Academic journal article Journal of Economic Cooperation & Development

Client Satisfaction in Faith-Based Microfinance: A Comparison with Mainstream Models of Microfinance

Academic journal article Journal of Economic Cooperation & Development

Client Satisfaction in Faith-Based Microfinance: A Comparison with Mainstream Models of Microfinance

Article excerpt


The role of microfinance in poverty alleviation, though adequately backed by empirical findings, has been countered by some researchers like Murdoch (2000). It has been argued that the effect of microfinance does not reach the poorest individuals. Secondly, a typical microfinance model assumes that the poor is entrepreneurial which may not actually be entirely true. The commercialization of the sector and the acceptance of microfinance as a business model have posed new challenges to the microfinance sector as well as poverty alleviation efforts. The sector has reported incidence of over-lending, multiple borrowings and diversion of loans for unproductive purposes (Buckley, 1996; Rahman, 1999). The size of the the market defined as "unserved" or "excluded" is over 2 billion (Rhyne, 2010) and less than 5% has been served so far (MIX Report, 2010). The cultural factors have also accounted for the exclusion of poor from using mainstream microfinance schemes (Obaidullah, 2007; Kozel and Parker, 1998). Since majority of microfinance models work on the same or an altered method of group lending, they all suffer from the same systemic problems. There is a need for innovation in product differentiation, operational procedures and targeting. Faithbased microfinance institutions operate on altogether different principles and may be able to reach the financially excluded population more efficiently. This study tries to explore the efficacy of the faith-based microfinance institutions in terms of client satisfaction.

2.Faith-based Organizations

Faith-based Organizations (FBOs) are organizations engaged in development or humanitarian activities that explicitly claim a religious motive (Kirmani and Zaidi 2010). Clarke and Jennings (2008) offered a comprehensive definition of Faith-based organizations:

"a faith-based organization is any organization that derives inspiration and guidance for its activities from the teachings and principles of the faith or from a particular interpretation or school of thought within that faith" (p6).

A faith-based microfinance and poverty alleviation initiative is generally started by, "a religious institution, or by an individual for strong religious motives; works with and through local 'branches' of the religion - churches, mosques, temples and raises substantial proportion of its funds from people of the same faith" (Harper et al. 2008). Faithbased Organizations (FBOs) are not similar, homogenous lot. Smith and Sosin (2001) also analyzed several institutions to study how faith is present in an organization and suggested that the presence of faith can be found in the form of "resource dependency, authority and organizational culture". The availability of funds, control of religious institutions or personalities, the influence of faith in the organizational design are some of the important factors that they found to be shaping the uniqueness of faith-based organizations (Sider and Unruh, 2004; Clarke, 2008; Hefferan, et al. 2009).

3. Literature Review

The empirical studies on faith-based organizations are few. Vidal (2001) mentions that the main reason for the scarcity of empirical analyses of these organizations is the absence of any listing of such organizations at international, country or even state/county level. There are several studies (Sider and Unruh, ibid; Jeavons, 1997) that point out the distinctive features of faith-based organizations. The role of these organizations in poverty alleviation has been investigated by few researchers (Martin, et al, 2007; van Engelenhoven 2006). Ashraf and Hasan (2013) presented an integrated model of poverty alleviation derived from Islamic faith. Ashraf, et al (2014) analyzed the faith dimension of microfinance institutions in terms of the country where the institution is based. A summary of the faith-based microfinance institutions present in literature is presented in Table 1.

Some studies have compared the performance of faith-based and mainstream microfinance institutions (Reinikka & Svensson, 2008; Mersland, et al. …

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