PROGRESSIVE LENDING IN INDONESIAN ISLAMIC MICROFINANCE INSTITUTIONS: IMPROVED MONITORING OR MISSION DRIFT? Supported by: Muhammad Miqdad Robbani 1 , Universitas Indonesia Mahdiah Aulia 2 , International Islamic University of Malaysia Fatiya Rumi Humaira 3, University of Manchester
Introduction Research Question Data Main Results Method • Does Islamic MFI • This study uses • This study uses • The findings suggest that take advantage of cross-sectional dependent Islamic MFIs do not relationship survey data of 1,001 variable have better lending to Ultra-Microloans regression, effectiveness in strengthen their borrowers from 5 namely Tobit extracting relationship with MFIs, in which three regression, additional the customers? of them are Islamic information from since the MFIs providing • Does the level of their interactions dependent financing in 13 customers’ welfare with the borrowers regions in Indonesia variable has influence the credit than conventional during 2018. availability from upper limit MFIs Islamic MFI • Islamic MFIs tend because of the to give financing to occurrence of wealthier borrowers mission drift? which is a sign of mission drift 2
Literature Review & Model Development Relationship lending helps the lender to extract soft information due to intense interaction between the lenders Fortunately , there SMEs contribute up to and borrowers. Berger and Udell (2002) 60% of total Scalability is MFI as an Islamic Berger and Udell (1995) employment and up to alternative for SMEs Bank is hard to institution 40% of national Petersen and Rajan (1994) finance SMEs since financing as a provide more income (GDP), but they they achieve their combination for also face fjnancing fjnancing than efficiency by financial constraints that non-Islamic to compound small intermediation and limit their deposits and provide small business capability to grow social intermediation big loans. Shaban et al. (2010) Mission Drift where World Bank (2019) Ledgerwood (2009) Diamond (1984) the MFI tend to Marshall (2004) provide more fjnancing for wealthier borrower Cornforth (2014) Armendariz, et al. (2013) 3
Data and Hypotheses RELATIONSHIP VARIABLE DATA MISSION DRIFT This study uses cross-sectional survey data of H1. H2. 1,001 Ultra-Microloans borrowers from 5 MFIs, in The longer MFI preference to which three of them are Islamic MFIs providing relationship between fjnance wealthier financing in 13 regions in Indonesia during 2018. lender and borrower borrower represent which represents their intention to We regress use Tobit Regression since our better monitoring prioritize profjtability dependent variable is a limited dependent variable tends to increase the instead of outreach, with certain limit. credit availability and indicates the since it decreases mission drift problem. We also use Probit Regression for robustness the borrower risk check where we change the dependent variable to through better be a dummy variable. access to assess borrower. 4
Empirical Model Percentage of loan approved = β0 + β1 Islamic Dummy x Relationship DEPENDENT VARIABLES characteristics + θ1 Individual characteristics PERCENTAGE OF LOAN APPROVED (including Borrower The amount of loan that have been approved by the MFI Wealthiness characteristics) INDEPENDENT VARIABLES + θ2 Business characteristics + θ3 Relationship RELATIONSHIP DURATION WITH MARKET Percentage of loan approved characteristics + θ4 Dummy The dummy variable for the borrower when they have relationship 2-5 years or more than 5 = β0 + β1 Islamic Dummy Islamic+ ε years BORROWER WEAL THINESS (MISSION DRIFT INDICATOR) x Borrower Wealthiness The total individual expense, individual asset owned and education level characteristics + θ1 Individual characteristics ADDITIONAL INDIVIDUAL CHARACTERISTICS Age, Gender and Head of Family (including Borrower Wealthiness characteristics) BUSINESS CHARACTERISTICS + θ2 Business characteristics Number of employees, Total sales, Total business assets, and Profjt + θ3 Relationship ISLAMIC INDICATOR characteristics + • Dummy Islamic variable, + θ4 Dummy Islamic ε • The interaction between dummy Islamic and relationship variables *model developed based on Petersen • The interaction between dummy Islamic and borrower wealthiness and Rajan (1994) and previous literature mentioned 5
Results (Relationship Factor) (2) (3) 1. Coefficient of relationship duration variable is significant. This condition means that MFI at overall can utilize this duration to decrease the asymmetric information and provide more credit availability for the borrower (Petersen & Rajan, 1994). 2. Dummy Islamic shows significant coefficient which means that Islamic finance provide more financing . This result is consistent with previous research (Shaban et al., 2010). 3. However, the interaction variable between Islamic dummy and relationship variable is not significant which means that the source of the increasing of credit (1) availability in Islamic MFI does not come from decreasing asymmetric information 6
Results (Mission Drift) (1) (2) (3) 1. The interaction variable is signifjcant at 10% level. The result shows that the increasing of one level of education in Islamic fjnancing tend to increase the percentage of credit approved for 5.157 percentage point larger than in non-Islamic fjnancing. 2. In column 3, the coeffjcient of average individual expense is also signifjcant at 5% level. The increasing of average individual expense for one category tend to increase the percentage of credit approved in Islamic fjnancing for 12.463 percentage point larger than in non-Islamic fjnancing. 3. Finally , in column 4 authors also fjnd the signifjcant efgect of asset owned by the borrower on credit availability Those results suggest that Islamic MFI tend to provide more fjnancing for wealthier borrower . This indicates the mission drift issue in Islamic MFI. 7
CONCLUSION • The fjndings show that Islamic MFIs are likely to provide greater credit availability. On the other hand, no signifjcant difgerence was found between Islamic MFIs and conventional MFIs relating to their relationships with relationship lending variable. Therefore, the fjndings suggest that Islamic MFIs do not have better efgectiveness in extracting additional information from their interactions with the borrowers than conventional MFIs • This study also fjnds that Islamic MFIs tend to give fjnancing to wealthier borrowers. It seems possible that this result is due to Islamic MFIs preference to obtain more profjt or pursuing sustainability by fjnancing customers with lower risk and larger loan size. This is a likely indicator of the occurrence of mission drift in Islamic MFIs which mission is to provide fjnancing to the most marginalized borrowers RECOMMENDATION • The fjndings of this study would be benefjcial for regulators and Islamic MFIs themselves to avoid or mitigate the occurrence of mission drift that may divert Islamic MFIs further from their core values and mimic conventional MFI • Balancing the levels of profjtability, cost effjciency and productivity will prevent the occurrence of mission drift in MFIs (Mersland & Strøm, 2010). • Since this study only uses data of Islamic MFIs in Indonesia, it would be interesting to investigate the conditions of Islamic MFIs in other countries to complement our understandings 8
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