Harmonising Microfinance With Islamic Banking

Harmonising Microfinance With Islamic Banking

Shahab Aziz (Department of Business Studies, Bahria University, Pakistan), Maizaitulaidawati Md Husin (Azman Hashim International Business School, Universiti Teknologi Malaysia, Kuala Lumpur, Malaysia) and Muhammad Ashfaq (IUBH University of Applied Sciences, Germany)
DOI: 10.4018/978-1-7998-0218-1.ch013

Abstract

While microfinance institutions play a role in the provision of financial services to individuals and small businesses that lack access to banking and related services, the question is: Can this role be taken up solely by the banking institutions? This chapter discusses the performance and application of microfinance institutions and challenges in developing a sustainable microfinance environment. The chapter deliberates the importance of integrating Islamic microfinance with Islamic commercial banks. It is argued that the integration of Islamic microcredit into the banking and credit schemes of Islamic commercial banks and Islamic microfinance institutions is a key to promoting financial inclusion. In addition, the chapter discusses how the Islamic microfinance model can be applied towards improving and humanising society and suggests strategies to improve the sustainability of microfinance institutions.
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Microfinance Institutions: Performance, Application And Challenges

The term “microfinance” generally refers to a broad set of financial services tailored to fit the needs of poor individuals (World Bank Group & Bank Negara Malaysia (BNM), 2017). According to Ernst & Young (2014), microfinance can be divided into three broad categories: microcredit, microsavings, and microinsurance. The purpose of microcredit is to provide small loans to micro-entrepreneurs to invest in their businesses, reinvest the returns, and allow them to grow out of poverty. Micro savings, on the other hand, aims to provide accessible and safe avenues for saving, either for future investments or as a precaution against economic shocks, while microinsurance is designed to mitigate different types of risks, such as agricultural or health risks.

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