Rethinking Microfinance in a Dual Financial System: An Agent-based Simulation

Abstract

Critics concerning the real impact of traditional microfinance as a tool for poverty alleviation are becoming frequent. In contrast, the financial crisis brought out interest for Islamic finance, whose models have been increasingly studied. Today, the real challenge lies in evaluating the impact of microfinance in a complex environment, where both Islamic and conventional microfinance institutions exist and address evolving clients in constant interaction. New methods and models are therefore needed in order to test the efficacy and assess the impact of introducing Islamic microfinance products, compared to the conventional system. In this context, this paper proposes an approach to build an Agent-Based Modeling (ABM) framework, which is aiming to test the effects of such products implementation using Islamic interest-free group loans. It also helps assess the impact of the behavioral biases as well as agents’ interactions within the repayment process.