Digital Islamic microfinance: tailoring services for ultra-micro borrowers

This study aims to examine the unique characteristics of the ultra-micro SMEs digital Islamic microfinance, focusing on the personal, social and financial factors. In addition, it also aims to investigate the determinants of digital adoption among the Islamic microfinance ultra-micro small- and medium-sized enterprises (SMEs). Grounded in asymmetric information theory (AIT), the study explores how information gaps between borrowers and lenders influence participation and financing decisions in digital Islamic microfinance. This study uses a qualitative research approach by conducting in-depth interviews with 12 ultra-micro SME owners. Subsequently, the data collected was merged and converged, and undergone the coding process. Consistent with the AIT, the findings suggest that ultra-micro SMEs often operate with informal financial reporting and unstable income, resulting in information asymmetries between the borrowers and digital Islamic microfinance institutions. This study shows that dimensions of personal life (comprising business and socioeconomic elements), social life and finance (comprising repayment method and financing characteristics) affect the ultra-micro SMEs’ common traits. Meanwhile, religious reasons, social dynamics, technological features, ease of access and trust-related apprehensions drive the acceptance of digital Islamic microfinance by ultra-micro SMEs. This study contributes to the growing literature by integrating the AIT into analyzing the ultra-micro SMEs’ engagement with digital Islamic microfinance. It highlights the importance of understanding how informational imbalances influence financing behavior and institutional design. Moreover, it sheds light on the novel characteristics of ultra-micro SMEs in choosing digital Islamic microfinance services.