Resumo

Enabling the poor to create their own income-generating businesses, MFIs have successfully alleviated poverty in most developing and newly industrialized countries Since the awarding of the Nobel Peace Prize to Mohammad Yunus, the founder of microfinance, MFIs have been recognized as an effective development tool and even as one of the main innovations in the past 25 years (HARTARSKA et al., 2013).

We have overall two hypotheses. First, we hypothesise that Islamic MFIs are less profitable and financially self-sufficient than conventional MFIs, because the transfer of assets involved in Shariah-Compliant financial products creates much higher operational costs and because the prices of Islamic MFI products are much lower than those of conventional MFIs. Second, we hypothesise that credit risk of Islamic MFIs is different from that of conventional MFIs.

Islamic finance law is based on Shariah Law, or “a system of duties that are incumbent upon a Muslim by virtue of his religious belief. Shariah law originates from the Qur’an, Islam’s holy book, and from the Hadith. The Hadith is a compilation of validated literal sayings of the Prophet Muhammad that are not present in the Qur’an.

We employ data from the Microfinance Information Exchange Network®, an international microfinance platform that provides data on individual MFIs. We construct a panel dataset that comprises1, 320 MFIs located in 58 countries within four regions, namely East Asia and Pacific (EAP), South Asia (SA), Middle East and North Africa (MENA), and Eastern Europe and Central Asia (EECA) during the period of 1998 to 2018. A large percentage of the poor in these four regions are practicing Muslims.

We hypothesize that Islamic MFIs have less profitability, less self-sufficiency and less credit risk. Employing a sample of firms from four regions for the period 1998 to 2018, we find empirical evidence for our hypotheses. Our study sheds light on extant literature from two perspectives. First, our research adds to the limited empirical literature on the role of Islamic finance in the economy and comparative literature between conventional and Islamic finance. Second, our research extends and complements the current literature on microfinance.

Compared with conventional banks, Islamic banks benefit more from lending to small businesses price their discretionary component lower (ELNAHASS et al., 2014), and have lower cost-efficiency, higher intermediation ratio, higher asset quality and higher capitalisation (BECK et al., 2013), lower credit risk and lower leverage (ABEDIFAR et al., 2013). Johnes et al. (2014) find that Islamic banks have similar efficiency with conventional banks.

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