Exploratory study of the role of Islamic Banks in improving financial inclusion through affordable mortgage in Nigeria

Abstract

Financial inclusion remains a major developmental challenge in Nigeria, where over 38% of adults are excluded from formal financial services, particularly in accessing affordable housing finance. Conventional banks have made efforts to reduce this gap through various savings, credit, and mortgage schemes; however, high interest rates, rigid collateral requirements, and lack of affordability have continued to exclude low- and middle-income earners. The question therefore arises: how can the financially excluded, who cannot access conventional products, subscribe to housing schemes in Nigeria? This study addresses this concern by exploring the role of Islamic banks in improving financial inclusion through Shari’ah-compliant and affordable mortgage products. Islamic finance, built on principles of risk sharing, prohibition of interest, fairness, and transparency, provides ethical alternatives that can serve excluded populations. The study explores the current state, challenges, prospects, and impact of Islamic mortgage products in Nigeria. It is grounded on institutional and agency theories, employing a qualitative case study design with semi-structured interviews conducted among management staff of Nigeria's four fully-fledged Islamic banks. Data were analysed thematically using NVivo 14. The findings reveal that Islamic mortgage products — particularly Ijarah Muntahia bittamleek, Murabaha, Musharakah, and Istisna — contribute significantly to financial inclusion by offering interest-free and affordable housing finance. Among these, Ijarah emerged as the dominant product due to its flexibility in adapting to Nigeria’s market realities. The study further finds that collaborations between Islamic banks, government, and NGOs in states such as Ekiti, Lagos, and Abuja have enhanced access to mortgage financing for low-income earners. Nonetheless, systemic challenges persist, including low public awareness, regulatory constraints, limited size of Islamic banks, liquidity management gaps, manpower shortages, and high compliance costs. By highlighting the transformative potential of Islamic mortgage products, the study underscores their role in bridging Nigeria’s housing deficit and advancing inclusive growth. The findings provide practical insights for policymakers, regulators, and industry stakeholders, advocating for reforms that can strengthen Islamic finance as a catalyst for affordable housing and sustainable development in Nigeria. Keywords: Financial Inclusion, Islamic Mortgage Products, Housing Finance, Islamic Banking, Nigeria.