Microfinance in the Islamic Society

This paper studies the viability of microfinance in Islamic countries. The main barrier to the adoption of microfinance in these countries is that Islamic religious law or the Sharia prohibits charging of interest or riba. Islamic finance:

• Encourages charity and discourages hoarding;
• Allows Sharia-compliant financing such as Mudaraba or profit and loss sharing partnership, Murabaha or cost-plus financing, Ijara or leasing and Musharaka or joint venture.

The paper studies the functioning of Grameen Bank in Indonesia as well as microfinanace providers in Bangladesh, Pakistan, Egypt and Jordan, and draws the following conclusions:

• Microfinance liberates the poorest of the poor from hunger and Islamic extremism;
• For-profit microfinance system may be unable to gather adequate capital to be self-sufficient in most Islamic countries;
• Grameen Bank is charitable in nature although it has flirted with profitability;
• Mudaraba would be the best system to use for Shari'a compliant microfinance;
• Institutions like the Grameen Bank charge above market rates although they seem Sharia-compliant;
• Muslims are likely to see such premiums as usurious.