Islamic Finance

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 gives a concise overview of the technical terms used in Islamic Finance and provides a general understanding of Islamic securitization in terms of the structure, procedure and types of Islamic Securities.

Based on observations and interviews with microfinance practitioners in Bangladesh, I explore problematic perceptions of traditional scholars of Islamic law and the Islamic finance sector that may obstruct cooperation with microfinance institutions. However, suspicion and misunderstanding flow both ways. Microfinance is poorly understood by the Islamic finance sector, and arguments against the activities of microfinance institutions often mischaracterize them and do not take into account ground realities.

The paper proposes a Monetary

The paper makes comparisons between Islamic microfinance and traditional lending on parameters such as business risks, repayments, administrative costs and growth. It compares three methods of financing,