Islamic Microfinance

Although Islamic finance was originally re-introduced to fight poverty, this objective fell down on the industry's agenda. An important area for the Islamic finance industry, therefore, is the adaptation of Islamic financial products to join in the development of microfinance to bring the initial objective of poverty alleviation back into the industry's focus.

Both the principles of Islamic finance and microfinance seek to prevent economic exploitation by prohibiting usury. Microfinance is a flexible tool capable of being tailored to satisfy the needs and conditions of various environments, including the Islamic financial sector which forbids riba, or the payment and receipt of interest.

A case study in Mali [1] is quite educational in this context:

The German development agency, GTZ, aimed to offer access to financial services to the poorest in a region in Mali with a diverse ethnic population, who were formerly in conflict. This can help to increase the acceptance of the microfinancial services for Muslims, as well as to provide the different ethnic groups with a way to cooperate through a different methodology of microfinance.

The region where it is was started is tiny, with 12,000 inhabitants and the intial reach out was to nearly 600 clients. Nevertheless, there has been some very interesting data from this institution's experience – the repayment rate is 99%Template:Citation needed, and the profit-sharing products like musharaka were the most profitable for this new microfinance institution. This experience is in contrast to expectations that many Islamic banks have regarding the moral hazard problem of profit-sharing products.

The Shariah-compliance of the product was not resolved by the international scholars because the local acceptance of the products was the most important factor for the microfinance institution. To achieve credibility the local Kadi (the Judge) acts as notary of each financing contract.

First: Islamic financial institutions having untapped potentials expanding to the poorest by creating Islamic Microfinance institutions and

Second: Wealth investors and institution can build on this experience and hire set up consultants to create more of those entities worldwide to serve the objective of Shariah and also to achieve returns which are not correlated with standard international risk/return profiles; with a higher country risk but reasonable overall risks which uncorrelates to other investments of the stronger interconnected, globalised world.

References

• [1] Köhler, Wolfgang, Small Loans according to the Koran, in: Islam and EZ in Afrika; Newsletter des Regionalbereichs

Afrika, No. 5/September 2004, translated by Saliya Kanathigoda,Financial System Development Section, GTZ.

Bibliography

• Introduction to Islamic Microfinance by Mohammad Obaidullah
• Islamic Microfinance, Theory, Policy and Practice, Ajaz Ahmed Khan, 2008
• The influence of faith on Islamic microfinance programmes, Ajaz Ahmed Khan and Isabel Phillips, 2010
• Islamic Microfinance Challenge 2010: Innovating Sustainable, Scalable, and Market-Driven Models
• Microfinance and Islamic Finance – A Perfect Match, Dr. Linda Eagle, 2008
• Meeting Customer Needs by Making Microlending Products Sharia-Compliant, Dr. Linda Eagle, 2009
• Case Study: Islamic microfinance and socially responsible investments
• Islamic Microfinance in Indonesia GTZ, 2005
• Islamic Microfinance: A Case Study of Australia by Abu Umar Faruq Ahmad, Professor A. B. Rafique Ahmad
• Guidelines for Islamic Microfinance Business by Financial Institutions State Bank of Pakistan
• Islamic Business Contracts and Microfinance: A Case of Mudaraba Nadeem A.
• Supporting Credit Union Development in Afghanistan
• Microfinance Institutions in the OIC countries