Microfinance Horizon

Author(s): Mahmoud ElGamal, Mohamed ElKomi, Dean Karlan and Adam Osman

Abstract:

Microfinance institutions (MFIs) have continued to grow over the past few decades, both in numbers of clients and portfolio sizes. The growth of these MFIs has enabled greater access to credit in many of the world’s less developed nations. However, recent studies have shown that very many of the poor – especially Muslims – remain unbanked, and many who have access to banks remain credit constrained. Confounding this problem in many Middle Eastern countries is the poor’s propensity to reject microfinance, when available, on religious grounds. In this paper we propose an alternative microfinance model built on the familiar rotating savings and credit association (RoSCA) model that is Islamically accepted, and test its performance against Grameen style microcredit provision in a “laboratory experiment in the field” conducted in poor Egyptian villages. Our model of bank insured RoSCAs is shown to solve a coordination failure problems that may otherwise prevent the spontaneous development of informal RoSCAs in practice. Empirically, our guaranteed RoSCA model generated significantly higher takeup and repayment rates than the Grameen model, suggesting that this model can be a useful alternative for Islamic countries where many of the poor have rejected conventional modes of microfinance.

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