Exploring the Impact of Client Heterogeneity on Microcredit Outcomes of a Qard Hasan Programme in Pakistan

Purpose: This study explores the features and consequences of heterogeneity among clients of the largest Islamic microfinance institution in Pakistan, identifying differences in business and household outcomes between sub-groups of borrowers. Study Design: Our research is based on a longitudinal survey of 500 new clients of the institution conducted between 2015 and 2017, which we use to construct a unique dataset of entrepreneurs applying for interest-free microcredit loans. Evidence of significant heterogeneity was found among entrepreneurs at the time of the baseline survey. Findings: We find differences in business and household outcomes between different types of entrepreneurs based on their level of need. In particular, ‘necessity’ entrepreneurs, who were poorer at the time of the baseline survey, tended to experience greater reductions in poverty levels over the study period, while female clients were found to have decreased their savings frequency more than male clients over the sample period. Contributions: Our results challenge the conventional approach in microcredit programmes to treat the poor as a homogenous group to whom a rigid loan product is offered. We investigate this issue in the specific context of religious communities and institutions, which may further compound issues of client heterogeneity given a range of additional operational objectives. We also make a theoretical contribution in terms of applying agency theory and transaction cost economics in this novel context. Implications: Our findings have several theoretical and managerial implications with respect to the application of the Shari'ah principles of Islamic Finance among a heterogenous group of entrepreneurs.