Effect of Household Factors on Repayment Ability among Islamic Microfinance Borrowers in Bangladesh

Farzana Sharmin,Ridzwan Bakar

doi:10.5539/ijbm.v13n8p40

Abstract

The paper aims to discuss the effect of household factors on repayment ability among borrowers of Islamic microfinance in Bangladesh. Cross-sectional survey was used on borrowers who have been involved for more than two years in rural development scheme. Data was collected from 507 households through a close-ended questionnaire. The survey found that household income increased significantly after access to the Islamic microfinance program. The structural equation model analysis shows that household income has a significant positive effect on repayment ability. Household savings and consumption were also found to have a significant positive relationship with household income. Household savings also has a significant positive relationship with repayment ability when it is negative with the household consumption. Unlike conventional studies, this study found that borrowers involved in farm activities have a better repayment ability. The emerging result contributes to the research regarding repayment problems and the findings demonstrate that the adoption of Islamic microfinance could be a better solution. It is also anticipated that the empirical result will contribute to the furtherance of literature on Islamic microfinance.

Highlights

Though conventional microfinance is dominant in Muslim majority countries, some Muslims like to stay away from interest-based conventional microfinancing (Karim et al, 2008) as religious issues do matter in microfinance (Ashta & Hannam, 2014)
The analysis finds that household savings and consumption increases with income and these findings are in line with the theory of the savings’ ‘permanent income hypothesis’ (Friedman, 1957)
The empirical result of this study finds evidence that household consumption increases with household income, confirming the results of Rahman and Ahmed (2010) who find that with the increased income, consumption increased in households with Rural Development Scheme (RDS) borrowers

Summary

Introduction

Though conventional microfinance is dominant in Muslim majority countries, some Muslims like to stay away from interest-based conventional microfinancing (Karim et al, 2008) as religious issues do matter in microfinance (Ashta & Hannam, 2014). With the potential to solve religious restrictions, Islamic microfinance has the advantage of reducing fungibility of borrowed funds and increasing the willingness to repay the loan through its interest-free asset based financing mode (El-Komi & Croson, 2012). Islamic microfinance is a Shari’ah (Islamic laws) compliant method of providing microfinance which increases the productivity of the poor, empowers them, and assists in socio- economic development. Islamic microfinance could be defined as a collection of savings and disbursement of small loans based on Islamic principles (Dusuki, 2008). Islamic microfinance has experienced a very short journey and its literature lacks sufficient empirical evidence (Noipom, 2014). The limited empirical research in Islamic microfinance motivates this study

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Discussion

Conclusion