Islamic Alternatives to Finance Poverty Focused Group-Based Microfinancing

This paper yields a theoretical framework for MFIs (Microfinance Institutions) to provide microfinance according to Islamic principles. The strengths and weaknesses of conventional MFIs are delineated with the typical group-based lending for the positives and moral questionability for the negatives. Because the transactions only involve the transfer of real assets and goods, the problem of the diversion of funds to non-productive uses is alleviated. Currently however, Islamic MFIs are dealing with very high costs of operations. The paper goes on to claim that Islamic banks can provide micro-financial services more efficiently and effectively. The varied institutional structures of contemporary Islamic banks can be used to finance poor micro-enterprises.