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Research article
Unconventional banking and poverty reduction: A regression
analysis with policy recommendations for Hail
Sulaiman Mohammed
a
,
*
, Saleh Saud Alsaif
b
, Attallah alqataan
c
,
Abdelhaleem Abdelhalee
d
, Moawia Farah
e
a
Department of Economic and Finance, College of Business Adminstration, University of Ha’il, Saudi Arabia
b
Department of Economic and Finance, College of Business Adminstration, University of Ha’il, Saudi Arabia
c
Self-Development Department, Deanship of Prepratory, University of Ha’il, Saudi Arabia
d
Management Department, College of Business Adminstration, University of Ha’il, Saudi Arabia
e
Applied College, University of Ha’il, Saudi Arabia
ARTICLE INFO
Keywords:
Financial development
Bank performance
Poverty
Economic growth
GDP
Legal origin
Hail development
Competitive advantage
ABSTRACT
The present study addresses a signicant omission in the literature by examining the role of non-
traditional nancial organizations in poverty reduction. Previous research has primarily focused
on the direct impact of commercial banks on poverty, neglecting the contribution of other types of
nancial institutions. This research posited that Islamic banks are anticipated to assume a pivotal
function in mitigating poverty; nonetheless, more studies on the topic need to be conducted. This
research used the Partial Least Squares Regression technique to investigate the impact of Islamic
banks on poverty alleviation in several developing nations from 2013 to 2019. The empirical data
demonstrates a direct correlation between the overall assets of Islamic banks and some evident
characteristics. The heightened acquisition of holdings by Islamic banks indicates a decrease in
poverty. Furthermore, a statistically signicant correlation exists between the legal framework
and poverty alleviation. It is crucial to acknowledge that the research is limited by the intrinsic
limits imposed by the accessible information on Islamic banks and the specic temporal limita-
tions of the study. Future academic research should aim to increase the sample size and cultural
and social factors and expand the time frame to understand the intricate function of Islamic banks
in reducing poverty entirely. This paper is helpful to many policymakers in developing countries,
including Hail development plans in Saudi Arabia.
1. Introduction
1.1. Direct contribution of banks in poverty alleviation
Banks’ contribution to poverty reduction has garnered signicant attention from scholars,[1–4]. Banks provide nancial services
that empower individuals across various income categories to overcome economic challenges. Firstly, banks offer avenues to savings
for the impoverished, which, when accumulated, may lead to the establishment of their businesses, thus improving their living
standards. Moreover, the loans offered by banks are essential in elevating individuals’ income levels as they address their nancial
* Corresponding author.
E-mail address: sul.mohammed@uoh.edu.sa (S. Mohammed).
Contents lists available at ScienceDirect
Heliyon
journal homepage: www.cell.com/heliyon
https://doi.org/10.1016/j.heliyon.2024.e35164
Received 14 February 2024; Received in revised form 20 July 2024; Accepted 24 July 2024
Heliyon 10 (2024) e35164
2
difculties. Hence, banks have a direct impact and endeavor to mitigate poverty,[5]. However, the quantication of banks’ roles in
alleviating poverty is debatable. We, the authors of this paper, have found that banks are considered a part of nancial and economic
development when exploring their role in poverty alleviation,[5,6]. Capitalization, micronance institutions, non-banking in-
stitutions, banking institutions, and private credit are proxies for nancial development. In contrast, economic growth is assessed via
Gross Domestic Product, GDP growth rate, or ination. Banks, in general, play a vital role in boosting economic development; they also
give employment possibilities, loans to start company ventures, tax revenue, and charitable contributions to the disadvantaged. The
development of the nancial sector helps to alleviate poverty, [7]. Financial systems generally serve as a mechanism for mobilizing
savings, allocating capital funds, monitoring the usage of money, and controlling risk in support of the economic development process,
[8].
On the contrary, recently, scholars have been interested in the environment of non-traditional banking, (R. A. [9–11]). The
recorded evidence highlights the benecial impact of micro-nance organizations in alleviating poverty,[12,13]. Nevertheless, there is
a lack of quantication in research examining the impact of Islamic banking on poverty reduction since many of these studies have
primarily focused on the setting of conventional banking[14–16], They attempted to examine the roles of banks in poverty alleviation
empirically, but they only focused on conventional banks, ignoring the signicant role that Islamic banks play in poverty alleviation,
especially those in Islamic states that prefer not to deal with traditional banks, [11,17].
The key differentiating factor between Islamic and conventional banks is the rejection of interest-based operations in commerce,
which are seen as harmful to society. Due to their negative impact on individuals and institutions, Islamic Sharia forbids practices such
as gambling, smoking, and drinking [11]. Islamic banking adheres to specic principles and regulations. It encompasses different
forms such as Mudarabah, which involves sharing prots and losses in business ventures, Wadiah for safekeeping, Ijar for leasing,
Musharakah for joint ventures, Murabahah for cost plus nance, Hawala for transfers, Takaful for Islamic insurance, and Sukuk for
Islamic bonds. During these activities, the bank may serve as a loan provider and a business partner; see Fig. 1.
The 1998 crisis conrmed that Islamic banks have a higher intermediation ratio and asset quality and are better capitalized than
conventional banks [18]. The research examines the nancial development of Islamic banks in terms of their total assets, economic
growth in terms of their gross domestic product (GDP), and the poverty rate in each nation. The research also focused on the country’s
legal background. Since only a small amount of empirical research has been undertaken on the roles of Islamic banks in economic
development and poverty reduction, it appears worthwhile to explore the inuence of Islamic banks on poverty reduction in a few
countries.
It is worth noting that exploring the unconventional banking function is essential since prior studies have yet to address this area
adequately,[19–21]. Additionally, the current research contributes to its authenticity by considering the effect of legal origin, namely
the rule of law,[22–24]. Indeed, a few research investigations have shown the signicant role of good governance in reducing poverty
in developing countries, [22,24]. These studies have found a benecial inuence on poverty alleviation, particularly regarding factors
such as the frequency of meetings, audits, supervision, domestic legislation, and adherence to a code of ethics, (R. [25]). Hence, the
legal origin plays a signicant role, especially in the context of non-traditional banks in developing countries.
1.3. Importance, objectives, and the problem statement
This study is necessary due to various facts. Firstly, it proposes a new dimension to exploring the contribution of non-traditional
banks by using Islamic banks’ total assets as a unique construct. Secondly, the study chose the context of developing countries as
poverty reduction is a priority for many governments, particularly in the Middle East and Africa, where there are high levels of poverty.
The objective of the current study is to investigate the relationship between the total assets of Islamic banks and poverty reduction
Fig. 1. Islamic nance growth.
Source: World Bank report
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Heliyon 10 (2024) e35164
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to determine the extent to which these banks’ nancial performance contributes to alleviating poverty.
The research questions are as follows.
I. How does economic growth independently contribute to poverty reduction, and how does it interact with the total assets of
Islamic banks in inuencing poverty levels?
II. To what extent do legal origins inuence the effectiveness of Islamic banks in reducing poverty?
III. What are the critical policy implications derived from the ndings, and how can policymakers leverage the insights to enhance
the impact of Islamic banks on poverty reduction, considering the interplay of economic growth and legal origin?
This research is necessary for several methodological and contextual reasons. First of all, using the total assets of Islamic banks as a
distinct construct adds a fresh perspective to the investigation of the role played by non-traditional banks. This strategy is novel
because it distinguishes Islamic banks from other kinds of banks, such as commercial banks, and offers a more accurate way to gauge
their success. Second, because many governments continue to prioritize reducing poverty—especially in the Middle East and Africa,
where high poverty rates are standard—the emphasis on emerging nations is essential. Policymakers may benet signicantly from
knowing Islamic banks’ roles in these areas. Thirdly, given their distinct legal roots, there is a sizable vacuum in quantitative research
carried out on the contribution that Islamic banks make to ght against poverty. This research closes the knowledge gap by presenting
actual data on the relationship between poverty alleviation and Islamic banks’ nancial successes. Finally, the research seeks to
identify important policy ramications that governments and nancial regulators may use to better capitalize on the distinctive
qualities of Islamic banks and lessen poverty. Through an analysis of the relationship between Islamic bank performance, legal origin
and economic growth, this paper offers practical recommendations for enhancing nancial inclusion and economic development in
emerging nations.
This paper is appealing because of the way it measures the impact of Islamic banks on reducing poverty. Through an analysis of the
overall assets of Islamic banks and their relationship to legal roots and economic development, the study offers fresh perspectives not
thoroughly covered in other studies. The study provides a nuanced understanding of how various regulatory environments affect the
performance of Islamic banks in reducing poverty. It also offers policymakers practical recommendations for designing more effective
strategies for leveraging Islamic banks to combat poverty. These contributions include adding a new dimension to the eld of Islamic
banking research by using the total assets of Islamic banks as a key variable in assessing their impact on poverty reduction.
Furthermore, the research closes a gap in the literature by providing actual data on the connection between Islamic banks’ nancial
success and poverty reduction in developing nations. It advances the conversation on nancial inclusion and economic growth.
1.2. Poverty reduction in developing countries
Developing countries are racing toward poverty alleviation, China has shown positive performance towards poverty alleviation,
and many developing countries have shown improvement in poverty numbers, [26]. According to current studies [27,28], China
achieved the most signicant poverty reduction internationally by lifting 738 million people out of poverty from 1990 to 2017.
Vietnam has decreased its poverty rate from 53.3 % in 1993 to 3.2 % in 2018 by primarily focusing on enhancing agricultural output,
implementing market reforms, and implementing specic social programs. Indonesia signicantly reduced poverty rates, dropping
from 61.7 % in 1991 to 9.2 % in 2018. India successfully alleviated poverty for 271 million individuals from 2005/6 to 2019/21,
primarily due to economic expansion, job creation measures, and rural development projects. Bangladesh successfully decreased its
poverty rate from 53.2 % in 1993 to 21.0 % in 2016 via economic development, investments in education and healthcare, and the
implementation of micronance programs. Ethiopia has made signicant strides in decreasing its poverty rate, which dropped from
44.2 % in 1996 to 23.2 % in 2019. This achievement may be mainly attributed to advancements in agriculture, investments in
healthcare and education, and the implementation of social security programs. Ghana reduced its poverty rate from 56.7 % in 1991/92
to 23.4 % in 2016/17. This positive change was driven by economic development, policies prioritizing the well-being of the poor, and
investment in human resources. Rwanda has made remarkable strides in decreasing its poverty rate, which dropped from 59.7 % in
2005/06 to 35.5 % in 2016/17. This achievement may be attributed to the country’s focus on rural development, investments in
agriculture, and the implementation of social protection programs, see Table 1. However, this record of accomplishment has yet to be
consistent. Several nations have seen minor alleviation in poverty or even a rise in poverty levels, see Table 1. The underwhelming
result might be partially attributed to the lackluster economic development seen by most African nations throughout the 1980s and
early 2020s. Signicant economic disparity, consistently seen in several Latin American nations throughout time, maybe an essential
Table 1
Poverty reduction in developing regions (1990–2020).
Region Poverty Rate in 1990 (%) Poverty Rate in 2020 (%) Change (1990–2020)
East Asia & Pacic (developing countries only) 49.7 5.0 −44.7
Latin America & Caribbean 48.7 25.2 −23.5
Middle East & and North Africa 32.6 24.9 −7.7
South Asia 44.3 22.1 −22.2
Sub-Saharan Africa 41.0 38.7 −2.3
Source: The World Bank (2023): Global Economic Prospects.
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factor. Therefore, substantial concerns have been raised about the driving force behind poverty reduction in developing countries.
Income growth has been the main driving force for the decrease in the average and rise in poverty. The analysis, however, reveals
signicant variations across regions and countries concealed by the overarching narrative of hegemonic development. Although
growth was the primary driver of poverty reduction or increase in most countries[26], the poverty rate signicantly inuenced poverty
dynamics in many nations.
In conclusion, while the evidence indicates substantial advancement in alleviating poverty in developing countries, much work still
needs to be done. To achieve the Sustainable Development Goal of eradicating poverty by 2030, it is crucial to adopt a comprehensive
strategy that tackles the underlying causes of the poverty rate, focuses on inclusive and sustainable economic growth, empowers local
communities through specic interventions, and utilizes innovative nancing methods. Only by doing so can policymakers accurately
depict a comprehensive portrayal of a society in which collective wealth is actualized for every individual.
2. Literature review
2.1. Underlining theories
To comprehend the factors contributing to poverty reduction, it is essential to conduct our study using a sound theoretical foun-
dation. This foundation should be built upon frameworks that outline the role of Islamic banks in poverty reduction. Islamic banks start
the process by allocating a portion of their overall assets as legally mandated contributions. This sum of money is then allocated to
charitable causes and used to eradicate poverty, [11,29]. Taking a bank’s total assets into account reects, in some way or another, the
contribution of specic Islamic banks to the poverty reduction effort, (Mohseni-Cheraghlou, 2017). Society represented in bank
customers is regarded as one of the stakeholders of Islamic banks; see Fig. 2. Islamic banks as businesses are more suitable with
stakeholders’ theory [30]. The importance of Islamic banks having Corporate Social Responsibility (CSR) explains the reasons behind
the selection of Islamic banks’ total assets as an indicator of their contribution to poverty reduction.
Islamic banks are required by law to give a certain amount of their total assets to charity projects that strive to eliminate poverty.
This approach is rooted in the principles of Islamic nance, which prioritize social justice and economic equality. By considering
banks’ overall assets, we may assess the level of impact that certain Islamic institutions have on reducing poverty. This is consistent
with stakeholder theory, which implies that stakeholders contribute to a rm’s performance and advocate for enterprises to prioritize
the interests of all their stakeholders, including the wider community,[31]. The signicance of Islamic banks’ CSR endeavors is vital to
their operating philosophy. Islamic banks provide money from their holdings to diverse humanitarian activities, including those
specically targeted at mitigating poverty. By including these contributions into their overall assets, Islamic banks showcase their
dedication to the betterment of society, satisfying their obligations to stakeholders as prescribed by Stakeholder Theory. This theo-
retical framework offers a solid basis for our research, connecting the overall resources of Islamic banks to initiatives aimed at reducing
poverty. Incorporating total assets as a metric in our model is warranted due to the banks’ involvement in CSR and their responsibility
to contribute to societal initiatives. This relationship guarantees that our study is based on thoroughly comprehending the banks’ dual
function as nancial entities and catalysts for societal transformation. This study focuses on the relationship between the total assets of
Islamic banks and their impact on poverty reduction. We want to demonstrate the practical implications of Stakeholder Theory within
the framework of Islamic nance and social responsibility.
Fig. 2. Stakeholder theory in banking, clients as one of the stakeholders.
Source: VB bank website, Zurich
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Furthermore, the legitimacy theory debates the position of corporations from a general societal perspective; it denes an under-
lying compact between the company and society to satisfy society’s expectations to validate the company’s existence, [32]. As a result,
Islamic banks with higher expectations of societal development and well-being must provide more information on CSR. Furthermore,
Islamic banks assert that they are founded on Islamic principles and values. This is an ideal assumption; the immanent critique
contends that ideal assumptions vary from reality. Nevertheless, Islamic banks as corporations create a poverty alleviation contri-
bution through entrepreneurship construction, corporate social responsivity, and charity integration [32,33]. In relation to the
importance of examining the legal origin’s inuence on the relationship between bank performance and poverty reduction, we based
our analysis on Legal Origin theory,[34]. This idea asserts that a nation’s legal traditions and institutions substantially impact several
facets of its economic and nancial progress,[30,34,35]. Legal scholars frequently categorize legal traditions based on their historical
origins, with two notable classications being the Common Law tradition and the Civil Law tradition, [34,36].
2.2. Financial development, micronance, Islamic banks, and poverty
Financial development is believed to play a vital role in poverty reduction through the nancial services offered in the banking
sector [37], which fosters growth that results in poverty reduction, (Beck et al., 2008). When a wide range of nancial products and
services are offered to the excluded people through conventional banking, their income will grow, and poverty will be minimized [7].
While researching this, it was found that a positive relationship exists between nancial development and economic growth [38].
As well as this, a positive relationship between the average income of the population and the income of the poor [39–42] or access by
the poor to the nancial services, represented their ability to access the loans easily [43,44]. According to Zhuang [45], the more the
poor access nancial services, the better their chances are. However, not all the studies supported the idea of a positive relationship
between nancial development, economic growth, and poverty reduction, and this has been proved by linking the stock market and
bank development to the income level of the poor [46]. The studies reported a signicant effect in reducing the poverty rate in
developing countries, [7,37]. The review further reported these assets. Different methods measure nancial development, such as
credit, gross domestic product, and bank assets. Poverty can also be measured in other ways, such as the poverty rate, poverty gap, and
micronance institutions; the methods of analysis are ordinary least square, two-stage least square, and GMM, [47–49].
Furthermore, previous research focused on the impact of micronance on poverty using Islamic banks as nancial development
indicators, [5,50]. Indeed, compared to Grameen bank microcredit respondents, Islamic bank microcredit respondents have a more
extensive history of providing credit for income-generating activities to decrease poverty, [51]. Islamic charity effectively alleviates
short- and long-term poverty, especially by integrating Islamic social and commercial nancing into a unied paradigm, [52]. Islamic
nance mitigates short- and long-term poverty within the Indonesian setting using the autoregressive distributed lag method, a method
used to analyse the relationship between bank performance and poverty reduction, [10].
Islamic micronance institutions act as a solution for meeting the poor’s needs by providing them with the required nancial
products and services that increase their income without harming or increasing their debts. Islamic nancial institutions play a sig-
nicant role in funding the decit units from the surplus units in the economic system, eventually leading to more economic activities
and reducing poverty. The basic principle of Islamic nance does not rely on the interest rate as in conventional banking; it is based on
prot and loss sharing. It also does not allow unfair practices or set a predetermined rate for investment return. This reduces the
nancial burden on the individuals, particularly the poor ones, and allows for sharing loss if incurred or prot if received. Islamic
banks are rapidly growing; they have recorded a high growth rate in size and number and operate in about 60 countries worldwide.
Islamic banking is predicted to control over 50 % of the savings in Islamic countries within the next decade [53]. Many economic ills,
such as poverty, inequalities of income and wealth, economic instability, social and economic injustice, and ination of monetary
assets, are all in conict with the value system of Islam [54]. Islamic nance is directed toward full employment, economic well-being,
equal distribution of income, and growth of the economy as this shall lead to socio-economic justice, more savings, and productive
mobilization and stability in the value of money (Chapra, 2000, cited in Ref. [55]).
In short, Islamic nancial institutions do not work based on the principle of prot maximization; their system is integrated with
moral and ethical values that aim to make a social change in society. They also do not depend on the supply of tangible collateral,
leading to better income and wealth distribution. Integrating moral values in their system allows poor people access to income and
greatly benets social justice and long-term growth, [56].
However, total assets might more accurately reect the role of Islamic banks. To conclude, we have chosen Islamic banks’ total
assets to indicate their contribution towards poverty alleviation. Based on the above discussion, it seems interesting to investigate the
role of Islamic banks in reducing poverty and improving the standard of living. Accordingly, the following hypothesis is developed.
H01. The total assets of Islamic banks positively impact poverty mitigation in developing countries.
2.3. Economic factors and poverty
Poverty has always been categorized as a multifaceted phenomenon challenging the growth and development of economies
worldwide, particularly in developing countries. It is not conned to only income shortage; it may also include poor education,
malnutrition, housing and shelter. Poverty is a complex issue requiring a joint effort of various sectors in each country to mitigate it. In
cooperation with international organizations, local governments have attempted to minimize the poverty rate among their citizens by
implementing different policies and economic reforms to meet these goals.
However, despite this effort, it is still reported that there are about 900 million people globally trapped in the poverty cycle with
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extreme poverty status. One of the strategies for poverty reduction is the concentration on economic growth and development, as it is
believed to function as a driver and a good tool for mitigating poverty. Economic growth might help in poverty reduction, but it should
be noted that it is not the only tool for cutting the poverty rate to below 3 % by 2030 unless it has been accompanied by necessary
policies that guarantee the maximum benets of the job creation process and growth [57]. It is of utmost importance to policymakers
since it deals with population welfare [58]. Furthermore, it may result in more sophisticated issues such as misallocation of resources,
malnutrition and an increase in fertility.
Previous investigations reported that economic growth plays a crucial role in the diminishing incidence of poverty [26]. Also,
continuous economic reforms are a necessary step in the process of poverty lessening, similar to the 1990 Indian economic reform [59].
Economic growth is said to achieve its goals when it allows marginalized people to access distinct nancial services and use them to
establish their income-generating activities, ultimately reducing poverty. This task is conducted by micronance institutions and Is-
lamic ones, too. The required credit for poor individuals should be provided effortlessly with low interest rates to allow them to benet
from tiny loans. Moreover, many previous studies revealed that economic growth development can reduce poverty (R. et al., 2004; R.
et al., 2003; [60]).
The xed costs and indivisibilities also prevent poor people from receiving the required cash, limiting their growth. Poverty
dampens the growth of the economy with market imperfections and failure, xed costs and strategic complementarities [61]. Thus,
once the economy develops and market imperfection lessons, access to capital in various forms may be expected to widen, and in-
equalities will begin to lessen with continued economic growth [62].
A state is reported to have excellent and efcient economic growth when its growth is affected by a change in the people’s income
distribution. This is because wealth distribution is an integral part of the relationship between economic growth and poverty reduction;
thus, it is essential to look at it while measuring the effectiveness of economic growth. Economic growth needs to focus on areas where
most people live, such as the rural areas, meaning any development should incorporate initial education and necessary infrastructure
for bettering the rural poor. The mere concentration on the per capita income will not be a successful strategy for poverty reduction.
For a given rate of growth, the extent of poverty reduction relies on how the income distribution changes with changes in growth and
on initial inequalities in income, assets and access to opportunities to allow the poor to share the growth [63]. The existence of a high
percentage of poor individuals is an indicator of poor economic growth [64]. Inequalities in wealth imply inequalities in access to
productive assets, resulting in the underutilization of the productive potential of the poor (Ferreira, 1999).
From the above discussion, economic growth is a necessary tool for poverty reduction regardless of the measurement used, as it
allows the sharing of income and wealth and gives poor individuals a chance to start their income activities. Most importantly,
economic growth should ensure a positive change in income and living standards to claim that it is making a positive change.
Accordingly, it seems motivating to empirically investigate the relationship between economic growth and poverty in a selected
sample of developing countries. For that, the following hypothesis is developed.
H02. The economic growth represented by GDP positively impacts poverty mitigation in developing countries.
2.4. Legal origin, banks, and poverty
Studies in the last decade have shown the relationship between law systems and the nancial development of the state or com-
panies operating in its territory, [65,66]. Indeed, La Porta et al. (1999) believe that civil law states have a more critical role in
regulating business than states with common law. Applying the empirical models to Islamic banks at different levels requires
considering legal history; literature shows that countries whose legal systems are based on English common law differ from countries
whose legal systems are based on French law, [67]. The history of English and French law is a fascinating historical story with sig-
nicant implications for institutional economics. Legal origin is used in literature as a proxy for exogenous historical factors, (et al.,
2021). Nonetheless, in many nations, legal origin is considered a hindrance rather than an opportunity for Islamic banking, [68].
Previously, one or more of the primary authors of this research discovered that their legal origin may inuence the performance of
Islamic banks in emerging nations, [29,30]. As a result, we propose the following hypothesis.
H03. The legal origin positively impacts poverty mitigation in developing countries.
2.5. The nexus between Islamic banks and poverty reduction
The Islamic banking industry contributes to economic expansion by supplying employment and investing capital. However,
quantifying the impact of several types of banking on poverty is still in its infancy. In addition, the nancial accounts of these banking
institutions always contain a gift to the impoverished in the form of a donation known as Zakat [69,70]. This sum is claimed to
contribute to reducing poverty. Nonetheless, there is abundant opportunity to empirically examine this assumption by measuring
nancial progress using Islamic institutions as proxies. In high poverty-level clusters, overall assets, deposit funds and Islamic bank
funding show a substantial negative link with poverty [71,72].
In addition, increasing funding for Islamic banks will reduce poverty. However, growth in total assets and the number of branch
networks will impact the rising poverty levels, as will an increase in total assets and network branches. One possible explanation is that
a large portion of community savings backs Islamic banks’ assets and that Islamic banks’ distribution of nancing to the community is
still being determined [73].
Achieving sustainable development goals (SDGs) has been taken into consideration by Islamic banking research, particularly in
poverty reduction and economic growth; the ndings indicate that Islamic bank-specic and macroeconomic variables have a
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7
substantial inuence on poverty reduction and economic development, meaning that the Islamic Banking Industry (IBI) has the po-
tential to achieve SDGs and hence supports its promotion (Siddique et al., 2020). Furthermore, Wajdi Dusuki (2008) proposes that one
of the potential substitutes for Islamic banks to channel money to the needy is using a Particular Purpose Vehicle (SPV).
In conclusion, investigating the contribution of the Islamic banking sector to poverty reduction is a vacuum in the literature that
might be lled; this is what we are attempting to achieve in this research by compiling a list of nations with Islamic nance businesses.
Fig. 1 depicts the conceptual framework in which total assets quantify the contribution of Islamic banks to Gross Domestic Product.
3. Material and methods
3.1. Conceptual framework
The model below (see Fig. 3) shows that poverty has been described as the dependent variable, whereas Islamic banks are presented
as the independent variable. The independent variable is measured by three main measures: total assets, GDP and the legal region.
3.2. Source of data
Islamic banks are banks that adopt a system of banking based on prot and loss sharing rather than interest-earning; the guiding
principles of Islamic banks are the Islamic laws, and we measure the contribution of Islamic banks towards economic growth by the
total asset of Islamic banks compared to the economic growth in the specic country. The data about Islamic banks’ total assets are not
entirely complete; the source of data is the World Database for Islamic Banking and Finance (WDIBF). The data concerning the
economic growth of each country, as well as data on the poverty rate are derived from the World Bank database. Ultimately, the legal
environment data is sourced from articles [30]. The data covers 12 developing countries from the fourth quarter of 2013 to the last
quarter of 2019; the missing data, particularly in the poverty proxy, has been a challenge for the researchers; sometimes, we found
complete data for a quarter, but for some other quarters, we have dealt with data mathematically and approximately for some
countries. The data was analyzed using the Stata software, pooled linear regression was applied, and the panel xed the effect and
random effect. The appropriate results have been selected based on the Hausman test result.
Table 2 describes the study’s variables: the poverty rate, which measures the poverty percentage in the population; total assets,
which calculate the total assets of Islamic banks; and GDP, which measures economic growth. Finally, legal origin measures the legal
background. Table 3 indicates the countries selected for the study, depending on the availability of data about Islamic banks and
poverty.
3.3. Data analysis and Interpretation
For more accurate results, the study used the same model applied by (R. et al., 2005), which has been adopted from Ravallion
(1996); it is named as a growth-poverty model. It was used to investigate the impact of international migration on remittance and
poverty in developing countries. Thus, the same steps are followed; the nancial development is proxied by Islamic banks’ total assets
to the Gross Domestic Product. In contrast, poverty is measured by the poverty rate and economic growth by GDP. However, the legal
environment of different countries is measured by a dummy variable, and it indicates the legal system of each country starting from
0 to 6. See (Eq (1)).
Poverty Reduction =β0 +β1 * Total Assets of Islamic Banks +β2 * Economic Growth +β3 * Legal Origin +
ε
…. (1)
Variable Denitions.
•Poverty Reduction: The dependent variable is the change in the poverty rate from one period to the next.
•Total Assets of Islamic Banks: An independent variable, measured as the total assets of Islamic banks as a percentage of GDP.
•Economic Growth: An independent variable measured as the real GDP growth rate.
•Legal Origin: An independent variable, measured as a dummy variable, takes a value of 1 if the legal system is based on French civil
law and 0 if otherwise.
•β0, β1, β2, β3: The parameters to be estimated.
Fig. 3. Conceptual model of the study.
Source: Prepared by the Researcher (2024)
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8
•
ε
: The error term.
Full Equation
Poverty Reduction =β0 +β1 * (Total Assets of Islamic Banks / GDP) +β2 * GDP Growth Rate +β3 * French Civil Law +
ε
….(2)
Interpretation of Parameters.
•β1: The coefcient on total assets of Islamic banks which represents the change in poverty reduction associated with a one per-
centage point increase in the ratio of total assets of Islamic banks to GDP.
•β2: The coefcient on economic growth represents the change in poverty reduction associated with a one percentage point increase
in the real GDP growth rate.
•β3: The coefcient on legal origin represents the difference in poverty reduction between countries with French civil law legal
systems and those with other legal systems. See (Eq (2))
The pov is the measure of poverty in country i at the time r; GDP is the Gross Domestic Product of the country; total assets is the total
assets of the Islamic bank divided by the Gross Domestic Product; poverty rate measures people below the poverty line; legal origin
represents the legal background of the country; consistent with the poverty growth model explained by Ravallion [74]. More assets of
the Islamic bank has in general, represents growth in nancial development, which increases the GDP growth and reduces poverty.
Islamic banks are expected to improve economic growth, thus reducing poverty. The model analysis involved pooled regression, and it
was made sure that the data was declared panel data. Finally, the xed effect ordinary least square and random effect ordinary least
square were used.
Table 4 shows the descriptive statistics of the study variables, i.e., the poverty rate for the poverty variable, the total assets for the
nancial institutions, the GDP for the economic growth, and nally, the legal origin.
Table 2
Variables description and source.
Variables Description Source
Poverty
rate
Percentage of people living below the poverty line from the total population. The globaleconomy.com
Total-
Assets
Bank total assets are numbers taken from the balance sheets. World Database of Islamic Banking
and Finance.
GDP Gross Domestic Production in US dollars. World Bank
Legal
Origin
Measure the legal background using dummy variables between 1 and 4. English common law (1) or
French (2), German (3), or Nordic civil law (4)
(Porta et al., 2007).
Source: Secondary Data
Table 3
Countries selected for the current study.
No. Countries
1 Bahrain
2 Indonesia
3 Jordon
4 Kazakhstan
5 Lebanon
6 Malaysia
7 Nigeria
8 Oman
9 Pakistan
10 Saudi
11 Sudan
12 Turkey
Table 4
Descriptive statistics.
Variables Mean SD Min Max
Poverty rate 44.77 5.2 12.8 55.9
Total-Assets 41649 9685 371.99 5211
GDP 338.86 326.8 30.87 1000
Legal Origin 2.58 1.60 1 4
Source: Analysis of Secondary Data
S. Mohammed et al.
Heliyon 10 (2024) e35164
9
Table 5 above discloses the correlation among the study variables. The correlation between the GDP and the poverty rate is 62 %,
whereas the correlation between the legal origin and the poverty rate is 33 %. The correlation between total assets and Poverty rate is
−0.138 % Besides, the connection between the total assets and the GDP is reported as a weak correlation with 0.0245 %. Finally, the
total assets and the legal origin have a 36 % correlation, representing a moderate connection too. The highest correlation among the
study variables is found between the GDP and Poverty rate. There was a negative correlation between the total assets of the Islamic
banks and the Poverty rate.
3.4. Results
The analysis started with pooled linear regression; however, the model was not deemed suitable for an average pooled linear
regression analysis. Then, we declared the data as a quarterly panel data set and began with the xed and random effects. According to
the Hausman test, the random effects model makes more sense. It was found that there is a signicant negative relationship between
the total assets of the Islamic banks and the poverty rate at 5 %; the more the total assets of the Islamic banks, the less poverty is
achieved. At the same time, GDP is signicantly related to the poverty rate, which has a positive relationship; this indicates that the
economy’s growth corresponds to a higher poverty rate. The random effect analysis gave us the same result; no signicant difference
exists between random and xed effects. However, we applied the Hausman test to examine which test result was appropriate; the
Hausman result indicated that the random result was the appropriate one, see Table 6.
To sum up, the results indicate that when the total assets of Islamic banks as a measure of nancial development showed that there
is a signicant negative relationship at 5 % with poverty, the additional ownership of assets by Islamic banks corresponds to a
reduction in poverty, these results support the those from (Donou-Adonsou & Sylwester [75] and Honohan [76] who also found that
nancial development lowers poverty. However, the surprising result is that economic growth is positively related to poverty; this
result supports those from Ref. DFID ([77]) and Seven & Coskun [78]. The reasons could be attributed to the need to add additional
variables. Islamic banks showed a negative impact on poverty reduction because they serve small and medium enterprises, which
middle—and low-income people usually own. Our results add to the more excellent knowledge of how Islamic banking might impact
poverty reduction from a theoretical standpoint. Islamic banks must put aside a part of their assets for charity purposes and prioritize
providing nancial support to small and medium companies (SMEs) owned by persons with middle and low incomes. This helps to
redistribute wealth and encourages nancial inclusion. This aligns with Stakeholder Theory, which underscores the importance of
enterprises generating value for all stakeholders, including the wider community.
3.4.1. Robustness
We thoroughly evaluated the strength and reliability of our results by following a rigorous set of scientic procedures and including
additional factors. At rst, we used a pooled linear regression model to examine the data. Nevertheless, this method was considered
unsuitable for our dataset. As a result, we classied the data as a quarterly panel data set and used xed and random effects models to
address any possible differences across observations.
To strengthen the reliability of our study, we used supplementary variables such as ination rates. By including ination rates, one
can effectively account for macroeconomic factors that may independently impact poverty levels, apart from the variables being
primarily studied. This incorporation guarantees that the exclusion of relevant factors does not inuence our ndings and that the
associations we discover are not distorted by inationary forces. The Hausman test was used to ascertain the optimal model choice
between xed and random effects. The test ndings demonstrated that the random effects model was more appropriate for our
investigation, as shown by a non-signicant Chi-square value (p-value =0.558). This indicates that the effects distinct to each person
are not tied to the independent variables, which implies that the random effects model is a more suitable choice.
The results of our study indicate a strong inverse correlation between the overall assets of Islamic banks and the poverty rate, with
statistical signicance at the 5 % level. More precisely, as the overall assets of Islamic banks grow, poverty decreases, suggesting that
the development of Islamic banking plays a role in reducing poverty. The ndings of this study align with the earlier research con-
ducted by Donou-Adonsou and Sylwester [5] and Honohan [76], which also concluded that nancial development reduced poverty.
Furthermore, our examination uncovered a substantial positive correlation between GDP and the poverty rate, indicating that an
increase in economic development is associated with an elevation in poverty levels. This unexpected conclusion is consistent with the
research conducted by DFID [47] and Seven & Coskun [78], which indicates that the advantages of economic progress may not be
uniformly shared, thereby worsening poverty in some circumstances.
Upon examining the ination rate, we discovered that it had a substantial inuence on poverty rates. Rising ination tends to
gradually diminish the ability to buy goods and services, particularly impacting those with lower incomes and perhaps leading to an
Table 5
Correlation coefcient.
Poverty rate Total-Assets GDP Legal Origin
Poverty rate 1
Total-Assets −0.128 1
GDP 0.77 0.0245 1
Legal Origin 0.233 0.3407 1
Source: Analysis of Secondary Data
S. Mohammed et al.
Heliyon 10 (2024) e35164
10
increase in poverty rates. By including ination into our model, we guaranteed that the observed correlations between the total assets
of Islamic banks, GDP and poverty were not inuenced by inationary impacts. The robustness of our conclusions is further
strengthened by the consistency seen in both xed and random effects models, even after accounting for the ination rate. Regardless
of the many model parameters used, the fundamental conclusions remain consistent. The random effects study substantiated the
adverse inuence of Islamic banks’ aggregate assets on the alleviation of poverty, as well as the positive correlation between GDP and
poverty. Additionally, it underscored the damaging impact of ination on poverty.
To summarize, the ndings of our research are strong and dependable, backed by thorough statistical analysis and the incorpo-
ration of supplementary control factors like the ination rate. The strong inverse correlation between the aggregate assets of Islamic
banks and poverty highlights the vital function of Islamic banking in advancing nancial inclusivity and mitigating poverty.
4. Discussion
4.1. Total assets of Islamic banks and poverty rate
According to the ndings of this study, non-traditional banks play an essential role in poverty reduction and prosperous economic
growth in developing nations, particularly in countries with standard law legal systems. Non-mainstream banks, particularly rural
ones, give more loans to SMEs and households than mainstream banks. This is signicant since SMEs are the backbone of many
developing countries and play a key role in employment creation and poverty reduction. The ndings also reveal that Non-Traditional
banks are more likely to innovate and provide new nancial products and services tailored to the needs of low-income communities.
Non-traditional banks, for example, frequently offer mobile banking services and microcredit loans, essential for reaching people in
rural areas and the unofcial sector. The result supports the ndings of Alan et al. [10], Martiana & Rahmanto [79], Muih [17],
Nugroho et al. [11], and Rashid & Intartaglia [3],who proposed that there is a role for Islamic banks in alleviating poverty.
4.2. Economic factors and poverty rate
Furthermore, the ndings indicate that the inuence of Non-Traditional banks on poverty reduction appreciates when economic
growth is greater in countries with common law legal roots. This is an indication of the importance of ination rate and gross domestic
production growth. This result is in accordance with Ravallion [64]. Overall, this study provides solid evidence that non-mainstream
banks may be used to promote poverty reduction and economic growth in developing countries. According to the results, policymakers
should encourage the development of Non-Traditional banks and provide a supportive regulatory environment for these institutions.
This has been conducted by studies that explored the impact of nancial development on poverty alleviation [5,38,80]. However,
further justication could be made to argue the result by proposing an additional variable representing the role of Islamic banks in
alleviating poverty.
4.3. Legal origin and poverty rate
The control variable, legal origin, correlates moderately (36 %) with the poverty rate. This implies that there is a positive rela-
tionship between countries having a common law legal background and the number of Non-Traditional banks compared? to previous
studies [30,34,35]. A possible explanation for the increased inuence of non-mainstream banks in common law countries is that
common law legal systems will foster more nancial innovation and competition. Standard law systems are based on precedence,
providing more exibility and adaptation to changing market conditions. On the other hand, civil law systems are based on codied
laws, which can be more strict and less conducive to innovation[34,35].
Another argument is that common law countries have more robust mechanisms for protecting property rights and enforcing
contracts. This is signicant because non-mainstream banks frequently rely on unsecured lending, which means they lend money
without collateral. Non-traditional banks must be sure they can recover their money if borrowers’ default on their loans to be ready to
provide unsecured loans. Substantial property rights and contract enforcement institutions reduce the danger of default, making it
more appealing for Non-Traditional banks to lend to high-risk borrowers. Finally, common law countries may have a more developed
culture of entrepreneurship and risk-taking.
This study is based on a somewhat limited sample of developing countries. Further research is required to corroborate the study’s
ndings and to identify the specic elements that drive the inuence of Non-Traditional banks on property reduction and economic
Table 6
Result of the Regression (Fix effects - Random effects) analysis.
Variable
Poverty rate (DV)
Coefcient (FE) Std. Err. (FE) p-value (FE) Coefcient (RE) Std. Err. (RE) p-value (RE)
Total Assets of Islamic Banks (IV) −1.18 2.725 0.023 −0.187 2.604 0.015
GDP (IV) 0.008 0.0007 0.078 0.005 0.0006 0.002
Legal Origin (IV) 0.7210 0.167 0.062 0.187 0.132 0.004
Hausman Test Chi-square p-value
Fixed vs. Random Effects 0.34 0.558
S. Mohammed et al.
Heliyon 10 (2024) e35164
11
growth.
5. Conclusion & recommendations
Poverty and unemployment have always been challenges before the growth and development of any given state. The continuous
increase in the population rate and the scarcity of available resources lead to more people living in poverty. Despite the constant effort
to mitigate poverty and to create new job opportunities worldwide, particularly in the developing world, it is still believed that there is
a considerable share of people who live in a catastrophic situation and sometimes with no stable income. Governments and the private
sector may play a key role in poverty reduction. The provision of necessary physical and nancial infrastructures by the governments
for investments may encourage the private sector and, on top of them, the nancial institutions to invest and contribute to creating job
opportunities, which leads to poverty reduction. Financial institutions, in general, and Islamic ones, in particular, may function as a
means for economic growth and development by providing necessary funds for those individuals desiring to start their income-
generating activities. For that, there is a need for nancial development to ensure maximum benets for society. Therefore, this
paper examines the relationship between nancial development, economic growth, and legal origin with poverty. Unlike earlier
studies, nancial development is measured by Islamic banks’ total assets/gross domestic product; poverty rate measures poverty as an
indicator of poverty rate; and legal systems between developing countries are measured by legal origin.
The study employed a poverty growth model suggested by Ravllion (1997), regressing poverty against total assets/GDP, GDP, and
legal origin, applying xed effect and random effect techniques to a panel of 12 developing countries from the fourth quarter of 2013 to
the second quarter of 2019. The ndings report that poverty reduction is achieved when an Islamic bank’s total assets measure
nancial development; the economic growth does not show a signicant negative relationship; instead, it indicates a signicant
positive relationship. Moreover, the bank has a high impact on poverty. The study further writes that the development of Islamic banks
will contribute to combating poverty, which has been reported by previous studies arguing that nancial development in banks re-
duces poverty. The current study’s results align with those studies, at least when measured by Poverty rate, [7,48,75]. Poor access to
nancial services is still an obstacle; fees imposed on them to get permission to participate in the nancial and business markets may
have been the reason for poor development. The study recommends extending future studies to obtain more data about Islamic banks,
the poverty gap, and the poverty headcount ratio; they may also include more indicators.
6. Limitations
The present investigation offers novel insights into the relationship between nancial growth and poverty alleviation; moreover, it
is restricted to nations with Islamic banking systems and needs more data. As a result, the scope and amount of data examined may be
expanded in subsequent studies. Ordinary least square analysis was used in the research. However, other analytic techniques, such as
ARDL or GMM, are advised to investigate the correctness of the ndings further. We urge future scholars to include additional social
and cultural factors in examining Islamic banks’ performance. The study’s context can only be broadly applied once a more micro-
scopical analysis of a single nation is conducted, as every nation has a unique charter regarding Islamic banking and poverty. We
attempted to add a variable on political unrest, but we eliminated it after seeing that it was correlated with economic issues.
Establishing causality between the total assets of Islamic banks and poverty reduction is challenging. Although the study dem-
onstrates signicant correlations, denitive causality cannot be established due to potential issues such as reverse causation and
unobserved confounding factors. Additionally, the study employs a specic measure of the poverty rate, which may only encompass
some dimensions of poverty. Utilizing alternative metrics, such as the Multidimensional Poverty Index (MPI), could provide a more
comprehensive understanding of poverty reduction impacts.
7. Implication
Islamic banks have the potential to inuence poverty reduction signicantly: According to this research, expanding Islamic banks
has a more signicant benecial inuence on reducing poverty than traditional nancial institutions. This information may be helpful
to policymakers looking for different approaches to combat poverty. Contrary to specic predictions, current research suggests that
economic expansion is not linked to greater poverty in this particular circumstance. Therefore, economic development can occa-
sionally render poverty worse. This research casts doubt on long-held beliefs about the detrimental effects of growth on the impov-
erished. It indicates that measures for economic development could be undertaken in tandem with initiatives to reduce poverty. Hail’s
development plans have the potential to greatly improve its competitive edge by effectively resolving the long-standing problems of
poverty and unemployment, which have consistently impeded economic progress in the past. Hail may promote economic stability and
job development by giving priority to investments in physical and nancial infrastructure and by cultivating collaborations with Is-
lamic nancial institutions. These steps are expected to attract more private sector investments, therefore enhancing economic growth.
Implementing certain nancial methods can help reduce poverty, leading to a more inclusive and successful community. Therefore,
Hail’s efforts to develop will help achieve long-term economic growth, strengthening its competitive position in the area.
CRediT authorship contribution statement
Sulaiman Mohammed: Writing – review & editing, Writing – original draft, Methodology, Investigation, Funding acquisition,
Formal analysis, Conceptualization. Saleh Saud Alsaif: Writing – original draft, Supervision, Resources, Project administration,
S. Mohammed et al.
Heliyon 10 (2024) e35164
12
Funding acquisition, Conceptualization. Attallah alqataan: Supervision, Project administration, Funding acquisition. Abdelhaleem
Abdelhalee: Funding acquisition. Moawia Farah: Funding acquisition.
Declaration of competing interest
The authors declare that they have no known competing nancial interests or personal relationships that could have appeared to
inuence the work reported in this paper.
Acknowledgment
This research has been funded by the scientic research deanship at the University of Ha’il Saudi Arabia through project number
21047.
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