Islamic Microfinance: A Missing Component in Islamic Banking

Topics: Islamic banking, Grameen Bank, Sharia Pages: 27 (7831 words) Published: October 12, 2013
イスラーム世界研究(2007)2 号
イスラーム世界研究 第1巻 2 号(2007 年)38-53 頁 Kyoto Bulletin of Islamic Area Studies, 1-2 (2007), pp. 38-53

Islamic Microfinance: A Missing Component in Islamic Banking Abdul Rahim ABDUL RAHMAN*
1. Introduction
Microfinance means “programme that extend small loans to very poor people for self employment projects that generate income in allowing them to take care of themselves and their families” (Microcredit Summit, 1997). The World Bank has recognized microfinance programme as an approach to address income inequalities and poverty. The microfinance scheme has been proven to be successful in many countries in addressing the problems of poverty. The World Bank has also declared 2005 as the year of microfinance with the aim to expand their poverty eradication campaign. The main aim of the paper is to assess the potentials of Islamic financing schemes for micro financing purposes. The paper argues that Islamic finance has an important role for furthering socio-economic development of the poor and small (micro) entrepreneurs without charging interest (read: riba’). Furthermore, Islamic financing schemes have moral and ethical attributes that can effectively motivate micro entrepreneurs to thrive. The paper also argues that there is a nexus between Islamic banking and microfinance as many elements of microfinance could be considered consistent with the broader goals of Islamic banking. The paper, first, introduces the concepts of microfinance, and presents a case for Islamic microfinance to become one of the components of Islamic banking. The paper then discusses, the potentials of various Islamic financing schemes that can be advanced and adapted from microfinance purposes including techniques to mitigate the inherent risks. Finally, the paper concludes with the proposals to accommodate the Islamic microfinance within the present Islamic banking structure.

2. Principles of Microfinance
Microfinance grew out of experiments in Latin America and South Asia, but the best known start was in Bangladesh in 1976, following the wide-spread famine in 1974. Advocates argue that the microfinance movement has helped to reduce poverty, improved schooling levels, and generated or expanded millions of small businesses. The idea of microfinance has now spread globally, with replications in Africa, Latin America, Asia, and Eastern Europe, as well as richer economies like Norway, the United States, and England.

Among the features of microfinance is disbursement of small size loan to the recipients that are normally micro entrepreneurs and the poor. The loan is given for the purpose of new income generating project or business expansion. The terms and conditions of the loan are normally easy to understand and flexible. It is provided for short term financing and repayments can be made on a weekly or longer basis. The procedures and processes of loan disbursements are normally fast and easy. Additional capital can also be given after the full settlement of the previous loan. *  Associate Professor at the Kulliyyah of Economics and Management Sciences, International Islamic University

Malaysia (IIUM), and currently Director of the IIUM Institute of Islamic Banking and Finance.


Islamic Microfinance

Microfinance is an alternative for micro entrepreneurs, which are normally not eligible or bankable to receive loans from commercial banks.
The basic principle of microfinance as succinctly expounded by Dr. Muhamad Yunus, the founder of Grameen Bank Bangladesh, and the recipient of the Nobel Peace Prize in 2006, that credit is a fundamental human right. The primary mission of microfinance is, therefore to help poor people in assisting themselves to become economically independent. Credit or loan is given for self employment and for financing additional income generating activities. The assumption of the Grameen model is that the expertise of the poor are under utilized. In addition, it is also believed that charity will not...

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