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Islamic Banking and Finance


This assessment is about Islamic finance. Islamic finance refers to a system that compliant on the application of Islamic law or Shariah which are the primary sources from the Qur’an and the sayings of the Prophet Muhammad.

One of the elements contained in Islamic finance is microfinance. It is a new market in Islamic finance that can give help in financial to other people.

Introduction to Islamic Finance

Islamic finance refers to a system that compliant on the application of Islamic law or Shariah which are the primary sources from the Qur’an and the sayings of the Prophet Muhammad. Just like conventional financial systems, Islamic finance also including banks and other lending institutions, capital markets, investment firms, fund managers and insurance companies according to Shariah or Islamic law. There are a few main principles in Islamic finance which are the wealth must be generated from legitimate trade and asset-based investment, investment should also have a social and an ethical benefit to wider the society beyond pure return, risk should be shared and all haram activities should be avoided such as riba’ (usury) and risk or uncertainty (gharar).

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Definition to Microfinance

Microfinance is a program that provides small loans to very poor people for self-employment projects that can generate income in order to take care of themselves and their families (Microcredit Summit, 1997). It is a new market in Islamic finance that can give help in financial to other people. Islamic law highlights moral and ethical values in all dealings, prohibiting the payment or receipt of interest (riba’), prohibits investment in businesses dealing in pigs, alcohol and gambling, among others.

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Uncertainty (Gharar) and market speculation (Maysir) are not practiced either under Islamic Microfinance.

Description of Microfinance

The differences between Islamic and conventional Microfinance.
Islamic Microfinance has the same purpose as conventional microfinance except that it operates on a profit and loss sharing principle. For instance, when a financial institution (MSC in this case) invests in a client’s project, the proceeds from the project will be shared on an agreed ratio. Even though they have the same aim, there are still a few differences between Islamic and conventional microfinance such as:

Product of Microfinance

The item that have been utilized in Islamic microfinance is Qard Al Hassan, Musharakah, Mudaraba, Salam, Istisna’, Micro-Leasing and Takaful.

Qard-al-Hassan is a loan extended based on goodwill, and the debtor is only required to repay the borrowed amount. However, as a token of appreciation to the creditor, the debtor may pay an additional amount beyond the principal amount of the loan (without promising it). If the debtor fails to pay the creditor an extra amount, this transaction is a real interest-free loan. Some Muslims consider this to be the only type of loan that does not violate the ban on riba’, because it alone is a loan that does not really compensate the creditor for the money’s time value.
Musharaka and mudaraba were costs and benefits-sharing arrangements. Musharaka is a financial investment to a company by two or more entities, divided by net profit and loss. In compliance with the percentage of contribution to the Musharakah agreement, the parties share the profits and losses produced by the company. Meanwhile, Mudaraba is a form of partnership where one party, the financier or the investment capital owner (Rab-Almal), provides the investment capital while the other party, which operates the business (Mudarib), provides expertise and effort to run the business. Rab-Almal may not be involved in the management process, but sometimes it will monitor the progress of the funded project.

Salamis a development installment in return of a future conveyance. It is frequently utilized in agrarian circumstances, enabling ranchers to back a generation in return for future conveyance societies. The amount, nature of future products, and powerful date of conveyance must be indicated to regard the shariah.

Istisna’ is a seller-buyer exchange contract. It is a long-term contract whereby a party undertakes to purchase, build and create an item with an undertaking on the part of the supplier to supply it to the consumer at a future date for a fixed price agreed upon and to product specifications decided upon by both parties. Sellers can either produce goods directly, for instance or purchase them from a third party. Once the contract is signed, the end customer can pay the selling price, or subsequently at other stages of the production process.
Micro-leasing is when the organizations of Microfinance Institution permit the consumer to use a property that belongs to him. Risks exist within the MFI, unlike traditional leasing (the MFI accepts any damages caused by unintended means or in the event of force majeure to prevent leasing as a hidden interest sale). Cash flows are adjusted to cover MFI’s costs and risks. The terms of the lease are set in advance to avoid speculation.

Takaful is a form of Islamic insurance, where participants contribute money to the pool fund to guarantee each other against loss or damage. Takaful-branded insurance is based on sharia or Islamic religious law which describes how it is the duty of people to collaborate and defend each other. The member is interested in a fund used to assist the community in case of need, for example, death, agricultural losses, accidents and others.

Illustration of Microfinance

The microfinance is one of the big opportunities to help the poor people to live. It gives the loan to them to help the seek or create a job opportunity that can give or generate income. It gives strength to the families to live life like everyone else. Consequence to that, it can lead to communities empowered where it is about working in ways which empower people, feel the confident to involve, inclusive and organise the networks are that formed, cooperative and support each other.

Why People Choose the Microfinance

Microfinance projects have given numerous chances to lift themselves out of poverty out and out to the world’s least fortunate individuals. They can have a more prominent amount and progressively nutritious nourishment for their families, to teach their kids and to improve their homes as an increase in family unit pay.

A similarly significant piece of microfinance is the reusing of assets. As advances are reimbursed, for the most part in a half year to a year, they are re-lent. This ceaseless reinvestment duplicates the effect of every cash lent.

Microfinance has a positive effect a long way past the individual customer. A large portion of the credits go to ladies since studies have demonstrated that ladies are bound to reinvest their profit in the business and in their families. As families cross the poverty line and miniaturized scale organizations grow, their networks’ advantage. Employments are made, information is shared, municipal support increments, and ladies are perceived as significant individuals from their families and networks.


Although Islamic microfinance may be one of the best ways to alleviate poverty, no substantial attempts have been made in this field or any truly successful implementation. Islamic microfinance can be used as a tool for both the creation of wealth and the provision of solutions to raise living standards for the poor.

Islamic funding mechanisms are essential to facilitate capital or partnership-based finance that is sadly found more in debt-based financing systems. It is also commonly known that while debt-based modes that conform with Shariah are permissible, equity-based finance modes are specifically favored. The basic concept of group-based financing and mutual guarantee within the group are norms in microfinance, and these concepts are ideal for Islamic microfinance.


Cite this page

Islamic Banking and Finance. (2020, Sep 04). Retrieved from

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