Social Collateral and Repayment Performance: Evidence from Islamic Micro Finance

Authors

1 Department of Finance, School of Business & Economics, University of Management & Technology, Lahore, Pakistan

2 School of Commerce & Accountancy, University of Management & Technology, Lahore, Pakistan

3 HR Manager, Akhuwat, Pakistan

Abstract

I





n this study we designed to test the remarkable repayment performance of Akhuwat in Pakistan; the most successful Islamic Microfinance Institution (IMFI), which offers interest-free loans in order to improve the quality of life and alleviate poverty. The model of Akhuwat is based on Muakhaat (brotherhood) and Qard-e-Hasan (offering financial assistance to somebody in need without interest). The primary objective of this study was to investigate the determinants of microfinance repayment performance. The study examined the borrowers’ characteristics, loan attributes, lender/institutional characteristics and the social collateral characteristics related to the Akhuwat and the data of 387 borrowers is obtained from microfinance programs carried out on a continuous basis by Akhuwat. The findings depicted that among the socio-demographic factors like gender, marital status, number of dependents and numbers of previous loans are significantly and positively associated with loan repayment performance. However, previous loan default and religion are significantly and inversely associated with the loan repayment performance. The findings of the study supported the role of social ties in improving repayment performance and hold key insights and directions about microfinance policymaking in Pakistan.
 

Keywords

References

Abdullah, S., & Quayes, S. (2016). Do Women Borrowers Augment Financial Performance of MFIs? Applied Economics, 48(57), 5593-5604.
AbdulSamad, M. (2014). Islamic Micro Finance: Tool for Economic Stability and Social Change. Humanomics, 30(3), 199-226.
Ahlin, C., & Townsend, R. M. (2007). Using Repayment Data to Test across Models of Joint Liability Lending. The Economic Journal, 117(517), F11-F51.
Aggarwal, R., Goodell, J. W., & Selleck, L. J. (2015). Lending to Women in Microfinance: Role of Social Trust. International Business Review, 24(1), 55-65.
Ahmed, H. (2002). Financing Microenterprises: An Analytical Study of Islamic Microfinance Institutions. Islamic Economic Studies, 9(2), 27-64.
Armendáriz de Aghion, B., & Morduch, J. (2005). The Economics of Microfinance. Cambridge: MIT Press.
---------- (2000). Microfinance beyond Group Lending. Economics of Transition, 8(2), 401-420.
Ashraf, A., Kabir Hassan, M., & Hippler, I. W. (2014). Performance of Microfinance Institutions in Muslim Countries. Humanomics, 30(2), 162-182.
Baklouti, I. (2013). Determinants of Microcredit Repayment: The Case of Tunisian Microfinance Bank. African Development Review, 25(3), 370-382.
Banerjee, A. V., Besley, T., & Guinnane, T. W. (1994). Thy Neighbor's Keeper: The Design of a Credit Cooperative with Theory and a Test. The Quarterly Journal of Economics, 109(2), 491-515.
Beck, T. (2011). The Role of Finance in Economic Development: Benefits, Risks, and Politics. Center Discussion Paper, Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id= 1974471.
 
Belliveau, M. A., O'Reilly, C. A., & Wade, J. B. (1996). Social Capital at the Top: Effects of Social Similarity and Status on CEO Compensation. Academy of Management Journal, 39(6), 1568-1593.
Bennett, L., & Cuevas, C. E. (1996). Sustainable Banking with the Poor. Journal of International Development, 8(2), 145-152.
Besley, T., & Coate, S. (1995). Group Lending, Repayment Incentives, and Social Collateral. Journal of Development Economics, 46(1), 1-18.
Bhatt, N., & Tang, S. Y. (2002). Determinants of Repayment in Microcredit: Evidence from Programs in the United States. International Journal of Urban and Regional Research, 26(2), 360-376.
Bhole, B., & Ogden, S. (2010). Group Lending and Individual Lending with Strategic Default. Journal of Development Economics, 91(2), 348-363.
Cassar, A., Crowley, L., & Wydick, B. (2007). The Effect of Social Capital on Group Loan Repayment: Evidence from Field Experiments. The Economic Journal, 117(517), F85-F106.
 
Chapra, M. U. (1985). Towards a Just Monetary System (8). Leicester: The Islamic Foundation
Chaudhary, M. A., & Ishfaq, M. (2003). Credit Worthiness of Rural Borrowers of Pakistan. The Journal of Socio-Economics, 32(6), 675-684.
Chowdhury, P. R. (2005). Group-lending: Sequential Financing, Lender Monitoring, and Joint Liability. Journal of Development Economics, 77(2), 415-439.
Christen, R. P. (1992). Formal Credit for Informal Borrowers: Lessons from Informal Lenders (281-292). In D. W. Adams, D. A. Fitchett (Ed.), Informal Finance in Low-Income Countries. Boulder: Westview Press.
Clark, P., & Kays, A. (1999). Microenterprise and the Poor: Findings from the Self-Employment Learning Project Five Year Study of Microentrepreneurs. Retrieved from
https://assets.aspeninstitute.org/content/uploads/2017/01/Microenterprise_and_Poor.pdf?_ga=2.127408525.1092817628.1577697590-771143059.1577697590.
 
Coleman, J. S. (1990). Foundations of Social Theory. Cambridge, MA: Harvard University Press.
De Aghion, B. A. (1999). On the Design of a Credit Agreement with Peer Monitoring. Journal of Development Economics, 60(1), 79-104.
Demirguc-Kunt, A., Klapper, L., & Randall, D. (2014). Islamic Finance and Financial Inclusion: Measuring Use of and Demand for Formal Financial Services among Muslim Adults. Review of Middle East Economics and Finance, 10(2), 177-218.
D’espallier, B., Guérin, I., & Mersland, R. (2011). Women and Repayment in Microfinance: A Global Analysis. World Development, 39(5), 758-772.
De Soto, H. (2000). The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else. Retrieved from
https://search.proquest.com/docview/220264282?pq-origsite=gscholar.
 
Diagne, A. (2000). Design and Sustainability Issues of Rural Credit and Savings Programs: Findings from Malawi. Retrieved from
https://ageconsearch.umn.edu/record/16251/files/pb000012.pdf.
 
Dinh, T. H. T., & Kleimeier, S. (2007). A Credit Scoring Model for Vietnam's Retail Banking Market. International Review of Financial Analysis, 16(5), 471-495.
Dunn, L. F., & Kim, T. (1999). An Empirical Investigation of Credit Card Default. Ohio State University, Department of Economics Working Papers, Retrived from
https://core.ac.uk/download/pdf/7199467.pdf.
 
El-Komi, M., & Croson, R. (2013). Experiments in Islamic Microfinance. Journal of Economic Behavior & Organization, 95, 252-269.
Feigenberg, B., Field, E., & Pande, R. (2013). The Economic Returns to Social Interaction: Experimental Evidence from Microfinance. Review of Economic Studies, 80(4), 1459-1483.
Gangopadhyay, S., Ghatak, M., & Lensink, R. (2005). Joint Liability Lending and the Peer Selection Effect. The Economic Journal, 115(506), 1005-1015.
Garmaise, M. J., & Natividad, G. (2010). Information, the Cost of Credit, and Operational Efficiency: An Empirical Study of Microfinance. The Review of Financial Studies, 23(6), 2560-2590.
 
Ghatak, M. (1999). Group Lending, Local Information, and Peer Selection. Journal of Development Economics, 60(1), 27-50.
Ghatak, M. (2000). Screening by the Company You Keep Joint Liability Lending and the Peer Selection Effect. The Economic Journal, 110(465), 601-631.
Godquin, M. (2004). Microfinance Repayment Performance in Bangladesh: How to Improve the Allocation of Loans by MFIs. World Development, 32(11), 1909-1926.
Hadi, N. A., & Kamaluddin, A. (2015). Social Collateral, Repayment Rates, and the Creation of Capital among the Clients of Microfinance. Procedia Economics and Finance, 31, 823-828.
Hermes, N., Lensink, R., & Mehrteab, H. T. (2006). Does the Group Leader Matter? The Impact of Monitoring Activities and Social Ties of Group Leaders on the Repayment Performance of Group‐based Lending in Eritrea. African Development Review, 18(1), 72-97.
Karlan, D., & Morduch, J. (2009). Access to Finance in Handbook of Development Economics. Amsterdam: Elsevier.
Karlan, D. S., & Zinman, J. (2010). Expanding Credit Access: Using Randomized Supply Decisions to Estimate the Impacts. Review of Financial Studies, 23(1), 433–464.
Kevane, M., & Wydick, B. (2001). Microenterprise Lending to Female Entrepreneurs: Sacrificing Economic Growth for Poverty Alleviation? World Development, 29(7), 1225-1236.
Ledgerwood, J. (1999). Microfinance Handbook: An Institutional and Financial Perspective (Sustainability Banking with the Poor). Washington: The World Bank.
Levine, R. (2005). Finance and Growth: Theory and Evidence (865-934), In Aghion, P., and Durlauf, S. N. (Eds.), Handbook of Economic Growth. Amsterdam: Elsevier.
Lin, N. (2008). A Network Theory of Social Capital. The Handbook of Social Capital, Retrieved from
http://www.pro-classic.com/ethnicgv/SN/SC/paper-final-041605.pdf.
 
Matta, D. (2004). Examining Determinants of Group Loan Repayment in the Dominican Republic (Doctoral Dissertation, Ohio University) , Retrieved from
https://etd.ohiolink.edu/!etd.send_file?accession=ohiou1090935410&disposition=inline.
 
Mirpourian, S., Caragliu, A., Di Maio, G., Landoni, P., & Rusinà, E. (2016). Determinants of Loan Repayment Performance among Borrowers of Microfinance Institutions: Evidence from India. World Development Perspectives, 1, 49-52.
Nahapiet, J., & Ghoshal, S. (2000). Social Capital, Intellectual Capital, and the Organizational Advantage). Retrieved from
http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.598.8940&rep=rep1&type=pdf.
 
Naveed, A., & Ali, N. (2012). Clustered Deprivation: District Profile of Poverty in Pakistan. Retrieved from
https://www.sdpi.org/publications/files/Clustered%20Deprivation-district%20profile%20of%20poverty%20in%20pakistan.pdf.
 
Nawai, N., & Shariff, M. N. M. (2012). Factors Affecting Repayment Performance in Microfinance Programs in Malaysia. Procedia-Social and Behavioral Sciences, 62, 806-811.
Obaidullah, M. (2008). Role of Microfinance in Poverty Alleviation. Jeddah: Islamic Research & Training Institute.
---------- (2005). Islamic Financial Services. Jeddah: Islamic Economics Research Centre, King Abdul Aziz University.
Postelnicu, L., Hermes, N., & Szafarz, A. (2014). Defining Social Collateral in Microfinance Group Lending. Microfinance Institutions, Retrieved from
https://www.iap-socent.be/sites/default/files/SOCENT%20Pub%202013-10%20(wp13050).pdf.
 
Panizza, U. (2014). Financial Development and Economic Growth: Known Knowns, Known Unknowns, and Unknown Unknowns. Revue D'économie du Développement, 22(1), 35-65.
Putnam, R. D. (1995). Bowling Alone: America's Declining Social Capital. Journal of Democracy, 6(1), 65-78.
Shaikh, S. A., & Shaikh, S. A. (2017). Poverty Alleviation through Financing Microenterprises with Equity Finance. Journal of Islamic Accounting and Business Research, 8(1), 87-99.
Sharma, M., & Zeller, M. (1997). Repayment Performance in Group-based Credit Programs in Bangladesh: An Empirical Analysis. World Development, 25(10), 1731–1742.
Siddiqi, M. N. (2004). Riba, Bank Interest and the Rationale of its Prohibition, Visiting Scholars’ Research Series, 2. Jeddah, Saudi Arabia: Islamic Research and Training Institute, Islamic Development Bank.
Stiglitz, J. E. (1990). Peer Monitoring and Credit Markets. The World Bank Economic Review, 4(3), 351-366
Thomas, C. Y. (1996). Capital Markets, Financial Markets and Social Capital (An Essay on Economic Theory and Economic Ideas). Social and Economic Studies, 45(2/3), 1-23.
Udry, C. (1994). Risk and Insurance in a Rural Credit Market: An Empirical Investigation in Northern Nigeria. The Review of Economic Studies, 61(3), 495-526.
 
Woolcock, M. (1998). Social Capital and Economic Development: Toward a Theoretical Synthesis and Policy Framework. Theory and Society, 27(2), 151-208.
Wydick, B. (2001). Group Lending under Dynamic Incentives as a Borrower Discipline Device. Review of Development Economics, 5(3), 406-420.
Zeller, M., & Meyer, R. L. (2002). The Triangle of Microfinance: Financial Sustainability, Outreach, and Impact (Eds.). Baltimore: The John Hopkins University Press.
 
 
Iranian Economic Review
Volume 24, Issue 1
January 2020
Pages 41-74

Files

Share

How to cite

Statistics