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Experiments in Islamic microfinance

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  • El-Komi, Mohamed
  • Croson, Rachel

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.

Suggested Citation

  • El-Komi, Mohamed & Croson, Rachel, 2013. "Experiments in Islamic microfinance," Journal of Economic Behavior & Organization, Elsevier, vol. 95(C), pages 252-269.
  • Handle: RePEc:eee:jeborg:v:95:y:2013:i:c:p:252-269
    DOI: 10.1016/j.jebo.2012.08.009
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    References listed on IDEAS

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    Cited by:

    1. Shaikh, Salman ahmed, 2014. "Towards a Sustainable Islamic Microfinance Model in Pakistan," MPRA Paper 68748, University Library of Munich, Germany.
    2. Mahreen Mahmud, 2015. "Act Now: Microcredit with Voluntary Contributions and Zero Interest Rate - Evidence from Pakistan," Studies in Economics 1513, School of Economics, University of Kent.
    3. repec:eee:finsta:v:34:y:2018:i:c:p:12-43 is not listed on IDEAS

    More about this item

    Keywords

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

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • O10 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - General

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