ISLAMIC MICROFINANCE: BEST TOOL FOR POVERTY ALLEVIATION
PAKISTAN HAS BEEN ACKNOWLEDGED AS A LEADER OF ISLAMIC MICROFINANCE INDUSTRY.
Apr 9 - 15, 2012
In the wake of the financial crisis around the globe, the Islamic microfinance has gained even more importance due to its transparency and sustainability.
Islamic microfinance is the perfect opportunity for Islamic financial institutions (IFIs) to promote the humanitarian principles of Islam, and make a profit while doing so.
Microfinance is a proven success. Islamic banking is one of the fastest growing sectors of the financial industry. Microfinance, a division of finance ideologically compatible with Islamic finance, capable of Shariah-compliance and possessing a sizeable potential market, is a perfect fit for inclusion in IFIs' new products and services.
Microfinance is comprised of microcredit practices i.e., extension of very small loans, known as micro loans, to those who do not have access to traditional financial services due to lack of collateral, employment and credit history.
Around the world, conventional microfinance has failed and its examples can be clearly seen in India and Latin America.
Due to the failure of conventional financial system, many countries in the world are adapting Islamic microfinance system for poverty alleviation through which not only poverty will be eradicated but also a sustained economy shall come into being in these countries.
One reason behind expansion of poverty is interest based mechanism in Muslim countries. People do not use financial and banking system due to interest, as it is strictly prohibited in Islam hence forced to live in poverty.
Microfinance has a proven history as an economically viable credit program, as well as a proven history of serving customers in the Muslim world. In 1976, Muhammad Yunus, a Muslim Bangladeshi economist and economics professor, founded the Grameen Bank, the world's largest and most successful microfinance institution or MFI. Since its inception, Grameen has provided more than $5 billion in micro loans to several million borrowers in the Islamic nation of Bangladesh and boasts a repayment rate as high as 98 per cent. Since its creation in 1987, Egypt's National Bank for Development's (NBD) microfinance program has been so successful that the bank has implemented it in half of its branches. Unlike Grameen, which operates not for profit, Egypt's NBD has proven microfinance to be a profitable venture for private commercial banks in the Middle East.
Microfinance shares the same goals as Islamic finance. Islamic banking began as an effort for Muslims to engage in financial services consistent with the principles of the Shariah, which promotes social and economic fairness.
Experts told PAGE that Islamic microfinance is the best tool to combat poverty and social injustice in developing countries, as the principles of Islamic finance and microfinance seek to prevent economic exploitation by prohibiting usury.
According to them, Pakistan has been acknowledged as a leader of Islamic microfinance industry and right now in Pakistan over 25 institutions are providing microfinance services. Through Islamic microfinance by using the financial products based on Shariah principles, we can get the people out from poverty.
They highlighted the need assessment of Islamic microfinance in Muslim countries by saying that 44 per cent of conventional microfinance clients live in Muslim countries and United Nations has added half of the countries of Islamic Development Bank in the list of least developed countries, which shows that Islamic microfinance can be used to eradicate poverty from Muslim-majority countries.
They further said that not only Muslims but Non-Muslims can also get benefits from Islamic microfinance because Islamic microfinance is not a religion but a system which is equally useful for Muslims and non-Muslims as well and the clear example of this fact is that non-Muslims consider it very attractive.
Experts believe that Islamic microfinance is essential to achieve Millennium Development Goals (MDGs), proposed by the United Nations for alleviating poverty and social uplift.
Microfinance is a flexible tool capable of being tailored to satisfy the needs and conditions of various environments including the Islamic financial sector which forbids Riba, or the payment and receipt of interest. Islamic microfinance is the perfect opportunity for IFIs to promote the humanitarian principles of Islam, and make a profit while doing so.
AlHuda Centre of Islamic Banking and Economics has established a specific microfinance help desk so that trainings, research and technical consultation could be provided to microfinance institutions worldwide. AlHuda-CIBE seeks to create a new generation of business leaders, managers, academicians and researchers in this field of Islamic banking and finance.
Although many organizations offer Islamic microfinance awareness programs but AlHuda is the only organization to serve Islamic microfinance in detail by conducting workshops, trainings and awareness programs etc. AlHuda CIBE is also working with 12 international institutions as a partner for the development of Islamic banking and finance.
Investment in human capital is always of a paramount importance for any society's development. A poverty-ridden society is always a hub of growing militancy and crime. It can effectively be countered through creating a partnership with the poor along with creating awareness among them.
Islamic microfinance sector can link local investors with international financial institutions for curing our ailing economy. There is no denying the fact that industrial peace is a key to the smooth running of any unit as well as the overall economy.
Micro enterprises have a role to play in economic development of poor countries.
A World Bank study pointed out the advantages of microenterprises as increasing the aggregate output, enabling the efficient use of capital and labor, initiating indigenous enterprise and management skills, bringing a regional balance, and improving the distribution of income. Microenterprises can significantly generate economics activities, employment, and demand and can contribute significantly to the economic development. Access to financial resources is very important for economic development.
Islamic microfinance needs to be developed in the same manner to help Muslim micro-entrepreneurs. Islamic finance is needed to be seen in a very broader sense. It promotes risk sharing, entrepreneurship, materiality, and non-exploitation. Islamic prohibits involving in activities, which are harmful for the society as a whole.