Costs and Sustainability of Sharia-Compliant Microfinance Products

Paper
Date Published: 
Feb 2015
Author: 
El-Zoghbi, M. & Alvarez, K.
Publisher: 

Evaluating the sustainability of sharia-compliant microfinance products

This focus note assesses the underlying cost structures and business models of financial service providers (FSPs) that seek to offer sharia-compliant microfinance products. It evaluates whether these cost structures prohibit the development of a sustainable sharia-compliant microfinance sector. The note is based on two case studies of products (mushraka and salam) of two different FSPs: Bank Al Baraka in Algeria and Wasil Foundation in Pakistan. The case studies look at the operational costs associated with the products and assess the scale at which these types of products can be sustainable. After examining these case studies, the note offers preliminary takeaways on how service providers might incorporate some of the lessons of these FSPs to better serve their own markets. Key findings include:

  • Deep technical know-how of the underlying industries financed is required if FSPs are interested in salam, mushraka, or other sharia-compliant microfinance products;
  • In case of both mushraka and salam, there are high operational costs but salam has greater economies of scale over diminishing mushraka;
  • Dimensions of scale and sustainability differ for each sharia-compliant microfinance product;
  • Traditional FSP business models are not adapted for sharia-compliant products;
  • There is a need to understand return on investment (ROI) for each investee class.
Type: 
Paper
Countries: 
Algeria, Pakistan