Academic journal article Asian Social Science

A Shariah Perspective Review on Islamic Microfinance

Academic journal article Asian Social Science

A Shariah Perspective Review on Islamic Microfinance

Article excerpt


Islamic micro finance is a growing industry in several Muslim countries such as Bangladesh, Nigeria, and Malaysia. Islamic microfinance is at the heart of Islamic finance as it addresses one of the fundamental roles of financial intermediaries demanded by Shariah. Over the past few decades, many initiatives have taken place to alleviate poverty in Muslim countries. This paper provides the Islamic thoughts and motives behind these initiatives and then, it discusses the mechanisms proposed by Islam to improve the life of poor, prevent them to become poor, and also to improve the general economic relations among members of society. Later on, mudarabah, Musharakah, murabahah, Ijarah, and qard al-hasan are discussed as different types of Shariah compliant contracts that can be used as the base of micro financing business model.

Keywords: Islamic microfinance, micro-finance, Islamic finance, mudarabah, Musharakah, murabahah, Ijarah, qard al-hasan

1. Introduction

According to the Economist (2008), Muslims are one third of the world poor communities. Even though microfinance has been known as a useful tool to aid failing economies (Comim, 2007; Dowla & Barua, 2006; Islam, 2007; Wright, 2000), the Muslims do not take full advantage of the existing microcredit products (Karim, Tarazi, & Reille, 2008). Based on the findings of a global survey conducted in 19 Muslim countries by The Consultative Group to Assist the Poor (CGAP), 20-40 percent of the respondents said that religious reasons is one of the main reasons why they do not take advantage of the existing, interest based microcredit products. Thus, constructing and making the Islamic based microfinance available would encourage the reach of microfinance and aid of the Muslim poor in all countries which had only reached about 380'000 customers globally and it was accounted to an estimated of one half of one percent of total of microfinance outreach.

The Muslims view conventional microfinance principles as not compliant to the principles set forth in the Islamic finance law. According to Honohan (2008), an estimated 72% of people living in Muslim-majority countries did not use formal financial services. Therefore, even though many microfinance institutions had stepped in to help the low income Muslim clients, the demand for Islamic microfinance product has become the new driving force in the market.

Islamic financial principles and microfinance are two major elements in the fast growing Islamic finance industry. Islamic financial principles do not only relate to financial need of the poor but also the social principles in caring for the less fortunate. Even though Islamic microfinance is at its infancy stage, but by providing financial products which comply with the Islamic financial principles would encourage the acceptance by the Muslims toward the financial aid provided by the microfinance institutions and also fulfil the demands among the Muslim clients.

Therefore, to have better understanding of this issue related to Islamic financial principles in terms of Shariah - the Islamic law - we are going to look into Islamic perspectives in alleviating poverty, Shariah compliance, Islamic instrument in microfinance, instrument for mobilization of fund, Shariah compliant instrument of microfinance, risk management in Islamic microfinance and finally we are going to discuss financial sustainability and poverty reduction.

2. Islam and Poverty Alleviation

Islam believes that even though individuals are given the same opportunities, each person would not have the same level of economics status. It is because individuals are different in term of their ability to acquire a certain level of economic status. Islam defines poverty as a state where the individual fails to fulfil any of the five basic requirement in life which are religion, physical self, intellect or knowledge, offspring and wealth (Hassan & Ashraf, 2010). …

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