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Islamic Microfinance: Solution to Poverty Alleviation?

Moinuddin Malim, CEO
Mashreq Al-Islami Finance Company
December 2011

Microfinance could be one of the ideal approaches to alleviate poverty in the Islamic world. Moinuddin Malim questions why there have as yet been no significant attempts or successful implementations in the sector.

Modern day microfinance goes back to 1960s, when a few dominant donors developed programs which were focused on a particular aspect of assisting selective segments of the economy. Microfinance gave individuals and families the financial fuel they needed to stand on their own feet without the repressive burden of repaying moneylenders beyond their means. Borrowers use loan proceeds to buy raw materials to manufacture products for sale in the market; purchase livestock to sell milk/eggs; or open small shops.

However, most conventional microfinance providers charge high interest rates compared to mainstream banking. The main reason for this can be attributed to the miniscule size of investments compared to the earning numbers, and higher administrative and monitoring costs associated with microfinance.

This has raised an interesting debate. Should this method of financing remain interest-based? And ensuing from this debate comes the concept of riba-free financing — or to be more precise, Islamic investment and financing. As the world has seen during last few years, interest-related liabilities have accentuated the financial dismay or even failure of not only giant banking institutions but also some sovereign entities. Can non-compounding of debt in the case of possible default come to the aid of the borrower? If so then how can this be effectively used to alleviate the level of poverty that the world faces today, through the means of Islamic microfinance?

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