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Islamic Microfinance Models

By Edited Jan 3, 2016 0 2

Islamic Microfinance Models

Two distinct models of Microfinance can be used to caret the needs and requirements of poor in an Islamic society.

  • Charity Based Programs

Every divine religion has instructed humans to spend in the way of Allah and great rewards are pledged in hereafter for such a virtuous act. Therefore Charity has always played a major role in lives of poor. Charity both in terms of cash as well as kind has always been a source of relief for the poor as it helps them meet their basic needs. Millions of dollars are donated very year in terms of charity. More often this charity money is being used to fulfill the basic needs of life. Such a behavior creates dependency on charity. This is a huge amount which can turn around thousands of lives from poverty to prosperity with proper planning and execution. Microfinance provides us such a mechanism. Microfinance can help reduce the dependency of poor and help them become economically active.

A mission-based approach to poverty alleviation and development is primarily based on charities and donations. In Islam there are several not-for-profit mechanisms, such as, Zakat, Sadaqat, Qard-Hasan and Awqaf. These are all sources of funds for a Microfinance program. Practically such a program can take the form of

  1. Community based group lending mechanism
  2. Self Help Based Groups
  3. Credit Unions/Cooperatives
  4. 
  • Profit oriented programs

Islamic approach to poverty alleviation is truly multilateral. Islam has incorporated social safety nets within its system to safeguard poor. Islam has also allowed taking profit oriented initiatives subject to certain conditions. In an Islamic society we can adopt an approach for poverty alleviation which is composite of a mission based and market-based interventions for different segments of society. Microfinance in Islam need not be restricted to not-for-profit modes alone. It has been established that poor need a variety of services and products to cater their financial needs. Islamic Microfinance can offer them a variety of products based on their business nature and needs.

  • Savings Products
  • Financing Products

i. Participatory Modes

Participatory modes of financing use profit and loss sharing mechanisms like Musharka, Mudarba etc. Detailed study of such mides requires separate aricles.

ii. Trading Modes

These are sales contracts which provides required financings to the entreprenuer. Such products include Murabaha Sale, Bai Muajjal, Bai Salam and others like. Each of the product will be analysed in different articles.

iii. Debt Based Modes

There only one loan product which an Islamic Microfinance Institution can offer i.e benovelent loan. Islamic Microfinance Institution will not allowed to charge Interest so this can be used as a special product for ultra poor people.

iv. Others

More appropriate products may be developed according the loca needs, environment and essentially not without Shariah Compliance

  • Insurance Products

i. Micro Insurance

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Comments

Oct 31, 2010 7:29am
askformore
Thank you for a great article about Islamic Microfinance. I agree with you that the Islamic approach to loans without interest is an important (positive) element in microfinance (i.e. loans to poor people).

(I should have included this aspect in my overview article about Islam)
Oct 31, 2010 11:07am
AzharNadeem
Thanx for the comments.
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