THE ROLE OF ISLAMIC MICROFINANCE IN PROMOTING FINANCIAL INCLUSION: AN EMPIRICAL ANALYSIS OF INSTITUTIONAL DETERMINANTS IN AFGHANISTAN

Abstract

This study investigates the role of Islamic microfinance institutions (IMFIs) in enhancing financial inclusion in Afghanistan, with a particular focus on institutional characteristics that influence client outreach. Using data from nine Islamic microfinance institutions across the country, the study employs a log-linear regression model to examine the relationship between the number of active clients (as a measure of financial inclusion) and three key institutional variables: number of branches, operational self-sufficiency (OSS), and gross financing portfolio. The results reveal that both the number of branches and operational self-sufficiency have a statistically significant and positive effect on the number of active clients, suggesting that institutional expansion and financial sustainability are critical for broadening access to Islamic financial services. The gross financing portfolio also exhibits a positive but statistically insignificant relationship, indicating that the scale of financial operations alone does not necessarily translate into greater inclusion.

The findings underscore the importance of institutional capacity and outreach infrastructure in advancing inclusive finance within the framework of Islamic principles. Branch expansion facilitates greater accessibility for rural and marginalized populations, while operational self-sufficiency ensures the financial viability and long-term sustainability of IMFIs. The study contributes to the growing body of literature on Islamic finance by providing empirical evidence from a fragile, post-conflict context, highlighting how Shariah-compliant institutions can support social and economic development goals. Policymakers and development partners are encouraged to promote the expansion and sustainability of Islamic microfinance institutions to foster a more inclusive and equitable financial system in Afghanistan.