Shariah Foundation and Applications of Islamic

Microfinance

By: Abdul SamadBy: Abdul SamadAlHuda Centre of Islamic AlHuda Centre of Islamic

Banking & Economics (CIBE)Banking & Economics (CIBE)

What is Microfinance?

What is Microfinance?What is Microfinance?

Microfinance is usually defined as the Microfinance is usually defined as the provision of financial services and provision of financial services and

products to those whose low economic products to those whose low economic standing excludes them from standing excludes them from

conventional financial institutions.conventional financial institutions. Micro-finance offer of financial servicesMicro-finance offer of financial services such as such as loansloans, , savingssavings, , insuranceinsurance, ,

and and trainingtraining to people living in poverty. to people living in poverty.

Structure of Microfinance Structure of Microfinance InstitutionsInstitutions

The Aim of Microfinance The Aim of Microfinance InstitutionsInstitutions

To focus on people who generally did not have the To focus on people who generally did not have the means to Fund means to Fund

For example, a farmer needing seeds to plant for For example, a farmer needing seeds to plant for produce was given a loan for cash at interest rates produce was given a loan for cash at interest rates

New Business New Business The people who want to be self sufficient but do The people who want to be self sufficient but do not have a ready business idea or skill. This effort not have a ready business idea or skill. This effort

gave individuals and families the financial fuel gave individuals and families the financial fuel they needed to stand on their own feet.they needed to stand on their own feet.

Borrowers used loan proceeds to buy raw Borrowers used loan proceeds to buy raw materials to manufacture products for sale in the materials to manufacture products for sale in the

market; purchase livestock to sell milk/eggs; or market; purchase livestock to sell milk/eggs; or open small shops. open small shops.

Some Very Important Some Very Important Shariah Principle About Shariah Principle About

Islamic FinanceIslamic Finance Money is not an asset by itself and can increase in Money is not an asset by itself and can increase in

value only if it joins other resources to undertake value only if it joins other resources to undertake productive activity.productive activity.

Fund providers must share the business risk.Fund providers must share the business risk. Assets must back the transactions and investments Assets must back the transactions and investments

may be made only in real, durable assets.may be made only in real, durable assets. Islamic funds cannot finance activities deemed Islamic funds cannot finance activities deemed

inconsistence with Shariah such as, business related inconsistence with Shariah such as, business related to alcohol, gambling, any sort of trading of pork etc.to alcohol, gambling, any sort of trading of pork etc.

Islamic finance contracts required for mutual Islamic finance contracts required for mutual agreement and stipulates exact terms and agreement and stipulates exact terms and

conditions.conditions.

Tools of Islamic Tools of Islamic MicrofinanceMicrofinance

CharityCharity Islamic jurists have unanimously held the view that it is Islamic jurists have unanimously held the view that it is

the collective obligation (fard kifayah) of a Muslim the collective obligation (fard kifayah) of a Muslim society to take care of the basic needs of the poor.society to take care of the basic needs of the poor.

Charity occupies a central position in the Islamic Charity occupies a central position in the Islamic scheme of poverty alleviation.scheme of poverty alleviation.

When compulsorily mandated on an eligible Muslim, When compulsorily mandated on an eligible Muslim, sadaqa is called zakah.sadaqa is called zakah.

Zakah is the third among five pillars of Islam and Zakah is the third among five pillars of Islam and payment of zakah is an obligation on the wealth of payment of zakah is an obligation on the wealth of every Muslim based on clear-cut criteria.every Muslim based on clear-cut criteria.

These funds are meant mostly for the extremely poor These funds are meant mostly for the extremely poor and function as a safety net for meeting their and function as a safety net for meeting their immediate and basic needsimmediate and basic needs

In flow of benefits that are expected to be stable and In flow of benefits that are expected to be stable and permanent (such as, through endowment of a physical permanent (such as, through endowment of a physical property), it is called sadaqa jariya or waqf.property), it is called sadaqa jariya or waqf.

Economic EmpowermentEconomic Empowerment

Islam strongly encourages charity from the Islam strongly encourages charity from the giver’s point of view, it seeks to minimize giver’s point of view, it seeks to minimize dependence on charity from the dependence on charity from the beneficiary’s point of view.beneficiary’s point of view.

A man of the Ansar community came to the A man of the Ansar community came to the Prophet (peace be upon Prophet (peace be upon

him) and begged from him. (#1) him) and begged from him. (#1) He (the Prophet) asked: Have you nothing He (the Prophet) asked: Have you nothing

in your house? He (the man) replied: Yes, a in your house? He (the man) replied: Yes, a piece of cloth, which we wear, or which we piece of cloth, which we wear, or which we spread (on the ground), and a wooden bowl spread (on the ground), and a wooden bowl from which we drink water. (#2) from which we drink water. (#2)

Economic EmpowermentEconomic Empowerment   He (the Prophet) said: Bring them to me. He (the man) then brought these 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 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 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. 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)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 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 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) 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 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 with his own hands (#5) and said: Go, gather firewood and sell it, and do not let me see you for a fortnight. (#6) me see you for a fortnight. (#6)

The man went away and gathered firewood and sold it. When he had earned ten 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 dirhams, he came to him and bought a garment with some of them and food with the others. (#7) the others. (#7)

The Prophet (peace be upon him) then said: This is better for you than that 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 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 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 seriously in debt, or one who is responsible for compensation and finds it difficult to pay. (#8)to pay. (#8)

160 – B First Floor, Ahmad Block, New Garden Town, Lahore - Pakistan.

Ph: (92-42) 35913096 - 98, Fax: (92-42) 35913056Email: info@alhudacibe.com

www.alhudacibe.com