and Sustainable Development Goals (SDG): A Bibliometric Review.” Journal of Islamic Economics Literatures 1, no. 1 (2020): 1-10.
Saba, I., A. Khan, and H. Jawed. “Islamic Finance and SDGs: Connecting Dots.” In Islamic Finance and Sustainable Development (2021): 47-67.
Saleem, A., D. Ahmad, R.M.A. Zahid, and J. Sági. “Financial Intermediation Through Risk Sharing Vs Non-Risk Sharing Contracts, Role of Credit Risk, and Sustainable Production: Evidence from Leading Countries in Islamic Finance.” Environment Development and Sustainability 26, no. 5 (2024): 11311-1341.
Sarker, Md. N.I., M.N. Khatun and G.M. Alam. “Islamic Banking and Finance: Potential Approach for Economic Sustainability in China.” Journal of Islamic Marketing 11, no. 6 (2019):1725-741.
Shabbir, M., N. Kassim, M. Faisal, M. Abbas, and Y.M. Sabti. “Poverty Reduction through Islamic Modes of Finance: The Way Forward.” Journal of Social Sciences Research 11 (2018): 58-65.
Sheikh, I. “Prospects for Interest-Free Micro Finance in India: An Empirical Study.” Journal of Islamic Economic and Business Research 1, no. 1 (2021): 15-39.
Siddiqi, M.N. “Islamic Banking and Finance in Theory and Practice: A Survey of State of the Art.” Islamic Economic Studies 13, No. 2 (2006): 1-48.
Siddiqui, M.N. “Maqasid-e-Shariat (Objectives of the Shari’ah).” Markazi Maktabah-e-Islami: New Dehli (2009).
Silva, J., and U. Nizami. “How Islamic Finance Contributes to Achieving the Sustainable Development Goals.” OECD Development Policy Papers no. 30 (2020): 1-44.
Sofian, F.N.R.M., and R. Muhamad. “Corporate social responsibility (CSR) and Islamic Banks: A Synthesis of Literature Review.” International Conference on Accounting Studies (ICAS) (2016): 143-49.
Tebaldi, E. and R. Mohan. “Institutions and Poverty.” The Journal of Development Studies 46, no. 6 (2010): 1047-066.
Umar, U.H., A.J. Baita, M.H.B. Haron, and S.H. Kabiru. “The Potential of Islamic Social Finance to Alleviate Poverty in the Era of COVID-19: The Moderating Effect of Ethical Orientation.” International Journal of Islamic and Middle Eastern Finance and Management 15, no. 2 (2022): 255-70.
Walaa, J.A. “Using Blockchain in Waqf, Wills and Inheritance Solutions in the Islamic System.” International Journal of Economics and Business Administration 9, S. 2 (2021): 101-16.
Wudil, A.A. and R. Muhammad. “Al-Mubadarat Al-Riyfia: An Islamic Finance Product for The Underserved Segment and the Third Sector of the Economy.” Journal of Emerging Economies and Islamic Research 11, no. 3 (2023): 65-79.
Wulandari, P. “Enhancing the Role of Baitul Maal in Giving Qardhul Hassan Financing to the Poor at the Bottom of the Economic Pyramid.” Journal of Islamic Accounting and Business Research 10, no. 3 (2019): 382-91.
Downloads
Published
How to Cite
Issue
Section
