Social Collateral and Repayment Performance : Evidence from Islamic Micro Finance

A superior knowledge of determinants of repayment performance can contribute significantly to the development of microfinance in Pakistan. In this study we designed to test the remarkable repayment performance of Akhuwat; most successful Islamic Microfinance Institution (IMFI) in Pakistan. Akhuwat offers interest free loans in order to improve the quality of life and alleviate poverty in Pakistan. 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. In order to verify these relationships, data is obtained from microfinance programs carried out on continuous basis by Akhuwat. Data of 387 borrowers was collected and logistic regression was used for data analysis. The findings depicted that among the socio-demographic factors like gender, marital status, number of dependents and number 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. Further, institutional characteristics e.g. branch location and amount of processing fees are significantly and positively associated with repayment performance. On the other hand, late fees penalty is significantly and inversely related to the loan repayment performance. Loan related characteristics like amount of loan and ease in repayment are significantly and positively related to the 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 policy making in Pakistan