Financial Inclusion and Economic Well-Being: Evidence from Islamic Pawnbroking (Ar-Rahn) in Malaysia

Abstract

This study examines the impact of financial inclusion through Islamic pawnbroking, or ar-rahn financing facilities, on the economic well-being of ar-rahn clients in Malaysia. The data set consists of primary data assembled through questionnaire surveys conducted in 2010 and 2016 and analyzed by structural equation modeling. The findings demonstrate that financial inclusion through patronizing ar-rahn significantly improves client well-being. The use of arrahn financing for production-related economic activity is significant in enhancing individual well-being resulting in microbalancing as well as improvements in financial and socioeconomic development. This study concludes that ar-rahn helps overcome voluntary financial exclusion due to Shari’ah compliance in the face of the social failure of Islamic banking. Improved financial inclusion contributes to the everyday lives of clients who may have nonliquid assets in small values kept for security purposes. As a policy recommendation, this study suggests that policymakers and ar-rahn institutions should play a proactive role in improving the outreach of ar-rahn services. Providing active support and the regulatory environment necessary for greater financial inclusion also contributes to women’s empowerment.