MICROFINANCE PAPER WRAP-UP: “Increasing Financial Inclusion in the Muslim World: Evidence from an Islamic Finance Marketing Experiment;” by Dean Karlan, Adam Osman, Nour Shammout; published by the World Bank Group

In spite of the growth of the Islamic finance sector, which promotes loans, insurance and other services that comply with the religious laws known as Shariah, financial inclusion rates in predominantly Muslim countries remain low. In collaboration with Tamweelcom, a microcredit institution in Jordan, the authors analyze how the following factors influence people’s decisions to borrow: (1) pricing; (2) religiosity, as determined by whether the person watches “religious television programming;” and (3) partnership with a religious entity certifying that the loans marketed as Shariah-compliant are, in fact, acceptable under Islamic law.

In lieu of traditional interest payments, Islamic loans use mechanisms such as murabaha. In this form of Islamic lending, the lender purchases and retains ownership of a capital item while the borrower gains access to use of the item while paying over time for its cost plus a profit margin for the lender. At the end of the series of payments, ownership transfers from lender to borrower.

In this study, staff marketed conventional loans and Shariah-compliant loans to households in six cities using eight different pitches. Members of the control group were “offered a conventional loan to finance household asset purchases from ‘the Jordan Microfinance Company,’ the legal name of Tamweelcom and a known brand in the market.” The seven treatment groups were offered Shariah-compliant loans under the “unknown brand” Tathmeer. The first of these groups was given a similar pitch as the control group, but for an Islamic loan.

The next three groups also were offered Shariah-compliant loans – but the pitch was expanded to describe a religious entity’s certification that the loan terms comply with Islamic law. The religious entity was different for each group.

The final groups were offered both conventional and Shariah-compliant loans, with no mention of a religious entity. For these three groups, the pricing of the Shariah-compliant loan was set below, equal to and above the price of the conventional loan.

The results of the study suggest that individuals were not influenced by the religious entity supporting the loan. However, they were more likely to apply for any type of loan when given a choice of loan types. The authors also found that individuals were more likely to choose a conventional loan when the price of a Shariah-compliant loan increased. The extent of this price elasticity was twice as large among customers who were not deemed religious.

This is a summary of a paper by Dean Karlan, Adam Osman and Nour Shammout; published by the World Bank Group; April 2020; 44 pages; available at http://documents.worldbank.org/curated/en/816801585835678838/pdf/Increasing-Financial-Inclusion-in-the-Muslim-World-Evidence-from-an-Islamic-Finance-Marketing-Experiment.pdf

By Jessica McLeod, Research Associate

Sources and Additional Resources

World Bank Group homepage
https://www.worldbank.org/

Previous MicroCapital wrap-up on savings groups
https://www.microcapital.org/microfinance-paper-wrap-up-a-market-systems-approach-to-savings-groups-by-joanna-ledgerwood-published-by-the-seep-network/

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