Impact of digitalization and loan-to-deposit ratio (LDR) on the social outreach of Islamic and conventional microfinance institutions: a quantitative analysis

In recent years, the government of Pakistan is promoting digitalization as well as emphasizing on raising the loan-to-deposit ratio (LDR) in the financial sector of the country. In Pakistan, along with conventional microfinance institutions (MFIs), Islamic microfinance institutions have grown in popularity to meet the demands of the customers who desire Sharia-compliant financial services. This study aims to assess and compare the impact of digitalization and LDR on social outreach of Islamic and traditional MFIs in Pakistan. To fulfill its objectives, the study extracted secondary data for the period 2009–2023 of selected Islamic and conventional MFIs. The Least square dummy variable (LSDV) method is employed to analyze the data for Islamic and conventional separately on the basis of different theoretical foundation. The study shows that digitalization and LDR had a significant impact on the social outreach of both types of MFIs. In addition, the analyses revealed a positive and beneficial impact of digitalization on the social outreach of Islamic as well as conventional MFIs. The study found that the differential intercept and differential slope were positively significant, at 0.01 p-value pointing out that digitalization had a significant impact on social outreach and also is linked to the social outreach of both type of MFIs. However, LDR was found to be supportive for Islamic MFIs but rivalrous for conventional MFIs indicating the unique nature of each type of MFIs. The results shows that the differential intercept is significant at 0.01 p-value signifying that LDR has a significant impact on social outreach of both type of MFIs. Moreover, differential slope reveals positively significant at 0.01 p-vale with Islamic MFIs and negative with conventional MFIs suggesting that, both type of institutions behaves differently with the changes in LDR. The analyses reveal that the impact of LDR on conventional MFIs is rivalrous. Based on the findings, the study recommends that the government should emphasize more digitalization across the microfinance sector in the country is associated with financial inclusion and proper utilization of financial services, particularly for the socially neglected communities. In addition, the policymakers should implement different LDR policies to account for structural differences between Islamic and conventional MFIs to maximize their social outreach all over the country.