Experiments in Islamic microfinance

Mohamed El-Komi and Rachel Croson

Journal of Economic Behavior & Organization, 2013, vol. 95, issue C, 252-269

Abstract: Microfinance has been identified as an important tool in increasing the productivity of the poor and in aiding economic development. However, a large proportion of the poor are practicing Muslims, and are thus unable to take advantage of traditional microfinance contracts which involve the payment of interest. This paper describes and experimentally tests Islamic-compliant microfinance products in the context of information asymmetry and costly state verification. We find significantly higher compliance rates for the Islamic-compliant contracts (profit-sharing and joint venture) than for the traditional contract (interest-based). We believe that there is great promise for these types of loans in the microfinance context, for both Muslims and non-Muslims.

Keywords: Islamic finance; Experimental economics; Microfinance; Information asymmetry; Interest; Profit sharing; Joint venture (search for similar items in EconPapers)
JEL-codes: C91 D03 D82 O10 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:95:y:2013:i:c:p:252-269

DOI: 10.1016/j.jebo.2012.08.009

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