Abstract
• New data set on Islamic MFIs. • Islamic microfinance more important than previously recognized. • Outreach of Islamic MFIs exceeds that of conventional MFIs. • Conventional MFIs show stronger financial performance. Conventional microfinance institutions (MFIs) can promote financial inclusion, but they also prompt ethical concerns regarding the social consequences of commercialization and high interest rates. Islamic MFIs, which adhere to Sharia’s prohibition of riba (usually interpreted as a ban on interest), present an alternative. Differences between conventional and Islamic MFIs in terms of outreach and financial sustainability remain underexplored; no comprehensive data set details Islamic MFIs either. With new data, collected with a global survey, the authors construct a unique panel of 543 conventional and 101 Islamic MFIs, operating in Islamic and non-Islamic countries. These data suggest that the market for Islamic microfinance is more important than previously recognized, has grown in recent years, and is likely to continue growing in every region of the world. Statistical comparisons, using various estimation techniques, regarding the outreach and financial performance of Islamic and conventional MFIs also reveal that the breadth and depth of Islamic MFIs exceed those of conventional MFIs, though conventional MFIs achieve stronger financial performance. This latter result is not robust though.
Highlights
Microfinance institutions (MFIs) generally strive to generate positive social impacts while simultaneously delivering sound financial performance to achieve a ‘‘double bottom line.” By the end of 2017, 981 MFIs had submitted performance reports to the Microfinance Information Exchange (MIX Market), which revealed an estimated US$114 billion in loan volume and 139 million customers (Valette & Fassin, 2018)
Even if some fundamental similarities apply to the financial instruments or techniques, the products and services provided by Islamic MFIs are free of particular elements (Obaidullah, 2008), because their business activities must adhere to halal principles
We offer several reasons Islamic MFIs may be likely to underperform financially relative to conventional MFIs
Summary
Microfinance institutions (MFIs) generally strive to generate positive social impacts while simultaneously delivering sound financial performance to achieve a ‘‘double bottom line.” By the end of 2017, 981 MFIs had submitted performance reports to the Microfinance Information Exchange (MIX Market), which revealed an estimated US$114 billion in loan volume and 139 million customers (Valette & Fassin, 2018). We identify 644 MFIs by type and specify 101 of them, based in 33 countries that can be classified as Islamic MFI providers These comprehensive data suggest that the market for Islamic microfinance is more important than is generally acknowledged, and its recent growth appears likely to persist, in every geographical region. Using this newly constructed data set, we undertake a comparison of the performance of conventional MFIs and Islamic MFIs, according to the dual objectives of social benefits and financial performance.
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