Impact of Islamic Financial Development on Income Inequality And Poverty in Pakistan

Abstract

Macroeconomic stability and development of the financial sector are important factors which shape poverty situation and income distribution in developing countries such as Pakistan. The aim of this study is to investigate the correlation between inflation, economic growth, Islamic finance, poverty, and income inequality on quarterly basis for a period 2013–2024 for Pakistan. The primary goal is to examine the effect of macroeconomic variables on poverty and income distribution with the inclusion of Islamic Financial development. The study uses econometric methods to study the short run and long run relationships between the variables under consideration. The findings show that inflation markedly increases both poverty and income inequality, which suggests that inflation has an adverse impact on low income households. On the other hand, economic growth is shown to be a major driver of reducing poverty and income inequality, and therefore inclusive development. Moreover, Islamic finance development has positive relationship with financial inclusion and financial inequality. The results indicate that policy measures such as a stable macroeconomic environment along with growth of Islamic financial institutions can be effective in reducing poverty and enhancing income inequality in Pakistan. The study suggests that Islamic financial systems need to be strengthened, inflation needs to be controlled and long-term inclusive economic growth needs to be maintained to attain long term socio-economic stability.