Paper Title: Do Islamic Microfinance Institutions Affect the Socio-economic Development of the Beneficiaries? The Evidence from Turkey

Author:        Salih Ülev, Fatih Savaşan, Mücahit Özdemir

Publisher:    International Journal of Ethics and Systems, Vol. 39(2), 286 – 31. 

This paper aims to investigate the effect of Islamic microfinance on poor households through the case of the IKSAR Qard al-Hasan Program in Turkey. It examined the changes in the socio-economic status of beneficiaries before and after the program.

Authors conducted two surveys to micro-entrepreneurs: the first is when they received the loan and the second is when they finished their instalments.

According to the results obtained from the analysis of the pre- and post-surveys, a statistically significant increase of 35% was experienced in the monthly household income after receiving the qard al-hasan loan compared to before. Similarly, a statistically significant increase was found in the monthly expenditures of 23 out of 30 households after receiving the qard al-hasan.

The study indicated that Islamic microfinance and qard al-hasan, which were combined in the IKSAR Qard al-Hasan Program, have direct and indirect positive effects on the borrowers. While the qard al-hasan led to a rise in the borrowers’ income, it also uplifted the self-confidence of the borrowers.

There are two limitations in this research. First, the data used in the quantitative part of the study covers only one to two years. Secondly, the sample size is small.

However, the study provides interesting insights that if microcredit products do not overburden the client, then it can result in socio-economic mobility. In conventional microfinance, high cost of finance with frequent repayment constraints the clients in achieving socio-economic mobility. It also leads to people falling in debt trap if they use the funds in consumption and find it difficult to repay the instalments which become due after a very short interval and escalate with the effect of compounding.

On the other hand, Qard-e-Hasan model does not overburden the client. It has no element of interest, either in simple or in compounded form. In fact, the case of Akhuwat also testifies this fact that repayment rates can be as high as 99%.

The socio-economic mobility is also significant in Qard-e-Hasan model whereby the past clients become the future donors. Thus, it gives rise to organic growth and sustainability of the program. Therefore, if government subsidize provision of finance and if private sector also plays a role in providing funding support, then Qard-e-Hasan model can prove to be a very disciplined and effective way to achieve poverty alleviation and socio-economic mobility.

What is important in these programs is to ensure right targeting and trust. Akhuwat builds trust by utilizing the social and religious collateral. The contracts are signed and the funds are distributed in holy places to ensure compliance and sensitivity about upholding the trust.

Thus, this paper is a welcome study to document the potential of Islamic microfinance in general and Qard-e-Hasan model in particular. 

In future studies, the effectiveness of different Islamic financing methods can be compared with each other. For example, by giving qard al-hasan to one group and using murabaha or mudarabah to another group, these financing effects on beneficiaries’ repayment performance and the level of income increase can be analyzed. Moreover, it can be examined whether the results of the two groups differ when Islamic values related to qard al-hasan are emphasized to one group and not the other group.