Efficiency Analysis of Conventional vs. Islamic Microfinance: An Appraisal for Sustainability in Pakistan

Abstract

Microfinance has emerged as an impressive tool for poverty alleviation in global developing economies of all of the continents. Critiques have questioned some of the features of conventional system of microfinance which gave room to Islamic mod of micro-financing (IMF) to the poor. But sustainability of Islamic microfinance is questioned by pyramids of microfinance proponents. Therefore, this study has been devised to compare the efficiency of the conventional vs IMF institutions in Pakistan. A non-parametric approach i.e. Data Envelopment Analysis was rendered to gauge the efficiency of the target institutions. In this regard, panel data of 9 Conventional microfinance institutions and 3 IMF institutions were used spanning over a period of 4 years i.e. 2008 to 2011. The results revealed that 2 out of 3 IMF institution and 2 out of 9 conventional MFIs were found on efficient frontier. Therefore, the sustainability of IMF institutions can be rated as high in Pakistan and this mod of financing should be encouraged by policy makers.