Skip to main content
SpringerLink
Log in

A theory and contractual framework of Islamic micro-financial institutions’ operations

  • Original Article
  • Published:
Journal of Financial Services Marketing Aims and scope Submit manuscript

Abstract

Microfinance is seen as a ‘new paradigm’ for bringing about development and eradicating poverty. Many studies prove that the provision of small amounts of credit to the poor is crucial in this new paradigm. However, these studies mainly focus on the conventional microfinance institutions (MFIs) which have already existed for a couple of decades. Their role in helping the poor to achieve higher income and higher standards of living has been well recognized. Currently, there are quite a few MFIs that are operating based on Islamic principles. Although a few studies have been conducted on this subject, the literature lacks a comprehensive theoretical framework to describe the Islamic microfinance institutions (IMFIs). This article explores the contractual framework in modelling the IMFIs, on the one hand, and discusses the role of IMFIs via various modes of financing in providing capital to micro-enterprises, on the other.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Similar content being viewed by others

References

  • Al-Bayhaqi. (1994) Al-Sunan Al-Kubra $$\overline{a}$$ . Makkah al-Mukarramah, Mecca: Dar al-Baaz.

  • Obaidullah, M. (2008) Introduction to Islamic Microfinance. New Delhi, India: IBF Net.

    Google Scholar 

  • SESRTCIC. (2007) Poverty in Sub-Saharian Africa: The Situation on the OIC Member Countries (A Preliminary Report). Ankara: Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRTCIC).

  • Murdoch, J. and Armendariz, B. (2005) The Economics of Microfinance. Cambridge, MA: MIT Press.

    Google Scholar 

  • Morduch, J. (1999) The microfinance promise. Journal of Economic Literature 37 (4): 1569–1614.

    Article  Google Scholar 

  • Hulme, D. (2000) Impact assessment methodologies for microfinance: Theory, experience and better practice. World Development 28 (1): 79–98.

    Article  Google Scholar 

  • Allen & Overy LLP. (2009) Islamic Microfinance Report. Rome, Italy: International Development Law Organization.

  • Ismail, A.G. and Ahmad, N.Z. (1997) Pawnshop as instrument of microenterprise credit in Malaysia. International Journal of Social Economics 24 (11): 1343–1352.

    Article  Google Scholar 

  • Hadisumarto, W.M.C. and Ismail, A.G. (2010) Improving the effectiveness of Islamic micro-financing: Learning from BMT experience. Humanomics 26 (1): 65–75.

    Article  Google Scholar 

  • Ahmad, A.U.F. and Ahmad, A.B.R. (2009) Islamic microfinance: The evidence from Australia. Humanomics 25 (3): 217–235.

    Article  Google Scholar 

  • Iqbal, Z. (1997) Islamic financial systems. Finance & Development 34 (June): 42–45.

    Google Scholar 

  • Shanmugam, B. and Zahari, Z.R. (2009) A Primer on Islamic Finance. Charlottesville, VA: Research Foundation of CFA Institute.

    Google Scholar 

  • Askari, H., Iqbal, Z. and Mirakhor, A. (2010) Globalization and Islamic Finance: Convergence, Prospects, and Challenges. Singapore: John Wiley & Sons (Asia).

    Google Scholar 

  • Segrado, C. (2005) Islamic Microfinance and Socially Responsible Investments. Torino, Italy: The Global Development Research Center.

    Google Scholar 

  • Farooq, M.O. (2009) The challenge of poverty and mapping out solutions: Requisite paradigm shift from a problem-solving perspective. Paper presented at the 1st Unilorin International Conference on Islamic Banking and Finance, Ilorin, Nigeria.

  • Dhumale, R. and Sapcanin, A. (1998) An application of Islamic Banking principles of microfinance. World Bank, UNDP, Regional Bureau for Arab States.

  • Shahinpoor, N. (2009) The link between Islamic banking and microfinancing. International Journal of Social Economics 36 (10): 996–1007.

    Article  Google Scholar 

  • Akhtar, M.R. (1997) Partnership financing of microenterprises. International Journal of Social Economics 24 (12): 1470–1487.

    Article  Google Scholar 

  • Ismail, A.G. (2010) Money, Islamic Banks and the Real Economy. Singapore: Cengage Learning Asia.

    Google Scholar 

  • Ahmed, H. (2002) Financing microenterprises: An analytical study of Islamic microfinance institutions. Islamic Economic Studies 9 (2): 27–64.

    Google Scholar 

  • Al-ZamZami, A. and Grace, L. (2002) Islamic Banking principles applied to microfinance, case study: Hodeidah microfinance programme, Yemen, http://www.uncdf.org/english/microfinance/uploads/thematic/Islamic%20Banking%20Principles%20Applied%20to%20Microfinance.pdf, accessed 6 January 2010.

  • Smolo, E. (2007) Utilizing Mush $$\overline{a}$$ rakah Mutan $$\overline{a}$$ qisah partnership for Micro and Medium Enterprises (MMEs). Paper presented at the First International Conference on Inclusive Islamic Financial Sector Development: Enhancing Islamic Financial Services for Micro and Medium Sized Enterprises (MMEs), Darussalam, Brunei.

  • Parker, M. (1998) Credit where credit is really due. Islamic Banker Misc: No. 33, pp. 8–9.

  • Imboden, K. (2005) Building inclusive financial sectors: The road to growth and poverty reduction. Journal of International Affairs 58 (2): 65–86.

    Google Scholar 

  • Mehlum, H. (2005) A Closed Form Ramsey Saddle Path. Contributions to Macroeconomics 5 (1): 1–13.

    Google Scholar 

  • Solow, R.M. (1994) Perspectives on growth theory. The Journal of Economic Perspectives 8 (1): 45–54.

    Article  Google Scholar 

  • Stefano, B. and Luigi, B. (2004) Social Capital and Its Role in Production: Does the Depletion of Social Capital Depress Economic Growth? Siena: Department of Economics, University of Siena.

    Google Scholar 

  • Al-Harran, S. (1996) Islamic finance needs a new paradigm. New Horizon 48 (February): 7–9.

    Google Scholar 

  • Kharofa, A. (2004) Transactions in Islamic Law. Kuala Lumpur, Malaysia: A.S. Noordeen.

    Google Scholar 

  • Affandi, N.M. (2002) Islam and Business. Selangor, Malaysia: Pelanduk Publications.

    Google Scholar 

  • Mansuri, M.T. (2006) Islamic Law of Contracts and Business Transactions. New Delhi, India: Adam Publishers and Distributors.

    Google Scholar 

  • Khalil, A.F., Rickwood, C. and Murinde, V. (2002) Evidence on agency-contractual problems in Mudharabah financing operation by Islamic Banks. In: M. Iqbal and D.T. Llewellyn (eds.) Islamic Banking and Finance. Cheltenham, UK: Edward Elgar, pp. 57–92.

    Google Scholar 

  • Sulaiman, T.A.M. (1981) Menanggulangi Krisis Ekonomi Secara Islam. (Terjemah: Sitanggal, A.U) PT. Al-Ma’arif, Bandung.

  • Chapra, M.U. (1985) Towards a Just Monetary system: A Discussion of Money, Banking and Monetary Policy in the Light of Islamic Teaching. London: The Islamic Foundation.

    Google Scholar 

  • Akhtar, M.R. (1996) Practice and prospects of Musharaka financing for small enterprises in Pakistan. Journal of Islamic Banking and Finance 13 (3): 7–27.

    Google Scholar 

  • Dusuki, A.W. (2008) Banking for the poor: The role of Islamic banking in microfinance initiatives. Humanomics 24 (1): 49–66.

    Article  Google Scholar 

  • Al-Harran, S. (1999) Islamic partnership financing. Arab Law Quarterly 14 (3): 193–202.

    Article  Google Scholar 

  • El-Gamal, M.A. (2006) Islamic Finance: Law, Economics, and Practice. Cambridge: Cambridge University Press.

    Book  Google Scholar 

  • Akhtar, M.R. (1998) Islamic microfinance: Credit where credit is really due. Islamic Banker, October, pp. 8–9.

  • Hassan, M.K. and Alamgir, D.A.H. (2002) Microfinancial services and poverty alleviation in Bangladesh: A comparative analysis of secular and Islamic NGOs. In: M. Iqbal (ed.) Islamic Economic Institutions and the Elimination of Poverty. Leicester, UK: The Islamic Foundation, pp. 113–186.

    Google Scholar 

  • Ahmed, H. (2004) Role of Zakah and Awqaf in Poverty Alleviation. Jeddah, Saudi Arabia: Islamic Research and Training Institute, Occasional Paper No. 8.

  • Al-Harran, S. (1995) Proposal for an integrated marketing model of musharakah financing to help disadvantaged fishing people in Malaysia. Paper presented at the International Workshop on Islamic Partnership Financing for Small Enterprise, Cairo, Egypt.

Download references

Author information

Authors and Affiliations

  1. International Shari’ah Research Academy for Islamic Finance (ISRA), 2nd Floor, Annexe Block, Menara Tun Razak, Jalan Raja Laut, 50350, Kuala Lumpur, Malaysia

    Edib Smolo & Abdul Ghafar Ismail

Authors
  1. Edib Smolo
    View author publications

    You can also search for this author in PubMed Google Scholar

  2. Abdul Ghafar Ismail
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Edib Smolo.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Smolo, E., Ismail, A. A theory and contractual framework of Islamic micro-financial institutions’ operations. J Financ Serv Mark 15, 287–295 (2011). https://doi.org/10.1057/fsm.2010.24

Download citation

  • Received:

  • Revised:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1057/fsm.2010.24

Keywords

Search

Navigation