How Islamic Rural Bank Overcomes the Trade-off Between Sustainability and Outreach: Does Market Competition Matter?

Abstract

There was no consensus on how to deal with the trade-off between maintaining sustainability and outreach of microfinance institutions among researchers. This research aims to find out how Islamic rural banks balance the demands for sustainability and financial outreach at the same time where competition in the microfinance segment is increasing. The paper provides time series data which includes monthly industry data from Islamic Rural Bank for a period of more than 14 years starting from January 2009 to March 2023. In the first analysis, an estimate of the level of market competition is computed by the Lerner Index (LI) of each period. Furthermore, the efficiency analysis of Data Envelopment Analysis (DEA) is used to measure efficiency which allows estimation of efficiency performance using multiple inputs and outputs to understand how Islamic Rural Bank deals with sustainability and outreach. Finally, a Vector Autoregression/Vector Error Correction Model (VAR/VECM) analysis is used to analyse the relationship between the level of market competition and the efficiency of Islamic Rural Bank in achieving sustainability and outreach objectives. The results of the study suggest that by using a production approach, Islamic Rural Bank can operate efficiently while maintaining sustainability and outreach objectives without trade-offs. In addition, market competition has a moderate influence on achieving sustainability goals and their outreach. This research examines how Islamic Rural Bank is one of the microfinances to overcome the trade-off between the goals among high competition and the increasing financial needs of customers. The Microfinance model from Islamic Rural Banks can be replicated in other microfinance institutions (MFIs) to reach both outreach and sustainability goals.