PROGRESSIVE LENDING IN INDONESIAN ISLAMIC MICROFINANCE INSTITUTIONS: - - PowerPoint PPT Presentation

PROGRESSIVE LENDING IN INDONESIAN ISLAMIC MICROFINANCE INSTITUTIONS: IMPROVED MONITORING OR MISSION DRIFT?

Muhammad Miqdad Robbani1, Universitas Indonesia Mahdiah Aulia2, International Islamic University of Malaysia Fatiya Rumi Humaira3, University of Manchester

Supported by:

Introduction

2

Research Question

• Does Islamic MFI

take advantage of relationship lending to strengthen their relationship with the customers?

• Does the level of

customers’ welfare influence the credit availability from Islamic MFI because of the

• ccurrence of

mission drift?

Data

• This study uses

cross-sectional survey data of 1,001 Ultra-Microloans borrowers from 5 MFIs, in which three

• f them are Islamic

MFIs providing financing in 13 regions in Indonesia during 2018.

Method

• This study uses

dependent variable regression, namely Tobit regression, since the dependent variable has upper limit

Main Results

• The findings

suggest that Islamic MFIs do not have better effectiveness in extracting additional information from their interactions with the borrowers than conventional MFIs

• Islamic MFIs tend

to give financing to wealthier borrowers which is a sign of mission drift

Literature Review & Model Development

3

SMEs contribute up to 60% of total employment and up to 40% of national income (GDP), but they also face fjnancing constraints that limit their capability to grow World Bank (2019) Scalability Bank is hard to finance SMEs since they achieve their efficiency by compound small deposits and provide big loans. Diamond (1984)

Fortunately, there is MFI as an alternative for SMEs financing as a combination for financial intermediation and social intermediation

Ledgerwood (2009) Marshall (2004)

Islamic institution provide more fjnancing than non-Islamic to small business

Relationship lending helps the lender to extract soft information due to intense interaction between the lenders and borrowers. Mission Drift where the MFI tend to provide more fjnancing for wealthier borrower

Berger and Udell (2002) Berger and Udell (1995) Petersen and Rajan (1994) Cornforth (2014) Armendariz, et al. (2013) Shaban et al. (2010)

Data and Hypotheses

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The longer relationship between lender and borrower which represents better monitoring tends to increase the credit availability since it decreases the borrower risk through better access to assess borrower.

H1.

MFI preference to fjnance wealthier borrower represent their intention to prioritize profjtability instead of outreach, and indicates the mission drift problem.

H2.

RELATIONSHIP VARIABLE MISSION DRIFT

DATA

This study uses cross-sectional survey data of 1,001 Ultra-Microloans borrowers from 5 MFIs, in which three of them are Islamic MFIs providing financing in 13 regions in Indonesia during 2018. We regress use Tobit Regression since our dependent variable is a limited dependent variable with certain limit. We also use Probit Regression for robustness check where we change the dependent variable to be a dummy variable.

Empirical Model

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Percentage of loan approved = β0 + β1 Islamic Dummy x Relationship characteristics + θ1 Individual characteristics (including Borrower Wealthiness characteristics) + θ2 Business characteristics + θ3 Relationship characteristics + θ4 Dummy Islamic+ ε

*model developed based on Petersen and Rajan (1994) and previous literature mentioned

Percentage of loan approved = β0 + β1 Islamic Dummy x Borrower Wealthiness characteristics + θ1 Individual characteristics (including Borrower Wealthiness characteristics) + θ2 Business characteristics + θ3 Relationship characteristics + + θ4 Dummy Islamic ε

INDEPENDENT VARIABLES

BORROWER WEAL THINESS (MISSION DRIFT INDICATOR) The total individual expense, individual asset owned and education level RELATIONSHIP DURATION WITH MARKET The dummy variable for the borrower when they have relationship 2-5 years or more than 5 years

DEPENDENT VARIABLES

PERCENTAGE OF LOAN APPROVED The amount of loan that have been approved by the MFI ADDITIONAL INDIVIDUAL CHARACTERISTICS Age, Gender and Head of Family BUSINESS CHARACTERISTICS Number of employees, Total sales, Total business assets, and Profjt ISLAMIC INDICATOR

• Dummy Islamic variable,
• The interaction between dummy Islamic and relationship variables
• The interaction between dummy Islamic and borrower wealthiness

Results (Relationship Factor)

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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 availability in Islamic MFI does not come from decreasing asymmetric information

(1) (2) (3)

Results (Mission Drift)

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• 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
• wned 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.

(1) (2) (3)

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• 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

• 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
• f Islamic MFIs in other countries to complement our understandings

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