The impact of economic cyclicality on financial risks: evidence of islamic microfinance institutions

Loan portfolio is the largest asset component and a source of risk that a microfinance institution needs to treat carefully. The quality of the loan portfolio is very crucial as the loans are typically not backed by any physical collateral. Having dual roles of achieving social and financial objectives, lenders require the microfinance institutions to have long-term financial sustainability. The study aims to gauge whether financial risks of Islamic and conventional microfinance institutions are pro-cyclical to economic conditions.