Islamic Financial Services and Microfinance

This paper deals with the uniqueness of the Islamic Financial Services (IFS) in the sector of microfinance. It addresses the following issues:

• Understanding the IFS;
• The limited availability of Micro Islamic Financial Services (MIFS);
• The role of public policy in inclusion and challenges of MIFS.

The paper also discusses:

• The prohibitions on transactions involving Riba (barter, involving the exchange of a commodity of similar nature but lesser in terms of monetary value) and Gharar (transaction whose outcome is highly uncertain).
• IFS services on lines of social equity, and the formulation of contracts of no-exploitation (Qard-al-hassanah) and mutual responsibility (Zaqat).

The paper focuses on:

• The reasons for the services not being widespread in the microfinance sector.
• The positive side of the members directly owing and managing MIFS activities.
• Field notes from Bangladesh, Yemen and Syria.

The paper states that although financial services' penetration leads to economic growth and poverty reduction, this has not been the case with the Muslim communities.

Finally, it suggests that:

• The legal and regulatory framework that governs the MIFS needs to conduct research to incorporate mainstream finance in MIFS. In this regard, it also mentions the breakthrough made by:
  • Accounting and Auditing Organization of Islamic Financial Institutions (AAOIFI);
  • Islamic Financial Services Board (IFSB).
• There is a need to address the issue of reluctance to permit full service of microfinance organizations including those that offer MIFS.