Islamic Microfinance is a type of banking services that focus to a target group of low income individuals or groups who does not have other access to financial services.

The goal of Islamic Microfinance is to give the low-income people an opportunity to become self-sufficient by providing a way to save money and getting financial assistance which complies with the Islamic principle.

Islamic Microfinance products

There are several Islamic Microfinance product that can be explored and benefitted to the customer of Islamic microfinance sector.

Murabahah

The most commonly applied Islamic microfinance product is murabahah, which is applied in financing to purchase of goods.

When the client request for a specific product, the Islamic Financial Institution or IFI, will acquire it directly in the market and resell it with a fixed margin payment for the service provided.

Musharakah

The other suitable Islamic Microfinance product are musharakah and mudarabah where the Islamic Financial Institution and the customer share risks and benefits. Musharakah is a relationship between two parties or more that contribute capital to a business and divide the net profit and loss pro-rata.

The parties share the profit and losses in a predetermined percentage.

This type of financing can be used for the assets of fund bearing.

Mudarabah

Mudarabah is a trustee financing instrument in which one is a donor and the other brings management expertise in the project.

Salam

Salam is another suitable Islamic product of microfinance where the Islamic Financial Institution gives an advance payment in exchange for a future delivery.

It is often used in agricultural setting allowing farmers to finance production in exchange for a future delivery culture.

The quantity, the quality of the future goods, and the effective date of the delivery must be specified explicitly.

Istisna’

Lastly, istisna’ contract between a seller and a buyer where a seller can either produce goods themselves or buy them from a third party.

The end customer can pay the sale price once the contract is signed or subsequently at other stage of the manufacturing process.

Beside become an innovative tool to reduce rural poverty, the benefits of Islamic Microfinance are that the contract features under the Islamic Microfinance are more favorable and likable to the target customer.

The question is why?

The concept of risk sharing under musharakah and mudarabah between the IFI or investor and the client become more attractive for the target customer who will not carry the full risk as compared to many conventional products.

The concept of profit sharing under musharakah and mudarabah between the IFI which no longer become the IFI as a sole financer, but become a co-owner of the business with a strong interest in its success.

A fixed repayment rate under Islamic Microfinance product gives a fixed repayment amount rate with no possibility of uncertainty.

Lastly, transparency – Islamic Microfinance stipulates contract with a fixed liability that is known to the customer upfront.

In addition to the benefits that I mentioned earlier, the Islamic Microfinance promotes social welfare and justice.

After all, the ultimate goal of Islamic Microfinance is to ensure growth with equity for social welfare and justice.

If you are interested to get us to help you with Islamic finance consultancy and Shariah advisory, feel free to contact us. Our team are looking forward to grow your brand with Shariah compliance products and services.