Abstract
Microfinance (MF) has achieved tremendous success in improving socio-economic conditions all over the world, especially in developing countries like Bangladesh. Although, interest-based Conventional Microfinance Institutions (ConMFI’s) have been operating successfully in the majority of developing countries, there are still some Muslim people who are reluctant to receive financial support from ConMFI’s, due to their religious prohibitions on interest. To meet the demand for non-interest-based financing alternative, Islamic Microfinance Institutions (IsMFI’s) have emerged and are now operating alongside ConMFI’s. Moreover, rapid expansion and recent commercialisation of this sector introduced new challenges for Microfinance Institutions (MFI’s) i.e., financial self-sustainability and social outreach. Now both IsMFI’s and ConMFI’s in Bangladesh, with their unique dual objectives, operate in the same marketplace facing the same challenges. This makes it imperative to assess the performance of both type of MFI’s, using identical theoretical and methodological assessment frameworks, to improve their performance and realise their full potential towards economic development and improving socio-economic conditions of the poor.
The main aims of this study are to provide an empirical performance comparison between IsMFI’s and ConMFI’s and to examine the trade-off between financial sustainability and social outreach objectives, in the Islamic microfinance sector of Bangladesh. This study uses non-parametric Data Envelopment Analysis (DEA) method, to measure and compare the efficiency of 384 MFI’s in Bangladesh over the period 2017-2020. Additionally, this research estimates bias corrected efficiency scores, utilising the Bootstrap DEA method, to overcome the limitations of the Standard DEA method and to provide a more accurate analysis of the MF and Islamic MF sectors of Bangladesh. Furthermore, separate assessment frameworks have been used for each dimension of performance, which gives a better understanding of the challenges on each aspect of performance, for IsMFI’s and ConMFI’s in Bangladesh.
The first contribution of this study is towards MF and Islamic MF literature of Bangladesh by developing dedicated assessment models, with specific focus on the dual objectives, both simultaneously and in isolation. The methodological contribution of this study is towards the empirical performance comparison of IsMFI’s and ConMFI’s, by developing a methodology to overcome the contrast between 8 IsMFI’s and 376 ConMFI’s in the sample. The final contribution of this study is towards the unsettled debate on the trade-off between sustainability and outreach objectives of MFI’s, by providing an objective measurement of both dimensions of performance.
The outcome of the research suggests that IsMFI’s are not as efficient as ConMFI’s, but they are not as inefficient either. ConMFI’s get the highest and lowest efficiency estimation according to the analysis, although IsMFI’s, on average, get higher efficiency estimates, from all three perspectives (social, financial, and double bottom-line) of performance analysis. There is no consistent pattern of change in efficiency over the year from financial and double bottom line perspectives, whilst social efficiency improves overtime. MFI’s are better at attaining their social goals than financial goals, according to the analysis. Research outcomes regarding the second aim suggest that there is a trade-off between most of the IsMFI’s and ConMFI’s in Bangladesh. However, 1 MFI in 2017, 2018 and 2020 and 9 MFI’s in 2019 do not show trade-off between their social and financial objectives which suggests that it is possible to maintain both dual objectives simultaneously for IsMFI’s and ConMFI’s in Bangladesh