Islamic microfinance has the potential to expand access to finance to unprecedented levels throughout the Muslim world. It has the potential to merge the Islamic social principle of kindness for the less fortunate by providing financial access to the poor. Islamic microfinance is now facilitating millions of poor Muslims who rejected microfinance products that do not comply with Islamic law.
Islamic finance is the process through which the financial institutions including banks raise their capital in agreement to the Islamic rules and regulations that are commonly known as “Shari’ah”. Islamic financial system strongly restricts giving or receiving any fixed, predetermined rate of return on financial transactions. This ban on interest is derived from two fundamental Sharia precepts i.e. money has no intrinsic worth and fund providers must share the business risks.
Importance and Demand of Islamic Microfinance
Islamic finance is a centuries-old practice, now it has captivated the interest of millions across the globe and is gradually moving towards conventional financial system. Islamic microfinance found to be a very effective tool for reducing credit crisis globally. During last few years, conventional microfinance products have been very successful in Muslim majority countries.
A Few years ago, a Banladeshi banker and economist Dr. Muhammad Younus set a great example of Islamic microfinance, who originated the first microfinance program in Banladesh. He introduces the micro credit system for poor people and to strengthen this system he has established Grameen Bank in 2006. Later his microfinance program being recognized globally and was awarded the Nobel Prize for his immense contribution in poverty alleviation of Bangladesh.
There are millions of Muslim clients globally demanding Islamic financial products, but due to lake of conventional microfinance products majority of Muslim people can’t get these products. Due to rapid increase in the demand of conventional microfinance products, it becomes essential for Muslim countries to promote Islamic microfinance at large scale.
Islamic Microfinancing the Perfect Solution for Muslim Countries
Islamic micro financing can give millions of entrepreneurial poor access to microfinance as an option they might not consider if traditional, interest-based commercial loans were offered. There is a potential compatibility between the needs of micro entrepreneurs and the practice of Islamic financing. Muslim countries should recognize that with more experimentation and practice in the field of Islamic micro financing they could contribute more knowledge and a better understanding of effective loan delivery mechanisms.