Islamic Microfinance: A Missing Component in Islamic Banking

Abstract

Islamic MicrofinanceMicrofinance is an alternative for micro entrepreneurs, which are normally not eligible or bankable to receive loans from commercial banks.The basic principle of microfinance as succinctly expounded by Dr. Muhamad Yunus, the founder of Grameen Bank Bangladesh, and the recipient of the Nobel Peace Prize in 2006, that credit is a fundamental human right.The primary mission of microfinance is, therefore to help poor people in assisting themselves to become economically independent.Credit or loan is given for self employment and for financing additional income generating activities.The assumption of the Grameen model is that the expertise of the poor are under utilized.In addition, it is also believed that charity will not be effective in eradicating poverty as it will lead to dependency and lack of initiative among the poor.In the case of Grameen Bank of Bangladesh, women comprised of 95% of the borrowers, and they are more reliable than men in terms of repayments [Gibbons and Kassim 1990].In order to facilitate loan process for the poor, loan is given without collateral or guarantor, and normally is based on trust.Microfinance is an alternative for loan because the conventional banking system recognized the poor as not-credit worthy.Loan facility is provided based on the belief that "people should not go to the bank but bank should go to the people".In order to obtain the loan, the prospect borrower needs to join the recipient group of microfinance.The group members are given small loans, and the new loans will be given after the previous loans are repaid.

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