Experiments in Islamic microfinance

Mohamed El-Komi, Rachel Croson

Research output: Contribution to journalArticle

30 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)252-269
Number of pages18
JournalJournal of Economic Behavior and Organization
Volume95
DOIs
StatePublished - Nov 1 2013
Externally publishedYes

Keywords

  • Experimental economics
  • Information asymmetry
  • Interest
  • Islamic finance
  • Joint venture
  • Microfinance
  • Profit sharing

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