An Application of Islamic Banking Principles to Microfinance
From HodHood
Contents
Top 20 FREQUENT WORDS
islamic 77 banking 46 microfinance 45 loan 43 profit 41 program 39 borrowers 27 financial 27 entrepreneur 25 finance 25 mudaraba 21 costs 19 loans 19 model 17 profits 17 banks 16 sharing 15 lending 14 percent 14 business 13 institutions 13
DOCUMENT KEY POINTS
- at a very basic level the ciples of islamic finance draw curiosity from disbursement of collateral free loans in cermuslims and non muslims alike as they try tain instances is an example of how islamic to understand how a system that prohibits banking and microfmance share common the receipt and payment of interest has ai miss thus islamic banking and microcredbecome so widespread
- it programs may complement one another although islamic financial practices are in both ideological and practical ter miss this founded on the core belief that money is not close relationship would not only provide an earning asset in and of itself there is more obvious benefits for poor entrepreneurs who to the system s underlying tenets
- different interpretations the main arguments here are that islam does not allow gain from a financial activityunless an important islamic commitment is the the financial capital is also exposed to the risk denouncement of usury that is the lending of potential loss and that interest reinforces of money at exorbitant interest rates
- is assumed that all interest rates are real and most muslim scholars believe that riba is therefore are considered to hamper investprohibited but there are subtle differences ment and employment
- role in the economic process and avoid credit rationing proble miss in fact given the increased risks from investment returns based solely on profits an argument can under a mudaraba contract the bank prosometimes be made for banks to play a more vides the capital needed for a project while active role in project management to overthe entrepreneur offers labor and expertise
- again the profitand lending contracts used in islamic banking entrerneuoers loss sharing schemes advocated under the include qard al hasanah benevolent loan islamic principle of cooperation shirakat bai muajal and bai salam sales contracts allow all parties induding investors savers ijara wa iqtina leasing murabaha cost plus and financial institutions to play an active markup and jo alah service charge
- the seller reports to clear the market because sellers of low qualitycars the buyer the cost of acquiring or produchave an incentive to falsely advertise their cars as ing a good then a profit margin is negotibeing of good quality and thus demand a highated between the two parties
- banks occasionally experience difficulties ijara wa iqtina involves pure leasing when attempting to explain their practices ijara or lease purchase ijara wa iqtina in countries or systems that are not based on transactions in which a party leases a specific islamic principles
- intensive firms is receiving increasing the formal financial sector has played attention in developing countries and the a very small role in the development of focus in the development community is microfinance progra miss the world bank gradually shifting to small firms when it survey found that only one commercial comes to policy and resource allocation
- lending instruments are not adaptmoreover financial institutions often pered to the conditions of small borrowers and ceive small entrepreneurs as yielding smallshort medium and long term institutional er profit potential and higher lending costs financing is usually not available to the and risks for the bank
- subsidies send a signal to borrowers bangladesh bolivia egypt senegal mali that the government or donor funds are a and the west bank and gaza shows that the form of charity which discourages borpoor are bankable and that savings and credit rowers from repaying
- the most in reality although microfinance programs important is the uncertainty of the profit
- the murabaha contract as similar to trade the key issue in using this profit sharing finance in the context cf working capital model is whether it is possible under islamic loans and to leasing in the context of fixed banking principles for the lending agency capital loans
- given that very few microenscheduleunder the mudaraba example trepreneurs no matter what country they share profit totol are in keep track of their accounts in a way week buyback distribution payment that would permit the independent verifii soo lo cation of say weekly profits the acceptabil ity of the above model depends rather heavily on whether such an agreement is in accor dance with islamic banking principles
- each group member s business by the loan borrowers who manage their business wiseofficer the loan officer forwards the group s ly and efficiently and pay back their loans on application business appraisal and the time are eligible for a consecutive loan for guarantee form to the district supervisor and the same or a larger amount based on their district loan committee for review and business needs
- group members are also monthly progress reports indicating number asked to sign a guarantee form indicating of loans distributed types of businesses gentheir agreement to vouch for one another der distribution of borrowers loans per loan and their willingness to pay in case of arrears officer repayment rate overdue rate delinor delinquency
- bearing in mind determination of business profits and it is the guiding principles for successful micronot entirely dear how such profits would be finance programs see box and with determined this methodology is feasible adjustments to incorporate islamic banking and in some form or another can be used principles the islamic financial system could to achieve the goals of microenterprise lendoffer alternatives in microfinance
- other types of islamic lending such as jects that are rejected by conventional lendqard al hasanah benevolent lending with a ing institutions because of insufficient service fee may emerge as more practicollateral might prove to be acceptable to tioners implement islamic lending princiislamic banks on a profit sharing basis
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DOCUMENT WORD ANALYSIS
Main Category
- AlHuda Material\islamic banking
KeyWords
islamic banks banking financial finance investment conventional institutions funds risk financing deposits assets services management international countries equity profit products
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DOCUMENT REFERENCES
Number of Pages
17
Published Date
2005-04-26 10:10:55
