Paper

Islamic Microfinance: A Missing Component in Islamic Banking

Can Islamic banking models and governance structures facilitate microfinance?
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This paper examines the potential of Islamic financing schemes for microfinance.

Microfinance aims to alleviate poverty and enable poor people to empower themselves. The paper states that the main objectives of microfinance are in line with Islamic economic principles of justice. It states that:

  • Islam prohibits conventional, interest-based microfinance schemes;
  • Islamic financing schemes that use concepts of mudarabah, musharakah, murabahah and ijarah can contribute towards poor people’s financial development, in an ethical way;
  • Islamic banking has not addressed the financing needs of poor people and microentrepreneurs;
  • Islamic banking and microfinance are similar in that many elements of microfinance are consistent with the broader goals of Islamic banking;
  • Many Islamic insurance companies use the wakalah model;
  • Islamic banks can offer Islamic microfinance instruments using this model.

The paper highlights the need for further studies to examine the wakalah model and other possible structures and governance models, so that Islamic banks can effectively offer Islamic microfinance instruments, while mitigating its inherent risks.