The Role of Religious Faith in Financial Exclusion

Issue: Jan-Feb 2021 Financial inclusion may be thought of at two levels: having a bank account, reflecting access to banks and financial literacy; and financial deepening, as reflected in operating interest-bearing deposit or loan accounts. As a sizable proportion of the Muslims in the country subscribes to the belief that ‘Riba is Haram’, such religious prohibition to subscribe to interest-bearing banking products may lead to exclusion from financial deepening. While many countries have overcome this deficiency by hosting Islamic banking in their conventional banking systems, India is an exception. The objective of this paper is to examine the prevalence of financial exclusion owing to religious faith in India. A careful analysis of district-level data on deposit accounts, and population census data on urbanization and religious composition, suggests exclusion of Muslims from financial deepening. Regression analysis confirms that faith-based financial exclusion is significant in many states of India. A few private initiatives of recent years to offer interest-free banking services have attracted a large clientele, indicating unmet demand. The lack of a policy response means denying financial inclusion for large segments of population.