Islamic microfinance as an effective instrument to eradicate poverty and boost development

A girl helps her family harvest sugarcane in Sindh
province, Pakistan. ©IFAD/Asad Zaidi

By Jonathan Agwe

The Dubai Global Islamic Microfinance Forum, held in December 2012, brought together professionals, leaders and experts working in Islamic microfinance institutions, international donor organizations and development agencies from around the world. Together, they engaged in dialogue on sustainable development and poverty alleviation achieved through Islamic microfinance.

The forum was the second international conference on this topic organized by the Al Huda Centre for Islamic Banking and Economics (CIBE) through its Centre of Excellence in Islamic Microfinance (CEIMF). The fundamental objective was to demonstrate that – in parallel with conventional microfinance – Islamic microfinance can provide support to the “unbankable” members of society.

Participants in the Dubai forum reiterated that this instrument builds on ethical, moral and social factors to promote mutual support, equality and fairness for the benefit of the society and its members.

Potential to target diverse markets
According to Islam, there are three classes of Faqeir or vulnerable groups in society: (i) those who cannot earn a living, (ii) those who are financially distressed and (iii) those who capable of earning a living but lack adequate opportunities.

Family-run shop in a rural village in Egypt.
© IFAD/Marco Salustro
The forum showed how these groups are differentiated. The first two classes may be served by a social security system and charity based on Islamic ways, under which alms-giving is a personal religious duty. The third category qualifies for support through Islamic microfinance. People in the third group can be helped to become creditworthy and bankable through interest-free loans that comply with Islamic law – the Sharia – rather than through charity. Islamic microfinance refrains from practices that are not compliant with Sharia, such as providing or receiving any fixed, pre-determined rate of return on financial transactions.

The forum also underscored the concept that, for Sharia-based Islamic microfinance to reach out to the approximated 44 per cent of global microfinance clients residing in Muslim countries, the instrument has to be considered not as a niche but a service with the potential and ability to target diverse markets.

"Islamic microfinance: Unlocking new potential to fight rural poverty" – a publication released by IFAD in December, the same month as the Dubai forum – confirmed that in recent years, Islamic microfinance has reached a rapidly growing market. The publication reiterated that Islamic microfinance offers millions of disadvantaged people, in Muslim countries and beyond, access to financial services that are premised on providing for the welfare of the population.

Promising innovations
IFAD’s Near East, North Africa and Europe Division has successfully launched a series of initiatives piloting the use of promising innovations and products in Islamic microfinance. To reach out to more clients in Muslim countries and beyond, IFAD is exploring ways to collaborate with like-minded institutions – for example, Al Huda CIBE/CEIMF – and develop joint initiatives promoting the principles of Sharia-compliant Islamic microfinance.

For more information, visit the Dubai Global Islamic Microfinance Forum section on the Al Huda website.

Jonathan Agwe is an IFAD Technical Adviser on Rural Finance in the Policy and Technical Advisory Division, Programme Management Department. He serves as IFAD’s focal point on Islamic finance. E-mail; tel: +39 0654592848.