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Deadweight Loss in The Interest-Based and The Interest-Free (Islamic) Microfinance Programs: A Comparative Analysis
Deadweight Loss in The Interest-Based and The Interest-Free (Islamic) Microfinance Programs: A Comparative Analysis
Deadweight Loss in The Interest-Based and The Interest-Free (Islamic) Microfinance Programs: A Comparative Analysis
• Methods of Analysis:
• Graphical Analysis
• Numerical Example
3
What is Microfinance?
Microfinance
Financial non-financial
Micro-credit
education
Micro-insurance healthcare
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Nature of Microfinance
Microfinance
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Differences between interest-based and Interest-free (Islamic)
Microfinance
Basis Interest-based Microfinance Interest-free Microfinance
Basic Financial services: Financial services-
Function Microcredit through Lending- Microcredit through
borrowing, .Profit-Loss sharing Business,
Micro-savings, .buying & selling (bai-murabaha),
Micro insurance Micro-savings,
Micro insurance
Interest free Loan/ Qard al-hasanah
Non-Financial services: Non-Financial services:
education; healthcare Similar + Zakat based program
Basis of Interest rate Profit-Loss sharing (Mudaraba;
Musharakah),
Loan
Profit rate on buying -selling
Interest free Loan
Religious charity 6
Differences between interest-based and Interest-free
(Islamic) Microfinance
Basis Interest-based Microfinance Interest-free
Microfinance
Loan Sanction Cash Goods/Products
Real asset May be or may not be Must
building
Fund/Loan Easy Impossible
diversion
Methods of Group/center pressure Group/spouse
dealings with guarantee, Islamic
defaults ethics
Socioeconomic Secular, Religious motivation; 7
Deadweight Loss
• ‘deadweight loss’ means the 'excess burden’ or ‘welfare loss’.
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Determinants of the Deadweight Loss in the
Microfinance
Interest-based Microfinance Interest-free Microfinance
No Profit-Loss Sharing Business
No Trade: buying & selling
Interest Rate/Loan Price: 20 - 33% Profit Rate/Loan Price: 0 - 15%
No Interest free Loan
May be or may not be Real Asset building is Must
Cash transfer Product or goods transfer
Fund/Loan Diversion is easy Fund/Loan Diversion is Impossible
Charity: Optional based on fund Charity: compulsory responsibility
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Interest Rate / Loan Price
Interest-based Microfinance Interest-free MIcrofinance
Name of MFIs Interest Rate Name of MFIs Profit Rate
Grameen Bank 20% Muslim Aid; Bangladesh 0%
(Quard al-
Hasanah)
BRAC 26% IBBL-RDS 12.5%
(Rebate 2.5%)
ASA 25% Exim Bank 9%
Microfinance
Buro Bangladesh 15-20% Al-arafah Microfinance 15%
Shakti Foundation 27% - -
Average 23.5% Average 9.125%
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Interest Rate / Loan Price: World by Region
Region Interest rate
Sub-Saharan Africa 31-33%
South Asia, 25-26%
East Asia and the Pacific 27%
Eastern Europe and Central 28-29%
Asia
Latin America and Caribbean 31-32%
Middle East and North Africa 31-32%
Average 29.33% 11
Measuring the Deadweight Loss
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Deadweight Losses in terms of the Quantity demand (Qd) and the Loan
Price (P)
Deadweight Losses in terms of the Quantity Deadweight Losses in terms of the Loan Price (P)
demand (Qd)
Qd of Qd of Qd of Price of Price of Price of
Islamic Microfinan Conventional Islamic Microfinan Convention
Microfinan ce Loan at Microfinance Microfinan ce Loan at al
ce Loan market Loan ce Loan market Microfinan
Average Average ce Loan
price price
Qd OQI OQm OQc OPI OPma OPc Loan Price
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Key Findings of The study
• Dead weight loss is extremely higher in interest-based
Microfinance
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Key Findings of The study
• Fund diversion is the common phenomenon in
conventional Microfinance whereas it is almost impossible
in the Islamic Microfinance
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Recommendations
• conventional Microfinance Institutions should eliminate the interest and use
the tools of Islamic Microfinance.
• Islamic MFIs should increase its coverage by managing funds from different
sources.
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Thank you very much
for
Listening my paper
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