Innovations in Islamic Microfinance: Lessons from Muslim Aid's Sri Lankan Experiment
This paper highlights the need for creativity and innovation in poverty alleviation efforts using Sharia-compliant mechanisms.
Contemporary mechanisms used by mainstream Islamic banks and financial institutions may be inappropriate in the context of local economies and for financing micro-livelihood projects. Poverty alleviation efforts cannot be treated the same as commercial transactions given that an Islamic MFI seeks to provide a mix of services and other forms of support to its client. While some of its operations may involve for-profit transactions governed by sustainability concerns, the overall objective is benevolent and strictly not-for-profit.
The paper documents a case study of Sharia-compliant microfinance undertaken by Muslim Aid in Sri Lanka to highlight the need to move beyond popular Islamic banking instruments and search for appropriate solutions. This study on financing paddy cultivation for impoverished and displaced farmers is demonstrative of one such innovative solution that is also Sharia-compliant, involving use of value-based salam and mudharabah.
