The Mediating Impact of Regulatory Quality on Islamic Finance Products and Financial Inclusion in Nigeria (2014 – 2024)

This study examines the mediating role of regulatory quality on the relationship between Islamic finance products and financial inclusion in Nigeria from 2014Q1 to 2024Q4. The research is motivated by the persistent challenge of financial exclusion in Nigeria and the growing potential of Islamic finance to address this issue. Grounded in the Financial Intermediation Theory and the Institutional Theory, the study utilises the Autoregressive Distributed Lag (ARDL) model to analyse the short-run and long-run dynamics between the variables. The Augmented Dickey-Fuller (ADF) unit root test was initially conducted to establish the stationarity of the variables, revealing a mix of I (0) and I (1) series, which validated the use of the ARDL model. The ARDL bounds test confirmed the existence of a long-run cointegrating relationship. The empirical findings from the ARDL model indicate that Murabaha (MB) and Ijarah (IJ) have a positive and significant impact on financial inclusion in both the short and long run. Crucially, the analysis of interaction terms demonstrates that regulatory quality (RQ) positively influences financial inclusion and significantly enhances the effect of Murabaha and Ijarah. This result strongly supports the Institutional Theory, highlighting the amplifying role of a robust institutional framework. In contrast, Istisna'a (IT) was found to be statistically insignificant, suggesting its limited impact on broad financial inclusion. Based on these findings, the study recommends that policymakers and regulatory bodies in Nigeria prioritize reforms that strengthen the institutional framework for Islamic finance, as this is crucial to unlocking the full potential of products like Murabaha and Ijarah to drive financial inclusion and address the nation’s financial exclusion challenges.