Agent-Based Modelling and Simulation of Islamic Microfinance:

Evaluating Diminishing Partnership for Poverty Alleviation

Sofia Ayouche

Salwa Aligod

 

Abstract: The microfinance industry plays a significant role in reducing poverty in developing countries. However, new methods and models are needed to assess the effectiveness and impact of introducing Islamic microfinance products relative to the conventional system. Microfinance is considered a complex system in which both Islamic and conventional microfinance institutions exist and constantly interact with an evolving customer base. Furthermore, engaging low-income individuals through business partnerships is an innovative approach increasingly advocated in recent times, particularly through social entrepreneurship and inclusive business models. This paper aims to develop an agent-based model for comparing conventional and Islamic microfinance systems. For this purpose, we used a dataset of 619 micro-entrepreneurs and conducted the analysis using the NetLogo platform. The model relies on the Diminishing Partnership Contract, under which the MFI acts as a partner or investor rather than a mere lender. The results indicate that high interest rates reduce the effectiveness of microcredit as a poverty alleviation tool and significantly lower the recovery rate. The Diminishing Partnership Contract in Islamic microfinance demonstrates a positive impact, improving both MFI sustainability and poverty reduction outcomes.