Microfinance: economics and ethics

Abstract

Purpose The aim of this study is to examine arguments about the economic and ethical worth of microfinance. Design/methodology/approach This study draws on the available literature to provide a balanced discussion of different views about the economic and ethical desirability of microfinancing. The discussion is reinforced by the use of secondary data (statistics) on the attributes of microfinancing and by reference to a case study in rural Pakistan. Findings Microfinancing is less virtuous than commonly portrayed. Its economic inefficiency consequences are identified, and it is found only likely to make a small contribution to economic growth. The economic efficiency criterion for moral worth (promoted by Becker and Posner) is found to be wanting. From an ethical point of view, microfinance needs to be supplemented by charity to assist the poor. The supply of Islamic microfinance has grown rapidly, but it remains absolutely quite small. It still has some way to go to overcome the ethical and economic shortcomings associated with the supply of microfinance. Supplying microfinance to vulnerable female borrowers can put them under considerable psychological stress. Possible beneficial effects of microfinance are also identified. Originality/value This study is unique because it systematically draws on recent literature and data to provide a novel and balanced review of the economic and ethical worth of microfinance.

A review on literature of Islamic microfinance from 2010-2020: lesson for practitioners and future directions

“…His research offers alternatives to increasing the portion of profit-sharing-based financing such as Mudharabah and Musyarakah , which in the case of IMFI's can meet the needs of the lower middle class. Tisdell and Ahmad (2018) reveal the importance of economic values and ethical values in microfinance practice. From an ethical perspective, microfinance needs to be complemented by charitable activities to help the poor.…”

“… Ishak and Asni (2020) Maqasid al-syari'ah is applied to reconcile decisions in fiqhmuamalat with the banking environment to be adopted pragmatically without sacrificing Shariah principles Miah and Suzuki (2020) IMFI need to increase the portion of financing based on profit sharing Smolo and Ismail (2011) This article discusses the contractual framework in MFI modelling and the role of MFIs through various financing contracts in providing capital to micro-businesses. Tisdell and Ahmad (2018) The need for ethical values in the form of charity for the poor in microfinance practices. Wahyudi (2014) This research shows that commitment makes a positive contribution in achieving the financial goals of an alliance.…”

How does microfinance affect out–migration?

“…Clearly, microfinance has limited impact on poor, and it does not completely transform the lives of its' borrowers. 2,35,36 Our assumption may not capture the reality of life of poor people. Our perspective is shallow, and it has not been drawn from the complex social-economic structures of poor people's lives.…”

Impact of regulatory efficiency and market openness to social and financial efficiency: empirical evidence from microfinance institutions

“…According to Widiarto and Emrouznejad (2015), MFIs have a dual objective, which is to reach low-income consumers and ensure their financial sustainability can be maintained into the long-term. Tisdell and Ahmad (2018) stated that South Asia has the largest number of borrowers although MFIs’ loans in South Asia are smaller than elsewhere. Thus, MFIs greatly assist low-income people by granting them loans and the ability to generate their own income, especially in Thailand and the Philippines.…”