Rethinking Microfinance in a Dual Financial System: An Agent-based Simulation

Abstract

Critics concerning the real impact of traditional microfinance as a tool for poverty alleviation are becoming frequent. In contrast, the financial crisis brought out interest for Islamic finance, whose models have been increasingly studied. Today, the real challenge lies in evaluating the impact of microfinance in a complex environment, where both Islamic and conventional microfinance institutions exist and address evolving clients in constant interaction. New methods and models are therefore needed in order to test the efficacy and assess the impact of introducing Islamic microfinance products, compared to the conventional system. In this context, this paper proposes an approach to build an Agent-Based Modeling (ABM) framework, which is aiming to test the effects of such products implementation using Islamic interest-free group loans. It also helps assess the impact of the behavioral biases as well as agents’ interactions within the repayment process.

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“…The non-repayment of credits is due to some factor cultural norms and social environment and should be taken into consideration from IsMFIs before giving loans (Bourhime and Tkiouat, 2018). Wulandari and Kassim (2016) showed that the effectiveness of microenterprises in alleviating poverty is weak unless the customer is under the poverty line.…”

“…Several studies have agreed on the crucial role played by microfinance in alleviating poverty in different contexts, mainly Bangladesh, Sub-Saharian African countries (Al-Shami, Majid, Rashid, and Hamid, 2013;El-Komi and Croson, 2013;Khaki and Sangmi, 2017;Lal, 2018;Murshid, 2018), enhancing financial inclusion (Alaro & Alalubosa, 2018;Hassan, 2015; Maouloud, M.V., Kassim, S., & Othman, 2019;Singh & Yadav, 2012), and empowering women (Hassan and Saleem, 2017;Murshid, 2018). Notwithstanding, that Islamic microfinance has proved its role in enhancing the well-being of less-affluent, the conventional microfinance has been criticized as not an effective tool to alleviate poverty due to the high rate of interest that is charged to the poor (Bourhime and Tkiouat, 2018;Mahmood, Fatima, Khan, and Qamar, 2015). In addition to that, a lot of Muslim people around the world have the reason of religiosity as a barrier from benefiting from conventional microfinance (Hassan, 2015;Mansori, Kim, and Safari, 2015;Wilson, 2007).…”