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Returns to Islamic Microfinance: Evidence from a Randomized Experiment in Pakistan

Maazullah, () and Arjun Bedi
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Maazullah,: ISS, Erasmus University Rotterdam

No 10965, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The global microfinance movement is driven by the claim that once poor micro-entrepreneurs are provided access to capital, they will be able to generate high returns. The existing evidence on returns to capital is mixed and too limited to substantiate this claim. This paper reports on a field experiment conducted in Pakistan, in co-operation with Akhuwat microfinance, in which interest free loans were randomly provided to microenterprises. We find that treatment leads to a significant increase in working capital and in business profits. Using randomized treatment as an instrument for capital, we find average monthly returns to capital of 8.6 to 11.9 a month. These returns are substantially higher than the interest rates charged by microfinance institutions in Pakistan.

Keywords: returns to capital; microfinance; microenterprises; randomized experiment; Akhuwat microfinance (search for similar items in EconPapers)
JEL-codes: O17 O16 C93 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ent, nep-exp and nep-mfd
Date: 2017-08
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