MICROFINANCE PUBLICATION ROUND-UP: Islamic Banking and Growth; Sharia-Compliant Microfinance Products; Islamic Financial Services in Yemen

“Is Islamic Banking Good for Growth?”; by Patrick Imam and Kangni Kpodar; published by the International Monetary Fund; April 2015; 33 pages; available at: http://www.microfinancegateway.org/library/islamic-banking-good-growth

This paper analyzes the relationship between the development of Islamic banking and economic growth in low- and middle-income countries, finding that “countries where Islamic banking is present experience faster economic growth than others” [1].

This empirical study of 52 developing countries over 1999 through 2010 utilizes regression analysis to minimize the impact of the regions’ levels of financial development and growth determinants including trade openness, initial real GDP per capita and amount of government consumption. The document is broken into topics including: (1) the history of Islamic banking; (2) how Islamic banking could induce growth and financial deepening; (3) the methodology of the study; (4) discussion of results; and (5) possible areas for further research. The authors conclude that “Islamic banking is positively associated with economic growth even after controlling for various determinants” [1].

“Costs and Sustainability of Sharia-Compliant Microfinance Products;” by Mayada El-Zoghbi and Kaylene Alvarez; published by CGAP (the Consultative Group to Assist the Poor); February 2015; 12 pages; available at: http://www.microfinancegateway.org/library/costs-and-sustainability-sharia-compliant-microfinance-products

This focus note assesses the operational costs, overall cost structures and business models of Sharia-compliant financial service providers (FSPs) in order to evaluate what might “prohibit the development of a sustainable Sharia-compliant microfinance sector” [2]. The authors analyze case studies of Algeria’s Bank Al Baraka and Pakistan’s Wasil Foundation and two Sharia-compliant microfinance products they both offer: musharaka and salam. Musharaka is “equity participation in a business venture,” in which profits and losses are split between parties in a predetermined ratio, and salam is “an advance payment against future delivery,” typically utilized in agricultural settings [2]. Analyzing the cost structures of the two FSPs, the authors note several “takeaways” including: (1) the business models of traditional FSPs are not suited to handle Sharia-compliant microfinance products; (2) scale and sustainability vary for each Sharia-compliant product; and (3) both musharaka and salam entail high operational costs, but salam has the potential for greater economy of scale.

“Islamic Microfinance in Yemen: Challenges and Opportunities;” by Ali Saleh Alshebami and Dr DM Khandare; published by MacroThink Institute; June 2015; 9 pages; available at: http://www.microfinancegateway.org/library/islamic-microfinance-yemen-challenges-and-opportunities

This paper reviews the Islamic banking sector in Yemen from 1997 to 2013, identifying challenges to the implementation of Islamic banking practices in the country, as well as several positive aspects of Islamic banking that can lead to new opportunities. The challenges include difficulty reaching out to the poorest and most rural populations; client overindebtedness; and high operational costs [3]. The authors highlight the increased demand for Islamic microfinance services as the biggest positive aspect of Islamic banking in Yemen, stating that this demand presents the opportunity for international microfinance institutions (IMFIs) to diversify products and expand the industry [3]. Finally, the authors propose several suggestions for further developing the microfinance sector in Yemen, including establishing dedicated laws for regulating the microfinance market, reducing operational costs, and focusing on operations in rural areas.

By Meredith Steih, Research Associate

Sources and Additional Resources:

International Monetary Fund (IMF) Paper: “Is Islamic Banking Good for Growth?,” http://www.microfinancegateway.org/library/islamic-banking-good-growth

CGAP (Consultative Group to Assist the Poor) Paper: “Costs and Sustainability of Sharia-Compliant Microfinance Products,” http://www.microfinancegateway.org/library/costs-and-sustainability-sharia-compliant-microfinance-products

MacroThink Institute Paper: “Islamic Microfinance in Yemen: Challenges and Opportunities,”http://www.microfinancegateway.org/library/islamic-microfinance-yemen-challenges-and-opportunities

MicroCapital Universe Profile: International Monetary Fund (IMF)

MicroCapital Universe Profile: CGAP (Consultative Group to Assist the Poor)

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