Islamic vs Conventional Microfinance Institutions: Performance analysis in MENA countries

Abstract

Microfinance has been identified as an important policy instrument that allows greater financial and social independence for women and poor by facilitating access to financial services for the poorest and destitute. Microfinance institutions (MFIs) have mostly a high concentration of women beneficiaries and aim at alleviation of poverty in all its forms. Accordingly, the principal purpose of microfinance institutions is to be social performing by reducing poverty. However, they have to reconcile this objective with financial performance by trying to be profitable and sustainable. On other side, Islamic Microfinance has progressively growing in the world, particularly in poor countries, as credible alternative which allows poor populations to have access to basic financial services at low cost. The integration of Islamic finance concepts to microfinance was one of the valuable reasons in attracting poor to get advantage of these services. Whereas the complexity of these methods in microfinance and lack of transparency in profit distribution, there are some challenges about their efficiency. It is therefore of utmost interest to consider if the financial performance of Islamic microfinance institutions will be negatively correlated with the depth of outreach. The aim of this paper is to examine the performance of Islamic microfinance institutions in comparison with conventional institutions. This study focuses analysis on the MENA region, where a large proportion of the poor are practicing Muslims and are thus unable to take advantage of traditional microfinance contracts which are incompatible with Sharia’. Using a non parametric data envelopment analysis (DEA) to estimate the efficiency of the microfinance institutions, our study provides the empirical evidence from Islamic and conventional microfinance institutions in MENA region.