The effect of the nature of the financing activity on interest rates and Murabaha rates in the emerging economy

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Abstract

This study aimed to get acquainted with the impact of the nature of financing activity on the interest rates and Murabaha rates prevailing in commercial banks and microfinance institutions (MFIs) in Jordan, as the main object of microfinance activity is to reduce poverty and unemployment (Lal, 2018). The study used the descriptive and analytical approach to evaluate the extent of variation in interest rates among different financing sectors. The study used a t-test for independent samples to test the extent of statistically significant differences between the interest rates and Murabaha rates between the three types of activity; the one-way analysis of variance (ANOVA) test was also used to test the variance in interest rates between the MFIs. The study found statistically significant differences between fixed interest rates, declining interest rates imposed by MFIs, and interest rates in commercial banks, and between Murabaha rates used in MFIs and Murabaha rates in Islamic banks. Fixed interest rates, declining interest rates, and Murabaha rates were higher in MFIs than the commercial banks and Islamic banks which oppose the main object of a microfinance institution that is helping poor families and small institutions gain access to financial services, The study found statistically significant differences between the interest rates of the MFIs themselves. The study recommended tightening control over the microfinance sector or capping its interest rates (Heng, Chea, & Heng, 2021) to match the interest rates and Murabaha rates in it along with the cost of obtaining funds and operational costs in these institutions.

Keywords: Microfinance, Banks, Interest, Murabaha, Jordan

Authors’ individual contribution: The Author is responsible for all the contributions to the paper according to CRediT (Contributor Roles Taxonomy) standards.

Declaration of conflicting interests: The Author declares that there is no conflict of interest.

Acknowledgements: The Author would like to thank the Middle East University, Amman, Jordan for their substantial morally and financially efforts and Tanmeyah, the Jordan microfinance network, and the Islamic banks operating in Jordan for their support through providing the necessary data about microfinance institutions and Islamic banks products and Murabaha rates.

JEL Classification: D21, G21, L25

Received: 31.12.2021
Accepted: 20.05.2022
Published online: 24.05.2022

How to cite this paper: Al Jundi, N. A. (2022). The effect of the nature of the financing activity on interest rates and Murabaha rates in the emerging economy [Special issue]. Journal of Governance & Regulation, 11(2), 309–320. https://doi.org/10.22495/jgrv11i2siart10