Foreign Exchange

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Shariah Foundation and Applications of Islamic
Microfinance
What is Microfinance?

• By Abdul Samad
• AlHuda Centre of Islamic Banking Economics
  (CIBE)

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What is Microfinance?

• Microfinance is usually defined as the provision
  of financial services and products to those whose
  low economic standing excludes them from
  conventional financial institutions.
• Micro-finance offer of financial services
• such as loans, savings, insurance, and training
  to people living in poverty.

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Structure of Microfinance Institutions
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The Aim of Microfinance Institutions

• To focus on people who generally did not have the
  means to Fund
• For example, a farmer needing seeds to plant for
  produce was given a loan for cash at interest
  rates
• New Business
• The people who want to be self sufficient but do
  not have a ready business idea or skill. This
  effort gave individuals and families the
  financial fuel they needed to stand on their own
  feet.
• Borrowers used loan proceeds to buy raw materials
  to manufacture products for sale in the market
  purchase livestock to sell milk/eggs or open
  small shops.

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Some Very Important Shariah Principle About
Islamic Finance

• Money is not an asset by itself and can increase
  in value only if it joins other resources to
  undertake productive activity.
• Fund providers must share the business risk.
• Assets must back the transactions and investments
  may be made only in real, durable assets.
• Islamic funds cannot finance activities deemed
  inconsistence with Shariah such as, business
  related to alcohol, gambling, any sort of trading
  of pork etc.
• Islamic finance contracts required for mutual
  agreement and stipulates exact terms and
  conditions.

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Tools of Islamic Microfinance

• Charity
• Islamic jurists have unanimously held the view
  that it is the collective obligation (fard
  kifayah) of a Muslim society to take care of the
  basic needs of the poor.
• Charity occupies a central position in the
  Islamic scheme of poverty alleviation.
• When compulsorily mandated on an eligible Muslim,
  sadaqa is called zakah.
• Zakah is the third among five pillars of Islam
  and payment of zakah is an obligation on the
  wealth of every Muslim based on clear-cut
  criteria.
• These funds are meant mostly for the extremely
  poor and function as a safety net for meeting
  their immediate and basic needs
• In flow of benefits that are expected to be
  stable and permanent (such as, through endowment
  of a physical property), it is called sadaqa
  jariya or waqf.

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Economic Empowerment

• Islam strongly encourages charity from the
  givers point of view, it seeks to minimize
  dependence on charity from the beneficiarys
  point of view.
• A man of the Ansar community came to the Prophet
  (peace be upon
• him) and begged from him. (1)
• He (the Prophet) asked Have you nothing in your
  house? He (the man) replied Yes, a piece of
  cloth, which we wear, or which we spread (on the
  ground), and a wooden bowl from which we drink
  water. (2)

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Economic Empowerment

•  He (the Prophet) said Bring them to me. He (the
  man) then brought these articles to him and he
  (the Prophet) took them in his hands and asked to
  the assembly of people Who will buy these? A man
  said I shall buy them for one dirham. He (the
  Prophet) asked twice or thrice Who will offer
  more than one dirham? Another man said I shall
  buy them for two dirhams. (3)
• He (the Prophet) gave these to him and took the
  two dirhams and, giving them to the man of the
  Ansar, he said Buy food with one of them and
  hand it to your family, and buy an axe and bring
  it to me. (4)
• He then brought it to him. The Prophet (peace be
  upon him) fixed a handle on it with his own hands
  (5) and said Go, gather firewood and sell it,
  and do not let me see you for a fortnight. (6)
• The man went away and gathered firewood and sold
  it. When he had earned ten dirhams, he came to
  him and bought a garment with some of them and
  food with the others. (7)
• The Prophet (peace be upon him) then said This
  is better for you than that begging should come
  as a spot on your face on the Day of Judgment.
• Begging is right only for three people one who
  is in grinding poverty, one who is seriously in
  debt, or one who is responsible for compensation
  and finds it difficult to pay. (8)

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