Social Collateral and Repayment Performance: Evidence from Islamic Micro Finance

I n this study we designed to test the remarkable repayment performance of Akhuwat in Pakistan; the most successful Islamic Microfinance Institution (IMFI), which offers interest-free loans in order to improve the quality of life and alleviate poverty. The model of Akhuwat is based on Muakhaat (brotherhood) and Qard-e-Hasan (offering financial assistance to somebody in need without interest). The primary objective of this study was to investigate the determinants of microfinance repayment performance. The study examined the borrowers’ characteristics, loan attributes, lender/institutional characteristics and the social collateral characteristics related to the Akhuwat and the data of 387 borrowers is obtained from microfinance programs carried out on a continuous basis by Akhuwat. The findings depicted that among the socio-demographic factors like gender, marital status, number of dependents and numbers of previous loans are significantly and positively associated with loan repayment performance. However, previous loan default and religion are significantly and inversely associated with the loan repayment performance. The findings of the study supported the role of social ties in improving repayment performance and hold key insights and directions about microfinance policymaking in Pakistan.