This paper discusses the similarities between Islamic finance and microfinance. It suggests that the two work together to reach financial inclusions goals.
Islamic microfinance could be the key to providing financial access to millions of poor Muslims who currently reject microfinance products that do not comply with Islamic law. In spite of low penetration and efficiency, studies suggest a sizable demand for Sharia-compliant microfinance products. To take advantage of this opportunity and ease financial exclusion, Islamic microfinance needs to develop an original business model based on its principles of equity financing. Islamic microfinance also needs to:
- Adopt a performance-minded culture;
- Introduce proper risk management techniques and benchmarking methodologies;
- Focus on access, while designing and implementing microfinance programs;
- Provide a variety of financial services and not restrict itself to microcredit;
- Shift from a charity-based approach to one that reflects free market mechanics;
- Emphasise systemic efficiency and transparency.
Finally, Islamic microfinance has the potential to combine the Islamic social principle of caring for the less fortunate with microfinance’s power to provide financial access to the poor.