Diversification and performance of microfinance institutions: does Islamic microfinance model matter?

Abstract

Purpose The aim of this study is to investigate the effect of income and geographic diversification on the double bottom line of microfinance institutions (MFIs) in Middle East and North Africa (MENA) countries where conventional and Islamic MFIs coexist. The idea is to explore whether diversification impacts MFIs' financial performance and outreach differ for Islamic microfinance. Design/methodology/approach The authors test the effect of diversification and business models of MFIs on their performance and poverty outreach. The authors’ data set is an unbalanced panel sample of 81 (Islamic and conventional) MFIs in MENA countries covering 1999–2018, comprising 743 MFI-year observations. Findings The authors find that increasing income diversification in microfinance and focusing on rural areas decreases the financial performance of MFIs in MENA countries. Islamic MFIs benefit from income diversification by increasing their financial performance. The results provide evidence of a nonlinear relationship between income diversification and the financial performance of MFIs. Although conventional MFIs improve their depth of outreach by diversifying their income, Islamic MFIs have a lower breadth of outreach because they show a higher degree of income diversification. Practical implications This research contributes to the ongoing debate of whether MFIs should focus on or diversify their services to Islamic microfinance. Therefore, the findings of this study are practically crucial for MFIs' stakeholders to understand the contribution of diversification strategies in improving the Islamic MFIs to achieve both financial and social objectives. Originality/value To the best of the authors’ knowledge, it is the first research that addresses the impact of diversification strategies in Islamic microfinance. Additionally, using a panel data set of conventional and Islamic MFIs in MENA countries spanning 1999–2018, this study provides empirical evidence on the diversification versus focus issue from the microfinance industry and the subset of Islamic microfinance.

The integration of Islamic social and commercial finance (IISCF): Systematic literature review, bibliometric analysis, conceptual framework, and future research opportunities

“…An improvement in performance quality with the support of social finance was achieved based on a sample of 1519 micro finance institutions in 55 countries using three parameters – credit risk, financial capacity, and outreach [ 86 ]. However, countries in the Middle East and North Africa (MENA) have shown lower IMFI performance in terms of outreach when they record high-income diversification [ 85 ]. Nevertheless, IMFI performance measurement should be more holistic and not focus solely on profit and growth but also include spiritual and da'wah aspects (Islamic dissemination) [ 92 ].…”

Empowering Rohingya Refugees through Islamic Microfinance Exploring Prospects and Challenges in Bangladesh

“…Over the years, Bangladesh-Myanmar relations have been steady, notwithstanding occasional dissatisfaction. Human security and geopolitical issues have recently impacted bilateral partnerships (Ben Salem & Ben Abdelkader, 2023;Toivonen, 2023). Bangladesh and Myanmar signed an MoU in 1992 to repatriate Rohingya refugees, with little UNHCR participation (UNHCR).…”

“…Rohingya refugee entrepreneurs in Bangladesh also face language limitations, integration concerns, cultural challenges, social isolation, prejudice, and bureaucratic and legal impediments (Ben Salem & Ben Abdelkader, 2023;Migdad, 2023). These obstacles include freedom of movement, labour laws, tax laws, banking, and financial services, and Rohingya firm owners' lack of entrepreneurial skills and marketing power.…”

“…They only serve the Rohingya market in Bangladesh because Islamic microfinance from local and international organizations is inadequate. They exclusively operate in Bangladesh (Abdul Zalim, 2022;Ben Salem & Ben Abdelkader, 2023).…”

“…Bangladesh has many Rohingya. The International Committee of the Red Cross (ICRC), the United Nations High Commissioner for Refugees (UNHCR), and UNESCO are among the nongovernmental organizations (NGOs) working to promote human rights and raise awareness (Abdul Zalim, 2022;Ben Salem & Ben Abdelkader, 2023). Since the focus is on registered Rohingya, the unregistered group is overlooked.…”