Tuesday, May 03, 2011

Why Islamic Microfinance?

A large number of studies on poverty indicate that exclusion of the poor from the financial system is a major factor contributing to their inability to participate in the development process. In a typical developing economy the formal financial system serves no more than twenty to thirty percent of the population. The vast majority of those who are excluded are poor. With no access to financial services, these households find it extremely difficult to take advantage of economic opportunities, build assets, finance their children’s education, and protect themselves against financial shocks. Financial exclusion, thus, binds them into a vicious circle of poverty. Building inclusive financial systems therefore, is a central goal of policy makers and planners across the globe. These concerns are reflected in the Millennium Development Goals (MDG’s) set by the United Nations in the year 2000 and the international initiatives that have followed

Muslim population of the World is approximately 1.3 billion individuals. They are spread across the world and excluding few countries in Middle East all are suffering from extreme poverty. Among the Muslim countries few are very densely populated and contribute to a significant proportion of poor in Islamic countries. e.g. Indonesia, Bangladesh, Pakistan, and India have almost 400 poor Muslims with a daily income of less than Dollar Two.

Access to Financial services is very low in these countries despite the availability of such services. CGAP Survey reveals that it is estimated that some 72 percent of people in Muslim countries do not use formal financial services, many of them citing religious injunctions against paying interest.

The survey further reveals that “While conventional microfinance products have been successful in Muslim majority countries, these products do not fulfill the needs of all Muslim clients. Combining the Islamic social principle of caring for the less fortunate with microfinance’s power to provide financial access to the poor has the potential to reach out to millions more people, many of whom say they would prefer Islamic products over conventional microfinance products.”

Few other studies have revealed that there is great demand and preference for Shariah compliant products. Findings of another research carried out by Nimrah Karim, Michael Tarazi and Xavier Reille are as under.

Sixty percent of low-income survey respondents in the West Bank and Gaza claim a preference for Islamic financial products over conventional ones. Over half of this group is willing to pay higher prices for them.

A number of studies carried out in Jordan by USAID and IFC/FINCA, who found that 24.9 and 32 percent, respectively, of survey respondents cited religious reasons for not turning to traditional financial products. IFC/FINCA also found that 18.6 percent of those interviewed cited religious reasons as the most important factor in determining whether or not to obtain a loan. In Yemen about 40 percent of the poor demand Islamic financial services regardless of price. In Syria, another survey showed that 43 percent of respondents never obtained microloans for religious reasons. Forty-six percent of people who had never applied for a loan admitted that religious reasons had prevented them from ever even applying. Five percent of current borrowers said they would not apply for another loan for religious reasons.

This can be very carefully stated that there is a high demand for Islamic financial products in Islamic world. This can also be gauged from substantial growth of Islamic banking during recent past. Islamic Microfinance products and Institutions are to be created and strengthened to achieve Millennium Development Goal. This will help include a majority of poor people in the financial system and achieve micro and macroeconomic goals.

Source taken from :


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