Microfinance in the Islamic World

Abstract

This paper looks at microfinancing in the Islamic world. The exploration will be limited to the Sunni schools, without focusing on any particular school, as the current trend is towards scholars explicitly drawing on all of the major schools.

Microfinance is a financial service, generally speaking a loan to clients who are excluded from the traditional financial system on account of no, or little collateral. The primary differentiators between microfinance and the conventional credit disbursal mechanism lie in the joint liability concept, and that lender does not take a secured interest. In the third world, microfinance has become very popular because "inflation tends to be high and volatile; government is often incompetent; and the necessary legal framework for financial services is often missing." In addition, many microlenders claim a default rate as low as between one and three percent. In the Islamic world, there are additional barriers, because many countries in adopting Shari'a have outlawed usury (riba), the charging of interest.

Keywords: Microfinance, Microlending, Sharia, Islamic, Microenterprise, Riba

JEL Classification: K39, K37, O16, N85, N45, A12, A13