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Legitimacy of Islamic Microfinance as a Viable and Feasible Alternative to Conventional Microfinance » Women's Courage

Legitimacy of Islamic Microfinance as a Viable and Feasible Alternative to Conventional Microfinance

March 7th, 2011 by ntahir Leave a reply »

Why is there a need for Islamic Microfinance?

We know that the prime motive of every government and every country’s Finance Minister is to account for a sound and stable financial system in the economy, and try to alleviate poverty. However, factually speaking, there is no evidence of a system that has succeeded in the above-mentioned attempts. With the emergence, instant success, and exponential growth of the Microfinance industry, Microfinance has been claimed to be the mechanism that has the potential to eradicate global poverty. This claim obviously comes with its share of criticism and debate; how does Microfinance aim to defeat poverty, if it charges its high-risk, poor customers, excessive rates of interest that in some cases soar as high as 60%? The industry is getting carried away by its potential to generate profits; there is an increasing number of MFIs that have started operating under the business objectives of the commercial world, with profits and expansion being their main aim. MFIs have started to go public, when the only beneficiaries of this industry, as stated by Mohamed Yunus, should be the poor population it was initially created for. Of course, other social benefits such as justice and equality, and a proper distribution of income and wealth, remain just as unattainable and untouched with the industry moving farther away from its actual goals.

Looking at Different Countries as Case-Studies of a Global Need for Islamic Microfinance

In such a global situation, Islamic Microfinance could be the savior that the Microfinance industry needs to remind it of its original motivations. Like Muhammad Yunus pointed out, the Microfinance industry was created to protect the poor from loan sharks, not create more loan sharks. Looking at the global Microfinance industry, and the cost of borrowing money, the countries that are most shocking are Nigeria and Mexico (NYTimes). The demand in these countries for micro loans is very expansive. In this classic case of an excess demand being met by a high price, these countries charge their poor excessive rates of interest.

In Mexico, the average rate of interest for a micro loan is 70 percent, compared to a global average of about 37 percent (NYTimes). Uzbekistan also boasts a whopping 80 percent average in interest rates per annum, with Uganda, Kenya and Ghana following at approximately 55 percent, 55 percent and 50 percent (respectively) (CGAP).

In such a situation, where the global average itself is at 35 percent, would it help to have an industry serving the same purpose of providing the poor with basic financial access, WITHOUT charging interest? Islamic Microfinance is definitely an alternative to the problem of high rates of interest; although Islamic Microfinance does not mean that money is lent absolutely free cost (since the industry needs to make its profits in accordance with the Islamic Shar’iah), its compliance with Islamic rules and the Islamic goal of an Economic System with values such as justice and equality, the industry is obviously bounded by moral values that hinder it from getting carried away or trying to make profits at the expense of the poor.

Sources:

Rosenberg, Richard. Kneiding, Christoph. 2008. “Variations in Microcredit Interest Rates” Brief Note. Washington, D.C.: CGAP, June.

<http://www.responsability.com/domains/responsability_ch/data/free_docs/1_0807_CGAP_Variations_in_Microcredit_Interest_Rates_2.pdf>

MacFarquhar, Neil. “Banks Making Big Profits From Tiny Loans”. NYTimes. April 13 2010.

<http://www.nytimes.com/2010/04/14/world/14microfinance.html?_r=1

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