To understand the concept and implications of microfinance completely, let us first go through some of the best practices that govern the modern micro financing structure:
The basic aim on microfinance is to introduce to the poor and underprivileged people a complete mechanism of modern banking where they can experience all the concepts like savings, money transactions, insurance and others.
Another key aspect of microfinance is to eliminate poverty among the masses. Nearly half of the world population today is extremely poor and they lack even the basic necessities.
The idea is to create a self-sustaining financing structure which can be operated with small amounts which are easy to repay and work with. In normal banking and finance, people get loans which are big in volume and hence the mechanism to repay them is also complex and pressurized the borrower.
Microfinance may be opted as a support mechanism for the poor, but it constantly needs backing of the government and donor institutions.
A successful measure to ensure the smooth running of microfinance mechanism is constant monitoring and quality assurance. Although we are dealing with small amounts of money as loans but still constant check and balance can immensely increase the chances of making the overall system better and efficient.
Now to shift our discussions to Islamic finance, the main differentiating factor between regular finance and microfinance is more visible when we are talking about sharing the uncertainty factor amongst the lenders and borrowers. While in conventional finance, only one party bears the whole burden of loss, in Islamic finance it is very efficiently shared by both the parties. Hence microfinance actually generates a sense of ownership as well as sharing structure which increases the contribution of both parties.
In Islamic finance domain, microfinance comes with various complimentary structures such as charity finance and financing which doesn’t require time bound agreements. The concepts of Zakaat, Awkaaf and Qard-e-Hasan actually compliment the overall Islamic financing. You can take these as alternatives to modern microfinance, so in fact Islamic finance has already provided us with these beautiful sub-structures where the donor and receiver are actively engaged but the former poses no financial burden on the latter. In Islamic finance the minimum of payments are dealt with by converting them into charities and easy to pay loans.
If we closely monitor and analyze, the target market for both microfinance and Islamic charity finance is almost the same i.e. the lowest segment of the society which needs our financial assistance. Where proper agreement and partnership is required, Islamic finance comes up with Musharaka and Mubaraha models to facilitate both the parties.
The future of Islamic finance and global microfinance market is quite bright as already evident from the figures provided by the top global economic institutions. Around 97% repayment rate and maximum engagement of poor segment into the microfinance structure in the under-developed countries suggest that the extreme poor of the world might be offered a chance to eliminate their individual poverty as well as the overall image of the resident economy.