Is Islamic Microfinance a Resilient Business Model During Periods of Crisis? Empirical Evidence from Arab Countries

The purpose of this chapter is to investigate the impact of the microfinance business model on the risk of institutions with focus on the benefits of diversifying to Islamic microfinance. Furthermore, we consider whether expanding the activities of Islamic and conventional microfinance institutions to the rural market reduce their solvency risk. With regards to the resilience of microfinance institutions during periods of crisis, we identify the business model that mitigates the risk in microfinance. Using a sample of 81 microfinance institutions (MFIs) in Arab countries between 1999 and 2018, we find that Islamic MFIs have a higher credit risk. Our findings indicate that Islamic MFIs have a lower credit risk if they diversify their income, however they become less resilient. Our results provide empirical evidence on the effect of geographical expansion on the resilience of microfinance institutions and their credit risk. We find that the credit risk of microfinance institutions is likely to increase when they expand their activities to the rural market. However, MFIs are more stable when they restrict their market type. Our study provides empirical evidence on the business models of MFIs in Arab countries and the effect of their business-orientation on their risk during financial crises. It contributes to the understanding of risk diversification and stability links in Islamic microfinance and provides academic evidence to policy makers in microfinance for current and future reforms.