Islamic Banking Principles Applied to Microfinance Case Study (Hodeidah Microfinance Program)

Using the Hodeidah Microfinance Program (HMFP) in the Yemen as a case study, this paper looks at the ways in which Islamic Banking principles can be applied to microfinance. The paper argues that countries in which conservative Islamic practices hold sway often discourage the practice of charging interest, however, respective to how strongly these beliefs are held, microfinance institutions (MFIs) have adapted in a variety of ways. The paper concludes that Islamic banking principles pose several operational and financial challenges to an MFI and outlines some of the similarities and differences between ideal practices of a traditional MFI and those of an MFI practicing relatively strict Islamic banking practices as in the case of HMFP. In its final analysis of HMFP the paper states that HMFP focuses on providing a good service or product to the client by providing a culturally and religiously acceptable financial product in a timely manner with little or no collateral.