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Islamic Microfinance: A Model for Alleviating Poverty

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By Tasnim Nazeer

Islamic microfinance is becoming an increasingly popular mechanism for alleviating poverty, especially in developing countries around the world. The Islamic finance industry as a whole is expected to reach over $2 billion dollars in 2012 and is a continually growing sector due to its ethical principles and prohibition of riba (interest).

The concept of Islamic microfinance adheres to the principles of Islam and is a form of socially responsible investing. Investors who use their wealth for Islamic microfinance projects only involve themselves in halal projects which benefit the community at large. Such projects include zakat, which is charity based, or trade and industry projects to develop a country’s economy.

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The mechanism of lending in Islamic microfinance differs from conventional microfinance due to the prohibition of riba. Unlike conventional microfinance, Islamic microfinance offers an interest-free way to give small loans to people who are poor and in need. One key method of lending is through the Islamic financial instrument, qard’l-hasan, which is a loan that has been extended by the lender on a goodwill basis and the borrower is only required to pay the exact amount borrowed without additional charges or interest. The Quran clearly encourages Muslims to provide qard’l-hasan, or benevolent loans, to “those who need them”:

“Who is he that will give Allah qard’l-hasan? For Allah will increase it manifold to his credit.” (57:11) “If you give Allah qard al hasan… He will grant you forgiveness.” (64:17)

At a time when poverty is still prevalent around the world, there is no better solution than opting for funding which can provide benefits to a poverty-stricken community and help to rebuild economies.

Islamic microfinance gives the investor a chance to get involved in worthwhile projects which could essentially play a significant role in targeting poverty and alleviating it in many countries around the world. Islamic microfinance primarily relies upon the provision of financial services to the poor or developing regions which are subject to certain conditions laid down by Islamic jurisprudence. It represents the merging of two growing sectors: microfinance and the Islamic finance industry.

It has the potential to not only be the solution for an increased demand to help the poor  but also to combine the Islamic socially responsible principles of caring for the less fortunate with microfinance’s ability to provide financial access to the poor.

Unleashing this potential could be the key to providing financial stability to millions of less privileged people who currently reject microfinance products that do not comply with Islamic law.

Many regions around the world have already created tailor-made Islamic microfinance programs, either through Islamic banks or Islamic microfinance institutions to cater for dealing with poverty.

Abdul Latif Jameel Company Community Service Programmes (ALJCSP) in the Middle East has utilized Islamic microfinance applications such as qard’l-hasan in order to provide financial support and empower low income women in the UAE so that they can endeavor to improve their standard of living.

Zubair Mughal, Chief Executive Officer, AlHuda Centre of Islamic Banking, said in a statement that, “In the wake of the current financial crisis all around the globe, Islamic microfinance has gained even more importance due to its transparency and sustainability. Islamic microfinance becomes an effective tool for poverty alleviation.” (Micro Finance Africa).

Utilizing Islamic financial instruments such as Murabahah and Musharaka to help in facilitating Islamic microfinance can not only spur the Islamic microfinancial sector but can also increase the options of Islamic finance and make it more accessible to poverty stricken countries.

While poverty in the Muslim world is widespread, Somalia is shouldering more than its fair share of the crisis. The famine which hit Somalia in July 2011 resulted in the worst food crisis that Africa has faced since 20 years. The United Nations had confirmed that famine does exist in two regions of southern Somalia, Southern Bakool and Lower Shabelle. Across the country, nearly half of the Somali population, which is currently 3.7 million people, is now experiencing a crisis of food, poverty, shelter and malnutrition.

However, if the population of Somalia had more access to financial services then they would be able to develop their economy and get it back on track. Unfortunately, the options of financial services for alleviating poverty in East Africa are either inadequate or exclusive.

Islamic microfinance has been an unprecedented way to combat poverty which may also provide the affected people of Somalia with a form of economic relief and provide a financial solution to developing countries worldwide.

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12 Comments

12 Comments

  1. Muhammad Saeed Babar

    February 22, 2012 at 7:20 AM

    In my opinion, we should be using Sadqat & Zakat as microfinance instruments rather than Qard-e-Hassan as it is obligatory on the receiver to pay back. We should encourage the wealthy to spare some money for the needy not only for day to day needs but also for creating a permanent earning base for them. 

    We should seek guidance from Hazrat Ali (RAA), he said “if you want to pray to Allah (SWT) for better means of subsistence, then first give something in charity.” 

    Who does not want better means of living? Now is the right time to give more in Sadqat to bring in economic stimulus.

  2. Mezba

    February 22, 2012 at 10:51 AM

    I think the concept of Grameen Bank, which gives small amount of money to the poor who want to start self sustaining businesses, in return for interest, can be combined with zakat to really eradicate poverty. So we give the money to a poor guy who wants to start a business, but we don’t ask him to pay back (since it’s zakaat).

  3. Farhan

    February 22, 2012 at 1:52 PM

    If I have a good, working, TRUSTABLE friend who is in debt, I use my spare cash to often buy up their debt and they pay me a monthly payment interest free. Largest payment so far was $3100, and he pays me back $100 per month.

    Not quite the same concept, but it works.

  4. Yusuf - Cincinnati

    February 22, 2012 at 7:52 PM

    What’s the business model of the “Islamic microfinancing”? 

    How can a company function and be self-sustaining without income coming in (since no interest)?

  5. Tariq Javaid

    February 23, 2012 at 12:31 AM

    A good write by Tasnim Nazeer,however a number of challenges are being faced by the Islamic Microfinance sector. Technical support, regulatory framework, standardization policies, uniformity of contracts and products are still the gray areas and required an innovative contribution. Although Farz Foundation’s livestock Mudarbaha and Musharkah model is getting a rapid popularity, but at donor level no serious effort is being observed. Tariq

  6. Ameera

    February 23, 2012 at 6:37 PM

    Right here in California, Helping Hand USA has their grand banquet for interest-free mircofinance on the fourth weekend of March. You can find more information here under “upcoming events”: 
    http://hhrd.org/

  7. Mansur Danish

    February 24, 2012 at 1:56 PM

    BaarakAllaahu feekum for sharing this note…
    Islaam being the only acceptable religion designated by Almighty God – Allaah The Most High, it caters to all the needs of the society as a whole apart from the spiritual aspect.
    One amongst them is the Islamic Micro finance model which promotes loan on goodwill amongst the lowest segments of the society in order to assist them in uplifting their status and alleviating poverty from the society by providing the ‘have-nots’ easy loan with zero percent interest purely on goodwill and to return the principal amount once the person is in a position to.
    To a modern conventional banker it may seem absurd since he is day and night thinking of earning ‘revenue’ ‘revenue’ ‘revenue’ but to an Islamic Banker earning profit is important but also uplifting the society in the process. It is a win-win situation practically and not just theoritically like conventional banks claim.

  8. Asfa Mohamed

    February 27, 2012 at 7:42 AM

    A good article by Tasnim Nazeer very interesting I was unaware about the concepts of Islamic microfinance so good stuff

  9. Sahdia Ahmed

    March 6, 2012 at 5:08 AM

    Excellent Article by the author I agree there are a number of challenges in Islamic Finance but overall a great concept to be applied.

  10. Pingback: What is Islamic Microfinance and can it Uplift Millions out of Poverty? | Pi Blog

  11. fathima

    September 7, 2016 at 7:17 AM

    how islamic microfinance a solution to inclusive economic development??

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