Islamic Finance and Microfinance : Lessons for the Global Financial Crisis

With a historic role as a society builder and enabler, Islamic finance shares a strong affinity with microfinance. “Awqaaf” institutions (charitable trusts) were philanthropically endowed as a principal-preserving, usufructi-delivering, society-welfare asset. Initially consisting of donated durable assets (traditionally land and buildings), the trusts have evolved to also comprise endowment funds (adopted during the Turkish Ottoman period) and are used as a socio-economic tool for religious, education and public service provision. Their revenues enable the funding and maintenance of mosques, provision of scholarships, as well as the construction and management of schools, in addition to supporting general public services such as running orphanages, providing water and sanitation, and building hospitals.

Understanding Islamic finance requires an understanding of the governing philosophical framework from which it is derived – a religion requiring the financial system to be guided by social responsibility and justice, while enabling a free market role. The industry presents an alternative banking paradigm which has yet to reach its full potential, given its young contemporary start in the 1970s. As a result, its historic and natural affinity with microfinance has been slow to develop sponsorship. The first modern Islamic financial institutions (IFI) were a network of village microsaving associations in Egypt and a microsaving association setup in Malaysia to manage pilgrim savings, both established in a 1950s post-colonial setting.

In the holistic development and evolution of the industry, Islamic financial institutions are re-engaging with microfinance, as a tool to reach the current “unbanked” masses in Muslim-majority markets and provide banking products and credit market access that also conform to the customer’s religious requirements, primarily relating to the prohibition of interest…

Full article by Zohaib Patel, Microfinance Insights, Vol. 11 March/April 2009
Zohaib Patel, is an executive of Dubai-based Fajr Capital Limited.

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