ISLAMIC MICROFINANCE AND FINANCIAL INCLUSION

microfinance

Financial inclusion refers to the access of individuals and enterprises to financial services via affordable formal accounts, which generally contributes to the stability of the financial system, income equality, and healthier economic growth in a given country. Getting bank accounts is very useful for the poor; without bank accounts they end up paying high fees to cash checks or when applying for small loans. In addition, governmental cash aid instead of food stamps can be transferred to the poor through these accounts which could reduce leakage due to corruption.

Hurdles to financial inclusion within a given country include the lack of low-fee bank accounts, geographic distance, as well as complex documentation requirements which are imposed on account holders. In developing countries the lack of transparency and weak disclosure present additional deterrents to opening bank accounts.

Islam emphasises equity, justice and the sharing of resources among members of society, this is demonstrated by various mechanisms of wealth redistribution such as Sadaqa, Zakat and Waqf, however unfortunately Muslim countries are home for an estimated 700 million of the world’s poor according to the Consultative Group to Assist the Poor (CGAP).

fi-logoMuslim households and small businesses that are Shari’a-sensitive avoid conventional financial institutions which are based on riba, speculation, and risk transfer; this is described as voluntary exclusion. The findings of the Global Financial Inclusion Database [Financial Inclusion Index] show that only about 25 percent of adults in OIC member countries have an account in formal financial institutions, compared to a much higher global average of about 50 percent. Studies report that in OIC countries as the number of adults who stay away from conventional banks increases the size of Islamic assets per adult increases. 

Recently hopes resurfaced that Islamic microfinance could serve in increasing financial inclusion among the Muslim populations which would assist in alleviating poverty. The Islamic microfinance industry currently suffers from operational inefficiencies due to the high cost of managing small transactions, it is highly dependent on subsidies, and it has been criticised for its lack of innovation with its high emphasis on Murabaha and Qard-Hassan. Other concerns include human capital qualification issues and weaknesses in the area of credit risk management. In addition the whole Islamic finance industry suffers from the absence of a global body or a standardised process for appraising the Shari’a compliance of financial institutions or products.

There have been calls for a change in some policy makers’ current view of microfinance as a mere tool for delivering charity to the poor. Governments are being advised to promote Islamic microfinance institutions through legislation, additional financial assistance, as well as education in order to help integrate poor Muslims into the formal financial system

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