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Role of Islamic Finance in achieving the SDGs:
How could the Islamic Development Bank Group fill the evidence gap

Article: Ibrahima Thierno Lo - Principal Monitoring and Evaluation, ICD

In the development arena, lot of efforts have been deployed in finding new solutions (financial and non-financial) to address the development challenges. The culmination of these efforts is the SDGs agenda adopted at the global level in September 2015. The new SDGs unlike the previous MDGs, are focusing on solutions owned by countries that can make sustainable improvements in people’s lives. However, despite all the ongoing initiatives, nationally or internationally driven, complementing, overlapping or conflicting sometimes, how would we know in the end the best solutions that have really made significant difference in achieving the SDGs? In the present article, we first highlight the case of Islamic Finance with some unanswered questions on its role in development. Section 2 presents rigorous methodologies that help answer those questions and section 3 concludes on concrete steps being taken at IsDB Group level.

  1. Unanswered questions on the role of Islamic Finance in development : few examples

More and more development agencies are relying on building strong empirical evidence as one of their main contributions to the SDGs. In
fact, their greatest impact will not be the amount of financing they provide (which is insignificant compared to domestic and private finance) but the evidence they provide in addition, to inform development policy on ways to accelerate the achievement of the SDGs.
For the IsDB Group, as a premier Islamic multilateral development bank, how are we going to demonstrate that Islamic finance is able to make significant difference in people’s lives, with rigorous empirical evidence?

More specifically, how does the demand for Islamic finance compare to conventional finance and how much does it differ based on the characteristics of the financial product itself? How do the different Islamic finance products affect repayment and long-term utilization of financial services, and ultimately the profits of Financial Institutions? How do Islamic finance products affect the welfare of the recipients? Evidence has shown that classical micro-credit has no significant impact on poverty, can we say the same for Islamic Microfinance?

  1. Rigorous methodologies to answer the unanswered questions

The above causal inference questions cannot be rigorously answered with anecdotal stories or classical surveys, which often suffer from selection bias and measurement errors, which lead to “False Positive” or “False Negative” results. Instead, to minimize these issues, researchers are using advanced empirical methods such as1 :

  • Randomized Control Trial (RCT): a sample is randomized between treatment and control groups. As the treatment (the intervention) has been randomly assigned, the difference in outcomes of the two groups is the effect of the intervention. Although RCT is the ideal set-up for causal inference, it is not doable for some interventions because of its strict requirements.
  • Difference-in-Differences (DD): DD compares outcome before and after an intervention for a group affected by the change (treatment) to a group not affected by the change (control). The validity of the method depends on whether the control group and the treatment group would be on the same trend in absence of the intervention.
  • Regression Discontinuity Design (RDD): RDD compares outcome for people whose value of the underlying targeting variable is just below (group 1) and just above the discontinuity (group 2). These two groups are similar before the intervention. Any difference could be attributed to the intervention. Here, large sample or sometimes census data are required.

 

  1. Concrete steps undertaken by the IsDB Group to invest in empirical evidence

The IsDB Group is taking steps to start including empirical research in its program design. The first attempt using Randomized Control Trial will be with the “Business Resilience Assistance for Value-adding Enterprises for Women (BRAVE Women) program” initiated by the Women and Youth Empowerment Division of IsDB and the IBES program of ICD. They have partnered to submit a joint proposal to the Women Entrepreneurs Finance Initiative (We-Fi),
a multi-donor fund supported by 14 governments and managed by the World Bank.
Based on the proposal, the IsDBG was granted $32 million in April 2018 to implement the BRAVE Women program with the aim to enhance the resilience of women-owned SMEs in Yemen, Nigeria and Mali. One of the empirical research question that the RCT will address is: In fragility context, which types of women-led/owned businesses benefit more from business resilience training combined with grant-matching.

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1  We have summarized here few of them, based on the paper prepared by Ester Duflo of the Department of Economics at MIT - “Empirical Methods MIT 14.771/Harvard 2390b”