The Role of Religious Faith in Financial Exclusion

An Analysis of Financial Deepening in India



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.


Islamic Banking, Interest-free Banking, Financial Exclusion, Financial Deepening, Religious Faith, Urbanisation, Deposit Accounts

Authors Bio

D Narayana

Prof. D. Narayana, Ph D (Indian Statistical Institute, Kolkata) is currently member of the Contributory Pension Review Committee of Government of Kerala. He was the Director of Gulati Institute of Finance and Taxation (GIFT), Thiruvananthapuram during 2012-13 and 2016-19. He was holding the position of RBI Chair at Centre for Development Studies, Trivandrum before taking over as Director of GIFT in 2012. He was a Fulbright Fellow at Harvard Centre for Population and Development Studies and a Visiting Professor at the Unit of International Health at University of Montreal.

Shagishna K

Ms Shagishna K completed her M A in Economics from University of Kerala, Kariavattom Campus in 2019. She completed six months Research Associateship Program in Inter University Centre for Alternative Economics (IUCAE), University of Kerala and produced a report titled ‘ Performance of Interest –free and Conventional Non- Banking Financial Companies in Kerala: A Comparative Study’. Currently, she is working as a Research Associate of D Narayana in the Contributory Pension Review Committee of Government of Kerala.