Building a Successful Business Model for Islamic Microfinance

This paper examines why Islamic microfinance has not succeeded in reaching as many clients as conventional microfinance. It is based on the conviction that Islamic microfinance can offer an alternative paradigm for millions of poor people who are currently not served by conventional microfinance. The paper recommends elements for a viable business model, and suggests prerequisites for laying the groundwork for successful implementation.

A 2008 CGAP survey revealed that global Islamic microfinance supply is very limited and concentrated in only a few countries. The paper states that Islamic microfinance has not reached scale due to a primary focus on asset-based sale transactions, limited experience with profit and loss sharing schemes, and limited financing resources compared to conventional MFIs. Prerequisites to building a potential business model of Islamic microfinance would include focusing on outreach and sustainability, learning from the achievements and errors of conventional microfinance, defining the target group, and thinking outside the box. Elements of the proposed business model include:

• Market segmentation;
• Being an investor, not just a creditor;
• Providing business development, microinsurance, and savings services;
• Use of different Islamic financing instruments.