Islamic microfinance is a confluence of microfinance and Islamic finance. Microfinance, by its very nature, is perceived to be compatible with Islamic finance principles; both are aimed at empowering the marginalized.
Islamic microfinance is seen as an effective medium to alleviate poverty in the Muslim-majority countries. It combines the elements of Islamic finance and conventional microfinance. It is touted to be capable of poverty alleviation and social development in not only Muslim-majority countries but also non-Muslim countries across the world.
Why Not Conventional Microfinance?
There is a growing demand from Muslim-majority countries for Sharia-compliant financial products. Conventional products are not always compatible with Islamic principles. Because of this, many people from these countries avoid taking loans from mainstream financial institutions, banks in particular.
The Middle East and North African nations fare the worst among all countries. In these countries, only 18.6 percent of adults have an account at a formal financial institution. In the Middle East, the region that comprises a large number of Muslim-majority nations, it is observed that one of the reasons for people not having a formal bank account is the incompatibility of conventional banking products with Islamic finance principles.
Emergence of Non-Muslim Nations as Key Centers
The features of Islamic microfinance make it attractive even to those who do not insist in Sharia compliance of the microfinance products they use. Profit- and loss-sharing products available in Islamic microfinance are beneficial to those who cannot afford the fixed interest products of traditional microfinance.
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Thus, Islamic microfinance is gaining popularity among non-Muslim nations too. Although not a Muslim-majority country, Australia is developing its Islamic microfinance market at a significant pace. The Islamic MFIs in Australia offer Murabaha, Ijarah, and Musharaka products to their clients for the purchase of cars, homes, consumer durables, and investment in small businesses.
Muslim Community Cooperative (Australia), Islamic Cooperative Finance Australia, and Iskan Finance are some of the leading Islamic microfinance service providers in Australia.
Promotion of Islamic Microfinance by Governments
Over the past decade, the growth of Islamic microfinance has been driven by strong support from the governments of various countries. In many Muslim-majority countries, governments, with the help of the central banks, are prioritizing Islamic microfinance.
For example, while the government of Sudan has instituted a dedicated unit for Islamic microfinance, the government of Indonesia has in place a long-term plan for the development of Islamic banking in Indonesia.
Not only the Arab world but also the government of the UK has in place the fiscal and regulatory frameworks that encourage Islamic finance. Such initiatives by governments all over the world are helping the growth of Islamic microfinance.
Promotion of Islamic Microfinance by Commercial Banks
During the initial stages, Islamic microfinance was mostly undertaken and promoted by NGOs while there has been increased interest from commercial banks in the past few years. Commercial banks, in general, because of their large scale of operations, have an enormous client reach that is difficult to attain by village/rural banks or even dedicated MFIs.
Commercial banks are able to reach 58 percent of the global Islamic microfinance client base. Commercial banks could achieve this even though they form only four percent of the total number of Islamic MFIs worldwide. These banks have not limited their services to microcredit, but offer a wide variety of Islamic microfinance products such as savings, microinsurance, and credit and debit cards.
Creation of Standards by International Organizations
During the last decade, a number of Islamic institutions that are aimed at promoting Islamic finance have been set up. Most are non-profit and autonomous bodies that are not involved in core financing activities but work on framing regulations and standards in areas such as accounting, auditing, governance, and transparency. The standard-setting institutions such as AAOIFI, IIFM, IIRA, and GCIBAFI have helped in developing transparency in the Global Islamic Microfinance market.
In addition, they have aided in the setting up of disclosure guidelines for the financial institutions. This is expected to build trust among the clients in using the services of Islamic MFIs. As these services are mostly sought by low-income people, some sort of confirmation that the products are authentically Islamic is very much desired.
