An impact assessment of Islamic microfinance on poverty alleviation : case of selected cities in Pakistan

Abstract

Poverty is considered one of the basic problems confronting the developing and underdeveloped countries of the world. About 970 million of the world’s population live below the $1.25 poverty line. Similarly, poverty is also considered the main problem of the Islamic world particularly in Pakistan. In the last two decades, microfinance institutions have rapidly been established all around the world on the premise that they can alleviate poverty and open new horizons of economic development. But the majority of Muslim populace yearn for Islamic products over conventional microfinance products on account of religious injunctions against paying interest. The establishment of Islamic microfinance institutions (IsMFIs) has provided the hope to the poor that they can now break their vicious circle of poverty and fulfil the dream of future prosperity in the Islamic way. The main objective of IsMFIs is to uplift the socio-economic status of the poor so it is very important to evaluate their impact on the programme’s participants. This research attempts to analyze the multilevel impact of Islamic microfinance at household level (measured by children’s education, household housing, household asset accumulation, diet and food security), at enterprise level (measured by financial performance, income smoothing effect and resource base) and at religious, social and ethical level in Pakistan. The present study adopted the Assessing the Impact of Microenterprise Services (AIMS) and Small Enterprise Education and Promotion (SEEP) tools for evaluating the impact at the household and enterprise levels and Islami Bank Bangladesh Ltd. (IBBL), Rural Development Scheme (RDS) tools as the baseline for measuring the impact on the religious, social and ethical levels. After that, tools were replicated in the local cultural context. Primary data were collected from the programme’s participants of two leading Islamic microfinance institutions in Pakistan, Akhuwat and Wasil Foundation by employing cross-sectional design with stratified random sampling method. Pearson’s Chi-Square χ2, Yates Continuity Correction, Cramer’s V (φ) and Odds Ratio were used to quantify the difference between established clients (more than one year) and new clients (less than one year). The results of the study support the wide literature belief that microfinance can significantly improve the socio-economic status of the participants. Mixed results reveal that IsMFIs have strong positive impact on the children’s education, financial performance and the enterprise resource base. IsMFIs have positive impact on household housing, household asset accumulation and household food security but no impact can be found on the income smoothening effect of the programme’s participants. Finally IsMFIs appear to spur the religious social and ethical behaviours of the programme’s participants.