Waqf-Based Microfinance Realizing the Social Role of Islamic Finance

To alleviate poverty in the world through Islamically-permissible methods, the paper posits the creation of waqf-based Islamic MFIs (Microfinance Institutions) that can provide microfinancing services to the poor. It delineates the strengths and weaknesses of traditional MFIs; in short, traditional MFIs solve the credit risk problem by institutionalizing group lending and the collection of weekly installments, but do not align with Islamic law due to their collection of interest. Islamic MFIs can use the effective methods of conventional institutions as well as utilizing waqf to finance their operations, thus reducing financing costs. The paper also addresses the risks of a waqf-based MFI, including various withdrawal risks. The paper counters these doubts, however, by putting forth the hypothetical use of takaful and profit-equalization reserves.