Banking for the poor: the role of Islamic banking in microfinance initiatives

The main purpose of this paper is to review the microfinance scheme and discuss how Islamic banks can participate in such an endeavor without actually compromising the issue of institutional viability and sustainability. The paper is based on an extensive review of microfinance with the objective of building a case for Islamic banking to participate in a microfinance initiative. Microfinance requires innovative approaches beyond the traditional financial intermediary role. Among others, building human capacity through social intermediation and designing group-based lending programs are proven to be among the effective tools to reduce transaction costs and lower exposure to numerous financial risks in relation to providing credit to the rural poor. This paper also suggests the use of a special purpose vehicle (SPV) as one of the possible alternatives for Islamic banks channeling funds to the poor.