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Enhancing The Enforceability Of Islamic Microfinance Contracts In Oic Countries

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Listed author(s):
  • ZOUARI, Zeineb
  • NABI, Mahmoud Sami

Abstract

The role of Microfinance in alleviating poverty and enhancing social development is increasing. However, Microfinance Institutions (MFIs) suffer from two important problems which undermine their growth. The first one is inherent to their exposure to information asymmetry (adverse selection and moral hazard). The second one is related to the higher cost of debt enforcement especially in the developing countries where they are generally operating. The problem of costly monitoring is also faced by Islamic Microfinance Institutions (IMFIs) and becomes more important in the case of Profit and Loss Sharing contracts. This paper provides a literature survey about the best practices of the MFIs in term of monitoring, discusses their relevance to the IMFIs, and explores the development of specific regulatory and institutional mechanisms to enhance the performance of different schemes of Islamic micro lending programs. It comes up with a number of policy recommendations (for policy makers and managers of the microfinance institutions) detailing the directions of enhancing the regulatory and institutional environment for the sustainable growth of the Islamic microfinance industry in the OIC countries.

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Paper provided by The Islamic Research and Teaching Institute (IRTI) in its series Policy Papers with number 1435-2.

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Length: 39 pages
Date of creation: 19 Jan 2015
Handle: RePEc:ris:irtipp:1435_002
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Keywords: Islamic microfinance; information asymmetry; monitoring costs; regulation and supervision;

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Find related papers by JEL classification:
  • G2 - Financial Economics - - Financial Institutions and Services
  • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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  8. Mohieldin , Mahmoud & Rostom , Ahmed & Fu, Xiaochen & Iqbal, Zamir, 2012. "The Role of Islamic Finance in Enhancing Financial Inclusion in Organization of Islamic Cooperation (OIC) Countries," Islamic Economic Studies, The Islamic Research and Training Institute (IRTI), vol. 20, pages 55-120.
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  11. Ghatak, Maitreesh & Guinnane, Timothy W., 1999. "The economics of lending with joint liability: theory and practice," Journal of Development Economics, Elsevier, vol. 60(1), pages 195-228, October.
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  16. Rafael Gomez & Eric Santor, 2003. "Do Peer Group Members Outperform Individual Borrowers? A Test of Peer Group Lending Using Canadian Micro-Credit Data," Staff Working Papers 03-33, Bank of Canada.
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