Islamic Microfinance: A Comprehensive Review of Its Potential and Significance in Bangladesh

Abstract

Islamic Microfinance is emerging market in Islamic Finance: Islamic Microfinance served the underserved segment who are excluded from the traditional banking policy in the society. Microfinance in general has the same target but Islamic Microfinance coupled Microfinance with Islamic Finance Tool which makes it halal ( Allowed by the shariah). Islamic Micro finance Projects should be charitable or have the essence to help to develop the economy of a country. Utilizing Correctly Islamic Microfinance have the capacity to help the 650 million Muslims living less than minimum amount of money and include them into the financial service. Excluding the poor from the financial service acts as a major deterrent in the developing process of the economy. That’s where Microfinance come from. Islamic finance and Microfinance has some major factors in common, both of them put emphasizes on ethical, social, moral and religious factor. Many elements of the Islamic finance are aligned with the core of Microfinance and Islamic microfinance is one of the major segment of Islamic Finance. Islamic Microfinance has been working on advocating risk sharing and entrepreneurship. Specially for women. Some studies indicated that empowering women and making them financially stable can be the ultimate step of turning the economy for better. Islamic Microfinance and various elements related to the Islamic Microfinance has been the focus subject of the first international conference on "Inclusive Islamic Financial Sector Development: Enhancing Islamic Financial Services for Micro and Medium Sized Enterprises". From the papers that was submitted in the conference it was found that the basic thing that distinguish Islamic Microfinance from mainstream finance was the handling of collateral that comes from the joint liability. in simple term Group loaning also can be used. Nothing wrong with the method from the shariah point of view. However it was also noted that the main Islamic Microfinance Institutions were not very much enthusiastic about the inclusion of microfinance in their portfolio. Except that despite the effort put behind the micro finance majority of the segments are still out of reach of the microfinance. The higher interest rate of the conventional Microfinance can be one of the reason for this. also the reluctance of religious people to take interest based also plays an important role from keeping them from the conventional financial system. Against this drawback, Islamic microfinance based on Zakat and other equally unique funding models can emerge as an effective financial inclusion tool to fight all types of poverty in the Muslim countries, especially in Bangladesh. Inspite of being a Muslim majority country and experiencing robust growth of Islamic banking, Bangladesh is lagging behind in promoting Islamic microfinance. The interest based conventional microfinance industry belongs to 95 percent market share of the microfinance industry while Islamic microfinance industry accounts for only 5 percent share of the market in Bangladesh. Which leaves a major portion of opportunity to utilize by the Islamic Micro finance segment.