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August 2013

Islamic Finance and Financial Inclusion: A Case for Poverty Reduction in the Middle East and North Africa?

Amin Mohseni-Cheraghlou's picture

The Middle East and North Africa (MENA) region is home to about 70 million of the world’s poor (living on less than two dollars per day) and 20 million of the world’s extremely poor (living on less than US$1.25 per day). According to a recent Gallup survey, 95 percent of the adults residing in MENA define themselves as religiously observant. The combination of these two facts has produced a growing interest in Islamic finance as a possible tool for reducing poverty through financial inclusion among the region’s religiously conscious Muslim population (see Mohieldin et al. 2011).

Uneven access to financial services and instruments that are compliant with Shari’ah, or Islamic law, could be one of the contributing reasons for the low number of bank accounts in the MENA region. A mere 18 percent of adults (above the age of 15) have accounts in formal financial institutions, the lowest in the world (Figure 1). There is ample evidence that, if done correctly, increasing access to and the use of various financial services can help both reduce poverty and its severity (for example see Burgess and Pande 2005 and Beck, Demirgüç-Kunt and Levine 2007 among many). With no access to financial services, many of the poor in MENA will continue to be trapped in poverty with little to no chance of escaping it in the foreseeable future.

Do Matching Grants Programs Increase Firm Productivity and Growth?

Miriam Bruhn's picture

Matching grant programs are one of the most commonly used policy tools for boosting productivity and technological upgrading in small firms. A matching grant typically consists of a partial subsidy to a firm for the use of business development services, such as management consultants or technical experts.

Despite their common use, there is currently little evidence as to whether or not matching grants actually improve firms’ productivity and growth prospects. One worry is that the money may simply be used for services that the firm may have hired even without a subsidy. Together with Dean Karlan and Antoinette Schoar, I conducted a randomized impact evaluation in Mexico that is among the first to document the positive effects of a matching grants program.

Do Relationships Matter? Evidence from Loan Officer Turnover

Alejandro Drexler's picture

One of the most frequent causes of credit constraints is the presence of asymmetric information between businesses and investors. Asymmetric information is particularly problematic for micro-entrepreneurs where the information about cash flows and investment decisions is not formally recorded. Furthermore, micro-entrepreneurs many times have few assets to pledge as collateral and do not have a guarantor with a solid financial condition, making it even more difficult for them to access the credit market.

Microfinance institutions specialize in lending to these types of borrowers and have lending technologies that do not rely on formal records. Instead, revenues and expenses are estimated based on non-verifiable information collected by loan officers during field visits to the borrowers’ houses and businesses.