This study proposes a new modelling approach for studying low-frequency oscillations (LFOs) in a droop controlled islanded microgrid. Due to the absence of inertia, these sources are more vulnerable to power and frequency oscillations. Their quick response can introduce faster electrical dynamics in the system which should be monitored from time to time. To ease the analysis process, this study proposes a simplified method for finding LFO in the microgrid. Inspired from the small-signal automatic generation control model of the conventional grid, a transfer function based closed-loop small-signal model of inverter-based islanded microgrid is presented in this study to study power-sharing among the various inverters. The proposed model uses the concept of dynamic power flow through the network to find the power output of each source following load perturbations in a system. Time domain simulation results and eigenvalue analysis is provided to verify the effectiveness of the proposed small-signal model. By comparing the results obtained with actual system simulation in MATLAB/Simulink, it is found that the proposed simplified model is able to predict the stability margin and the LFO of the system without using actual detailed state-space modelling procedure. © 2020 The Institution of Engineering and Technology.