Microcredit Using Equity Financing: An Alternate Approach to Equity Financing in an Interest Free Financing

Rationale for an interest-free microfinance approach
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This paper highlights barriers to development created by imposition of interest, and proposes interest free alternatives to traditional microfinance.

Interest-based lending at the micro level is usually carried out at very high interest rates, especially when the lending takes place informally without institutional intermediation. The paper cites statistics from Asia, Africa, Latin America and the Caribbean to demonstrate how income levels affect various parameters of development. It also focuses on the high rates of poverty, illiteracy and unemployment in Pakistan.

The paper proposes that institutional intermediation using equity modes of financing can relieve the finance recipient and increase diversity of entrepreneurial activities. In such a system:

  • Institutional arrangements would work by introducing microequity funds;
  • Documentation problems would be resolved through a centralized, computerized database;
  • Trust levels would be created through strong communal bonds;
  • Effective monitoring would be undertaken through cross guarantees;
  • Intermediaries would generate finance themselves through Zakat (giving to charity), corporate social responsibility contributions by corporations, opening saving accounts and mobilizing funds.

About this Publication

By Shaikh, S.