Islamic Microfinance: Social and Developmental Expectations

By Mehmet Asutay.

Microfinance has become a critical tool in tackling poverty and aiding development through building the capacity for the poor to enjoygreater self-suffi ciency and sustainability, granting them access to financial services and conceptualizing the poor individual as someone with innate entrepreneurial abilities who can generate jobs, income, and wealth if given access to credit.

Through microfinance, the poor are given the opportunity to become stakeholders in the economy; therefore, enabled and functioning
individuals will be the outcome. Due to this objective function of microfinance, as a development tool it has enjoyed some success.

Consequently, a number of conventional fi nancial institutions and banks now offer microfi nance in supporting business ideas from small projects to housing projects. Despite its success, microfinance has been criticized from an Islamic perspective for getting people into debt due to its fi xed interest charges.

If a project does not yield the expected returns in conventional financing, difficulties can ensue for the borrower. Islamic banking and finance thus, offers a more viable solution as a value oriented fi nancial proposition as part of the Islamic moral economy. Thus, typical Islamic banking and fi nance (IBF) instruments, such as Musharakah and Mudarabah, or institutions such as IBF, but also waqfs (pious foundations), are rather appropriate as providers of microfinance.

Islamic microfi nance fi ts into the asset-based economic paradigm and equity objective of the Islamic moral economy as well as fulfi lling all other expectations. Thus, there is compatibility and complementarity between the objectives and operational mechanism of microfinance and IBF.

Despite having similar objectives, IBFs have not fully appreciated microfinance, which is also a commercially viable undertaking.
However, in recent years there has been movement in this direction, as the successful implementation of Islamic microfinance has shown in countries such as Bangladesh, Indonesia, Yemen, and Syria.

IBF instruments can provide an additional opportunity for microfinance to flourish by giving the entrepreneurial poor access to fi nance in an alternative and dynamic manner. The contractual nature of such products is consistent with the financing nature of microfinance.

Conclusion
A financial system should be able to provide fi nancing to different segments of a given society such that, in addition to fi nancial and economic objectives, social objectives may be served. Since social objectives are an essential part of the Islamic moral economy, it is imperative for IBF to fulfi ll such objectives alongside their business interests.

As a social and moral method of fi nancing, IBF, therefore, should contribute directly to economic and social. This can become possible through social banking and microfi nance, though it should be recalled that the initial experience of IBF in the early 1960s in Egypt was a social bank that was microfinancing-oriented.

Due to the complementarity between IBF and microfinance, there is a need to see further and proactive involvement of IBF and non-banking Islamic institutions to provide Islamic microfinance.

By using the essential methods and instruments outlined here, authentic models of Islamic microfi nance can be developed that will ensure the proactive development and effi cient running of microfinancing, aimed at helping poor individuals and entrepreneurs who are excluded from economic and financial life, can be achieved as expected by the Islamic moral economy by also creating social capital.