Enhancing the Enforceability of Islamic Microfinance Contracts in OIC Countries
This paper provides a literature survey of the best practices of MFIs in terms of monitoring and discusses their relevance to the Islamic MFIs (IMFIs) in Organisation of Islamic Cooperation (OIC) countries. It explores the development of specific regulatory and institutional mechanisms to enhance the performance of Islamic microlending programs. The paper presents cross-country analysis of the institutional viability, regulatory environment, and sustainability of different MFIs. It analyzes the challenges and opportunities of the Islamic microfinance industry and introduces a set of recommendations for IMFIs as well as financial and regulatory authorities. Key recommendations include:
- Increase the intensity of regulation on formal IMFIs and frame informal financial market where the majority of IMFIs types ( such as Cooperatives, ROSCAs, NGOs, and NBIs) are banned to access deposits from the public;
- IMFIs should use appropriate risk management instruments to avoid loan defaults like Islamic microinsurance (micro takaful), social sanctions, and religion ties;
- IMFIs can implement branchless banking system to provide financial services to the unbanked poor in rural districts at minimal cost.