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����������������������ISLAMIC FINANCE AND SOCIAL DEVELOPMENT: EVIDENCE FROM A PANEL OF AFRICAN COUNTRIES��By�� �Adamu Ahmed Wudil & Rislanudeen Muhammad��Presentation at:�The 15th International Conference on Islamic Economics & Finance (ICIEF2024)��������������������A Comparative Analysis of Sustainable Financing Models for Social Development in Low and Middle-Income Countries in Africa��By�� �Adamu Ahmed Wudil�G2218843��Ph.D. Research Proposal Defence��06 October 2023.�

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Presentation Outline

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  • Introduction

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  • Literature Review

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  • Methodology

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  • Empirical Findings and Discussion

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  • Conclusion

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Introduction

  • Social development remains a paramount challenge in Africa, where millions of people continue to grapple with poverty, limited access to education, inadequate healthcare, and income inequality.

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  • Sub-Saharan Africa, in particular, stands as the world's poorest region, with a significant proportion of its population living in extreme poverty (World Bank, 2018, 2021).

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  • Despite some progress in recent years, poverty continues to persist, necessitating urgent and effective strategies for sustainable development.

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  • In addition to poverty, the region faces formidable obstacles in essential sectors such as healthcare and education.

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Introduction…

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  • Child mortality remains unacceptably high, with one in thirteen African children not surviving to their fifth birthday (WHO, 2021).

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  • Educational access is a major concern: over 90 million African children of primary school age and over 40 million secondary school-aged youths were out of school in 2019 (UNESCO, 2020).

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  • To address these challenges, African countries have adopted various financing models, including foreign aid, government budgets and Islamic finance.

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  • However, the effectiveness of these models in promoting social development remains a subject of debate.

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Introduction…

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  • Foreign aid, despite its importance, faces scrutiny regarding its effectiveness (ODI, 2019).

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  • Challenges such as limited budgetary resources, fund misallocation, and corruption hinder efficient use of government budgets for social development (Geda, 2015).

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  • In light of these critical issues, this study seeks to contribute significantly to the existing literature by examining the effectiveness of Islamic finance in promoting social development in Africa.

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  • The objective is to assess the impact of Islamic finance on social development, providing valuable insights into how this financing model can be optimally utilized to advance sustainable social development.

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Literature Review

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Author (s)

Year

Finding (s)

Guled

2022

Found that Islamic finance practices, specifically Murabaha, positively correlate with organizational performance, social development, poverty reduction, and job creation in Somalia.

Alam & Ullah

2022

Islamic finance contribute to social development by providing inclusive financial services and supporting economic growth

Rahman & Asyifaa

2021

Demonstrated that Islamic finance, particularly through the utilization of zakat and waqf, positively influences community welfare in Indonesia, reducing income inequality and creating equal economic conditions.

Syariah dan Binsin

2021

Found that Islamic finance has the potential to contribute to social development by addressing income disparities and promoting equitable economic conditions.

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Literature Review Cont...

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Author (s)

Year

Finding (s)

Elloumani

2023

The study reveals a negative correlation between Islamic financial development and economic growth in the MENA region.

Khan et al.

2022

Found that sustainable development, and market capitalization show a negative relationship with the Islamic Finance country index.

Zainur

2021

Concludes that the financial system in Islam has a positive impact on economic growth in Indonesia.

Laldin & Djafri

2021

The authors argue that Islamic finance shares commonalities with impact investment and can play a significant role in addressing societal problems.

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�Methodology

  • Descriptive statistics
  • Correlation
  • Generalized Method of Moment (GMM)
  • Arelano-Bond Test
  • Sargan-Hansen Test

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Model Specification

 

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Model Specification…

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  • We employ the System Generalized Method of Moments (SGMM) proposed by Blundell & Bond (1998). to explore the relationship between Islamic finance and social development, alongside other control variables.

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  • The SGMM offers several advantages, including the control for endogeneity, omitted variable bias, unobserved panel heterogeneity, minimization of data loss through the use of orthogonal deviations

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  • As well as the ability to obtain consistent parameters even when measurement errors exist.

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  • Therefore, the system GMM is express as follows:

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Model Specification…

 

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� Empirical Findings and Discussion

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Descriptive Statistics and Correlation Matrix

Source: Author’s Computations.

 

SD

IFD

AID

GB

GE

Mean

63.55151

90.23951

57.71200

15.02454

-0.328153

Median

62.50500

9.000000

50.61998

13.71335

-0.715245

Maximum

77.23659

812.0000

304.8394

56.85445

14.63538

Minimum

50.78100

1.000000

0.325280

-1.025568

-1.840873

Std. Dev.

5.674569

143.3130

39.02716

8.407611

2.402406

Skewness

0.479202

2.119735

2.129690

1.341849

5.237060

Kurtosis

3.098670

7.440933

10.76674

6.308567

30.21552

IFD

0.035390

 

 

AID

0.024522

-0.004723

 

GB

0.407100

-0.104964

0.015280

 

GE

0.135559

-0.106847

0.146102

-0.283843

 

Descriptive Statistics and Correlation Matrix

Source: Author’s Computations.

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� EMPIRICAL FINDINGS AND DISCUSSION…

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Descriptive Statistics and Correlation Matrix

Source: Author’s Computations.

 

Pool OLS

FEM

DGMM

LogSD(-1)

0.978549

0.549311

-0.216864

Difference GMM Estimator Vs System GMM Estimator

Source: Author’s Computations.

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  • The table shows the estimated coefficients of the three respective estimators which provide sufficient evidence to preferred System GMM estimator over the Difference GMM estimator.

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� Empirical Findings and Discussion…

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Descriptive Statistics and Correlation Matrix

Source: Author’s Computations.

Variable

Coefficient

Std. Error

t-Statistic

Prob.  

SD(-1)

0.4766***

0.007506

63.49754

0.0000

IFD

0.0024***

0.000204

11.75413

0.0000

AID

-0.0141***

0.001498

-9.439913

0.0000

GB

-0.0122**

0.005744

-2.121164

0.0413

GE

-1.2031***

0.274771

-4.378909

0.0001

No. of Observations

 

 

 

350

Root MSE

 

 

 

0.668

J-statistic

 

 

 

34.040

Inst. Rank/Group

 

 

 

35/35

Arellano-Bond R (2)

 

 

 

0.526

Sargan-Hansen Test

 

 

 

0.279

System GMM Estimate

Source: Author’s Computations.

 

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� Empirical Findings and Discussion…

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  • The results show that Islamic finance development (IFD) has a coefficient of 0.002402, with a standard error of 0.000204. The t-statistic of 11.75413 indicates that the coefficient is statistically significant at 1% level.

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  • This suggests that an increase in Islamic finance development is associated with a positive impact on social development.

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  • This finding is consistent with the theory that Islamic finance, with its emphasis on ethical and socially responsible practices, can contribute to inclusive economic growth and social well-being.

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  • Empirical studies have also shown that Islamic finance institutions can play a role in reducing poverty, promoting financial inclusion, and supporting sustainable development goals (Guled, 2022; Saba et al., 2021; Rahman & Asyifaa, 2021; Siddiqi, 2010).

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Descriptive Statistics and Correlation Matrix

Source: Author’s Computations.

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� Empirical Findings and Discussion…

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  • Foreign aid (AID) has a coefficient of -0.014145, with a standard error of 0.001498. The t-statistic of -9.439913 indicates that the coefficient is statistically significant at 1% level.

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  • This suggests that an increase in foreign aid is associated with a negative impact on social development.

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  • This finding aligns with certain empirical evidence that highlight the potential challenges and complexities associated with aid effectiveness.

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  • Issues such as aid dependency, governance challenges, and potential distortions in domestic resource allocation can undermine the positive impacts of foreign aid on social development (Alemu & Lee, 2015; Moyo, 2009).

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Descriptive Statistics and Correlation Matrix

Source: Author’s Computations.

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� Empirical Findings and Discussion…

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  • Government budget (GB) has a coefficient of -0.012183, with a standard error of 0.005744.

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  • The t-statistic of -2.121164 indicates that the coefficient is statistically significant at 1% level.

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  • This suggests that an increase in government budget is associated with a negative impact on social development.

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  • The negative relationship might suggest inefficient use of budgetary resources, misallocation of funds, or challenges in implementing effective social development programs (Alemayehu & Haile, 2016; Geda, 2015).

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Descriptive Statistics and Correlation Matrix

Source: Author’s Computations.

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� Empirical Findings and Discussion…

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  • Government effectiveness (GE) has a coefficient of -1.203197, with a standard error of 0.274771.

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  • The t-statistic of -4.378909 indicates that the coefficient is statistically significant at 1% level.

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  • This suggests that an increase in government effectiveness is associated with a negative impact on social development.

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  • This finding is not surprising as the data showcase a negative estimate of government effectiveness in most cases across the countries under study.

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Descriptive Statistics and Correlation Matrix

Source: Author’s Computations.

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� Conclusion �

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  • This study examines the relationship between Islamic finance and social development in 54 African countries from 2013 to 2022.

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  • The findings indicate that Islamic finance development has a positive impact on social development, highlighting its potential as a catalyst for inclusive economic growth and social well-being.

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  • Additionally, the study reveals the complex dynamics of foreign aid, government budget, and government effectiveness as control variables, suggesting the need for careful consideration and effective governance in their implementation.

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  • These findings contribute to the understanding of the role of Islamic finance in promoting social development in African countries and offer valuable implications for policymakers and stakeholders seeking to leverage Islamic finance as a tool for achieving Sustainable Development Goals (SDGs).

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Descriptive Statistics and Correlation Matrix

Source: Author’s Computations.

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Thank You…

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