A Market-Based Financing Model for Islamic Housing Microfinance Market

For many years, microfinance (MF) was considered an appropriate tool to accomplish social and financial goals simultaneously. Over time, microfinance has become more commercialized, transforming into a financially efficient industry, allowing customers to have access to more sophisticated banking products (e.g. small housing loans). Despite interest from the commercial sector, the industry has yet to find a workable market-based solution to fund microfinance. Microfinance in the member states of the Organization of Islamic Cooperation (OIC) faces two challenges: 1. Constraints in the area of risk and management capabilities as well as funding. 2. Limited access by consumers to financial services. Growing populations and rising urbanization have impeded the access of low income groups to housing finance. Housing cost in relation to incomes and the lack of formal titles have forced people to live in informal settlements. The objective of this paper is therefore to describe and assess the introduction of an innovative and practical market-based and Shariah-compliant mechanism aimed at housing microfinance with access to finance at lower cost. The market-based solution entails structuring sukuk through securitization of micro-portfolios. Due to the high risk of the underlying portfolio, conventional mechanisms of credit enhancements would fail. The paper proposes a unique way to overcome the credit enhancement problem through the use of Islam’s redistributive instruments such as waqf, qard-al-hassan, etc. The result is a viable option to develop a market-based financing solution to address core problems of financial inclusion and the non-bankable segment of the society.