Module 5
Islamic Microfinance
Islamic microfinance is a financial system that adheres to Islamic principles, avoiding
interest (riba) and promoting risk-sharing and social justice. Its aim is to provide financial
services to low-income individuals, fostering entrepreneurship and economic development.
The structure of an Islamic microfinance program involves partnerships between financial
institutions and clients based on the principles of fairness, risk-sharing, and ethical conduct,
contributing to both economic and social development within communities
Explain structures which should be considered by a financial
institution designing an Islamic microfinance program?
[Link]-Hasan (Benevolent/Interest free loan):
There is no interest on these loans and the only extra cost that maybe charged on these
loans is the amount of money required to cover the administrative and processing cost
(Kazim and Haider, 2012).
Utilization : Emergency loan, benevolence loan, student, maternity, etc.
2. Wadiah (savings and current accounts):
Al-Wadi`ah literally means the thing left with a person who is not its real owner for the
purpose of safe-keeping. For both current and savings accounts, the depositors grant
permission to the Islamic bank to mobilize the funds but at the same time guarantee their
deposits (wadi 'ah yadhamanah). No return is promised or expected but a gift (hibah or
hadia) can be given to the depositors (Ibrahim & Noor, 201 1).
Utilization: Current and savings Accounts
3. Mudarabah (labour capital partnership):
This can be used both as an assets as well as a liability. One of the parties invests its money
while the other invests its labour Shabrewy, 2011). Profit is shared based on agreed
proportion while the loss (if any) is borne by the Rabbul Mal except where the Mudarib is
found to be negligent. While, the loss of the Mudarib is limited to its/his time and effort.
4. Bai-Istijrar (repeat purchases from a single seller):
Bai-Istijrar takes place when the buyer purchases different quantities of a given commodity
from a single seller over a period of time. The payment may be deferred to a future date
and may indeed be based on a normal price or average price prevailing in the market. This
model is ideal for microfinance where micro-entrepreneurs often buy their raw materials
and inputs in small quantities from the same vendor over extended periods.
[Link] - Forward Sale
(Salam means a contract in which advance payment is made for goods to be delivered later
on. The seller undertakes to supply some specific goods to the buyer at a future date in
exchange of an advance price fully paid at the time of contract
It is ideal instrument for agricultural production activity and standardized manufacturing
where client can be financed for both purchase of raw material/inputs and liquidity
requirement. IsMFIs can also enter parallel salam
contract with third parties to dispose off the supplies.
Utilization in Halal Industry:
Salam is ideal product for Agricultural Financing, it can also be utilize for other business
purposes as well.
[Link] cum Murabahah Financing:
Sometimes financing_ through Murabahah only may not cater liquidity requirement of
farmers. On the other hand providing salam capital may find way towards unproductive
uses. Inputs/raw material can be sold through Murabahah while salam can provide liquidity
to meet financial requirements like hiring of tractor/labour, purchase of water, marketing
and transportation, etc.
[Link] (partnership):
This involves joint contributions with profit and loss sharing between the parties. Profit is
shared based on agreed ratio while loss is shared based on capital contribution ratio (Mirza
& Halabi, 2003). The most suitable technique of Musharakah for microfinance could be
diminishing partnership or Musharakah Mutanagisah (Rahim, 2007).
Utilization:
Musharaka can be used for Microenterprise & SME'S setup's, S Small productive projects
Working capital financing
8. Mrrabaha (Cost Plus Sale): This is a sale of goods
Usually fixed asset at the cost price added with an agreed profit margin (Sabita, 2007). Profit
margin is negotiable and the payment is made in installments. This type of finance is
commonly used for financing fixed assets such as machinery or equipment.
Utilization :
Murabahah can be utilize for Purchase of raw materials. equipment, agri. Inputs, Consumer
goods, Vehicle, Houses etc.
[Link] - Islamic Lease
This product is the Shariah compliant alternative to leasing, where Islamic bbank first buys
the good to be leased, and then determines a repayment schedule over time (Kazim and
Haider, 2012). Individual clients can be financed through Ijarah wa Iqtina or Ijarah
Muntahiya Bittmalik (lease to purchase) enabling them to ultimately own the assets). The
entrepreneur as a lessee will be responsible to safeguard the asset whereas the lessor will
monitor their usage (Rahim, 2007).
Utilization:
Auto Financing, Equipment Financing, House Lease, small production unit lease etc.
10. Istisna - Manufacturing contract
This is commissioned manufacture made-to-order in which the manufacturer designs and
makes the product in accordance with the buyer's wishes. It is an order to manufacture and
payment of price, unlike Salam, it's flexible, where price may be paid in advance, or in
instalments or on delivery of good.
Utilization:
Istisna may be utilize for small manufacturing business, for production use, Micro
entrepreneur Development sectors etc.
11. Muzara’ah. Mugharassaah, and Musaqah:
Muzara'ah is essentially a Mudarabah contract in farming where the bank can provide funds
in return for a share of the harvest 6f a new cereal or vegetable plantation (Dhumale &
Sapcanin, 1998). Mugharassaah sharecropping) joint venture in agriculture to share the
proceeds of anew tree plantation. Musagah (sharecropping) joint venture in agriculture to
share the proceeds in existing tree.
12. Takaful:
The word Takaful' is . derived ,._ from "kafala', flg which which literally literally means 'to
take care'` and hence Takafiul' is taking care of each other. Technically, Takafiul refers to
mutual insurance. Microfinance that was considered giving 'credit only` is now recognized
to include other financial services to meet the financial needs of the poor households and
micro-entrepreneurs.
Utilization: Micro Risk Management, Crop & Livestock Insurance
13. Zakat Model
When integrated with the two traditional Islamic tools of poverty alleviation – Zakat – in an
institutional set up, Islamic microfinance will be better able to reach the ultra-poor. This
model will be financially viable and sustainable in the long run, and will ensure proper use
of Zakat funds which do not require any return. This will, in turn, create a win/win situation
for all stakeholders, and will hopefully lead to lower default rates and faster higher
graduation from poverty.
[Link] model
Waqf means the dedication of resource in the way of God, for а charitable purроsе: usually,
Waqf is visble in the form of community mosques, cash donations, and dedication of land
for charity purposes. The basis of the Waqf based model is that the resources are given
away as Waqf and need to be utilized rightfully in order to bring about change amongst
those who require them