AlHuda CIBE - Role of Islamic microfinance in alleviating poverty in Islamic world

1|Page Role of Islamic microfinance in alleviating poverty in Islamic world By: Monowar Hussain Badrudduza Introduction: In the contemporary world, financial institutions may play pivotal role in alleviating poverty by extending loans but they need collaterals to fulfil this obligation. Therefore, nearly 75% the world’s poor are financially excluded from institutional finance for different reasons (World Bank, 2013) and, consequently, poor are kept unbanked. Lack of capital did not allow the poor to utilize economic opportunities and shelter themselves from financial crisis (Obaidullah & Khan, 2008). In this regard, various efforts have been initiated from international development organizations. Microfinance is one of those efforts initiated by Grameen Bank in Bangladesh, in 1976. Since its inception, the Grameen Model has been replicated in many countries where MFIs provide financial services under the umbrella of social collateral. Although global microfinance industry is expanding, rapidly, and it is playing significant role in alleviating poverty (World Bank, 2013; Aghion and Morduch, 2005; Khandker, 2003; Mosley, 1999), its success has been questioned due to its interest based feature which is normally very high (Fernando, 2006) and discourages poor to opt this route. Abdul Mannan (2007) argued that Grameen Bank charges 54.95 percent interest rate if the hidden costs are also included. In an Independent study, Sadeq (2007) concluded that Bangladeshi NGOs charge 25-30% interest which Ignites unrest in the population. As interest is strictly forbidden in Islam therefore most of the practicing Muslims try to avoid conventional microfinance. It has been observed that 72 percent of Muslims 86 Islamic Microfinance and Poverty Alleviation: An Empirical Ascertainment... in majority countries avoid financial services (CGAP, 2008). According to a study undertaken by ADB (2009), 80% of the respondents interviewed claimed to avoid interest. Similar kinds of results were observed by different international organizations during the surveys to know the preferences of the people of different Islamic countries. In this regard, 20-40%, 60%, 40%, 43-46% and 49% respondents of Jordan, Gaza, Yemen, Syria and Indonesia respectively, prefer Islamic Microfinance (ADB, 2009).

Poverty in Islamic world: The Islamic world is enormous with over 1.2 billion people, stretching from Senegal to the Philippines – comprising six regions: North Africa, Sub-Saharan Africa, the Middle East, Central Asia, South Asia, and Southeast Asia. Except for a handful of countries in Southeast Asia and the Middle East, there are high and rising poverty levels in both urban and rural parts of most Muslim countries. Poverty levels have also been associated with high inequality alongside low productivity. In Indonesia alone with world’s largest Muslim population, over half of the population - about 129 million are poor or vulnerable to poverty with incomes less than US$2 a day. Bangladesh and Pakistan account for 122

2|Page million each followed by India at approximately 100 million Muslims below poverty line. Indonesia, Bangladesh, Pakistan, Nigeria and Egypt account for over half a billion (528 million) of the world’s poor with incomes below $2 a day or national poverty line. With another five countries - Afghanistan, Sudan, Mozambique, Turkey and Niger, they account for over 600 million of the poor of the world. If one considers another comprehensive measure of poverty – the Human Development Index compiled for 120 developing countries by UNDP, it is observed that a large number of IDB member countries rank extremely low in the 1-120 rank. Mali, Burkina Faso and Chad have ranks below 100 at 102, 101 and 100 respectively, closely followed by Niger and Guinea at 99 and 96.

Micro finance and Islamic micro finance: Micro finance: Microfinance (MF) is a powerful poverty alleviation tool. It implies provision of financial services to poor and low-income people whose low economic standing excludes them from formal financial systems. Access to services such as, credit, venture capital, savings, insurance, remittance is provided on a micro-scale enabling participation of those with severely limited financial means. The provision of financial services to the poor helps to increase household income and economic security, build assets and reduce vulnerability; creates demand for other goods and services (especially nutrition, education, and health care); and stimulates local economies. A large number of studies on poverty however, indicate that exclusion of the poor from the financial system is a major factor contributing to their inability to participate in the development process. In a typical developing economy the formal financial system serves no more than twenty to thirty percent of the population. These concerns are reflected in the Millennium Development Goals (MDGs) set by the United Nations in the year 2000 and the international initiatives that have followed.

Similarities and differences between conventional and Islamic micro finance: While conventional micro-finance institutions exist in Muslim countries, they barely conform to Islamic values on finance. Therefore, Islamic microfinance paves the way for the religious Muslims to participate in financial services industry through Islamic microfinance programs. We also need to look at the similarities and differences of conventional and Islamic micro finance.

It is also worth mentioning that Islamic microfinance is a combination of both microfinance and Islamic finance. It is also argued that microfinance and Islamic finance are quite similar in several ways.

Firstly, they focus on promoting the welfare of the entire society. Secondly, both encourage the poor to participate in entrepreneurship activities in order to improve their welfare. Thirdly, these two financial 3|Page systems advocate for financial inclusion and participation of the poor in financial services. Finally, both are based on principles of ethics, morality and equality (Obaidullah, 2008).

On the other hand, there are however, some points of difference, discomfort and discontentment.

Unlike conventional microfinance, Islamic microfinance products are shariah compliant. It means that it avoids all kinds of Riba, Gharar( Uncertainty, deception etc) and Mysir( Gamble) which are the basic tenets of Islamic finance. Conventional microfinance is not for the poorest of the poor. There is a sizeable substratum within the rural poor whose lives are unlikely to be touched, let alone improved by financial services. They are not "bankable" in their own or their neighbour’s eyes, even when the bank is exclusively for poor people. On the other hand, in theory Islamic micro finance programs should target the poorest of the poor. An Islamic microfinance system, on the other hand, identifies being the poorest of the poor as the primary criterion of eligibility for receiving zakah. It is geared towards eliminating abject poverty through its institutions based on zakah and sadaqah.

Sources of funds of Islamic micro finance: Sources of funds of Islamic Micro finance institutions (IMFI) may be broadly divided into (1) charity that includes zakah, sadaqah, awqaf; gifts that include hiba and tabarru; (2) deposits that may take the form of wadiah, qard al-hasan and mudarabah and (3) equity that may take the form of classical musharakah or the modern stocks.

While sadaqah, hiba and tabarru have parallels in conventional microfinance, such as, donations or contributions, zakah and awqaf have a special place in the Islamic system and are governed by elaborate

fiqhi rules. Prohibition of riba, gharar, jahl, darar and other constraining norms in Islamic finance does not constitute an obstacle in building sound microfinance products. On the contrary, the need for Shariah compliance has led to considerable research into product development. While the conventional system provides for simple interest-based deposits, donations and loans, the Islamic financial system comprises an array of instruments for mobilization of funds, financing and for risk management.

Islamic microfinance models IMFIs consist of several models tailored to meet the needs of various sections of the poor in the society.

Onakoya and Onakoya (2013) list the major ones as Mudaraba, Musharaka, Mubaraha and Wakalah.

Apart from these, there are also Qard e Hassan, Salam, Istisna, Micro leasing and takaful for Islamic micro finance projects. These are discussed below: 1. Mudaraba: The Mudaraba principle requires that the Islamic micro finance Institutions(IMFIs) provide the funds while the borrower (who in this case is an entrepreneur) acts as the manager of the project. The losses in this kind of a venture are bone by the financer (who in this case is the IMFI).

4|Page 2. Musharaka: When it comes to the Musharaka model, the IMFI and the entrepreneur enter into a joint venture arrangement in which they equally share in profits and losses . In most cases the entrepreneur will provide skills for the project while the IMFI will avail the funds to be used by the project. The profits and losses are shared in equal proportion.

3. Murabaha: The Murabaha model envisions a situation where the IMFI will purchase particular goods or assets and sell it to a customer at mark-up price (Onakoya and Onakoya, 2013). The payment can be made at future date or instalments.

4. Wakalah:In Wakalah model, the IMFIs act as agents Although Islamic principles prohibit default on loans but it is not a sufficient deterrent to delinquency on the part of the borrower.

Therefore, IMFIs need not risk their institutions’ funds by providing credit where there are clear signs of potential default. If they do this, they risk running into bankruptcy, a situation that will deny credit to others who are in dire need of it. This is the reason why there was devised another model of IMF. The funds would be provided from a Zakat fund or a Non Governmental donor.

5. Salam: It is an advance payment in exchange of a future delivery. It is often used in agricultural

settings, allowing farmers to finance production in exchange for future delivery cultures. To respect the sharia, the quantity, the quality of future goods and effective date of delivery must be specified explicitly 6. Istisna: In istisna, the Sellers can either produce goods themselves or buy them from a third party. The end customer can pay the sale price is at once the contract is signed, or subsequently at other stages of the manufacturing process.

7. Micro-leasing: The MFI allows the customer to use an asset that belongs to him. Risks remain within the MFI, unlike a conventional leasing (all damages caused by involuntary means or in case of force majeure are supported by the MFI, to avoid leasing as a disguised sale with interest). Cash flows are adjusted so that costs and risks of MFIs are covered. The terms of the lease are set in advance to avoid speculation.

8. Takaful : Mutual insurance is needed in Micro finance project. Each person participates in a fund that is used to help the group in case of need, for example, death, agricultural losses, accidents etc... Premiums paid are reinvested to avoid the mechanism of interest.

The needs of the Poor and alleviation of poverty through Islamic microfinance: 5|Page The needs of the poor in Islamic countries are no different from the poor in other societies except that these are conditioned and influenced by their faith and culture in a significant way. They need financial services because they are often faced with events that call for spending more money than might be available around the house or in the pocket. To come up with the financial outlays required by lifecycle events, emergencies, and opportunities, micro-credit is needed. However, the poor need more than credit. They need a range of options, from credit (beyond enterprise finance), to savings, to money transfer facilities, and insurance in many forms. Provision of these financial services to the poor is expected to lead to poverty alleviation. We need to review how Islamic micro finance meets these financial service services and alleviate poverty: 1. Micro-credit: Micro-credit as offered by conventional MFIs in Muslim countries violates the fundamental prohibition of riba that the Islamic Shariah mandates. While some poor Muslims, devoid of options and hard-pressed for cash avail of interest-bearing credit, many prefer to stay away. The Islamic MFIs offer micro-credit using a variety of Shariah compliant mechanisms, such as, qard alhasan (with recovery of actual costs of service), murabahah with baybithamanajil,

ijarah, bay-salam etc. Less popular are partnership-based financing based on mudarabah and musharakah.

2. Micro-savings: Poor people want to save, and many of them do save. But they are constrained by the multiple demands on their low incomes and a lack of available deposit services that match their needs and expectations. Poor people in Islamic countries like their counterparts elsewhere, prefer high returns. They also want their deposits to score high on safety, security and liquidity. However, there is an additional dimension to their needs and expectations in the matter of deposits. They want the returns to be halal even while they may be using interest rates as a benchmark for comparison. A hotly debated issue relates to expected behaviour of savers when faced with a trade-off between returns and Shariah compliance. Indeed, many Islamic FIs seek to artificially smoothen returns on their deposits on the basis of a fear of losing clients if “realized� volatile returns are passed on to savers. Arguably, there is not enough understanding of savings behaviour in Islamic societies.

3. Micro-transfers: Money transfers encompass more than just remittances, which are defined as the portion of migrant-worker earnings sent to family members or other individuals in their place of origin. Some mainstream Islamic Financial Institutions, with emphasis on technology and strategic partnerships have been quite successful in offering this service that is efficient, economical and also Shariah-compliant. A case in point is the Al-Rajhi Banking and Investment Corporation catering to migrant workers in the Gulf. However, few Islamic MFIs offer such services to their clients.

6|Page 4. Micro-Insurance: Few poor households have access to formal insurance against such risks as the death of a family breadwinner, severe illness, or loss of an asset including livestock and housing. This is recognised as micro-takaful in the Islamic micro finance framework.

Fundamental conditions of Islamic microfinance for alleviating poverty: The components of two hadith1 can be seen to emphasize the following fundamental conditions of a successful Islamic microfinance program: 1. Access of the poorest of the poor to the program 2. Careful assessment of the financial health of the poor; enquiry blended with empathy; insistence on contribution and beneficiary stake; 3. Transformation of unproductive assets of the beneficiary into income generating ones through

rigorous valuation (on the basis of price discovery through auction method); Involvement of the larger community in the process; 4. Meeting of basic needs on a priority basis and investment of the surplus in a productive asset; 5. Direct involvement of the program in capacity building in the run-up to income generation and technical assistance to the beneficiary; Commitment of top management of the program;

1 (1) Narrated Ubaydullah ibn Adl ibn al-Khiyar: Two men informed me that they went to the Prophet (peace be upon him) when he was at the Farewell Pilgrimage while he was distributing the sadaqah and asked him for some of it. He looked us up and down, and seeing that we were robust, he said: If you wish, I shall give you something, but there is nothing spare in it for a rich man or for one who is strong and able to earn a living.

(Sunan Abu Dawood, Kitab alZakah, Book 9, Number 1629).

(2) Narrated Anas ibn Malik: A man of the Ansar came to the Prophet (peace be upon him) and begged from him. (#1) He (the Prophet) asked: Have you nothing in your house? He replied: Yes, a piece of cloth, a part of which we wear and a part of which we spread (on the ground), and a wooden bowl from which we drink water. (#2) He said: Bring them to me. He then brought these articles to him and he (the Prophet) took them in his hands and asked: Who will buy these? A man said: I shall buy them for one dirham. He said twice or thrice: Who will offer more than one dirham? A man said: I shall buy them for two dirhams. (#3) He gave these to him and took the two dirhams and, giving them to the Ansari, he said: Buy food with one of them and hand it to your family, and buy an axe and bring it to me. (#4) He then brought it to him. The Apostle of Allah (peace be upon him) fixed a handle on it with his own hands (#5) and said: Go, gather firewood and sell it, and do not let me see you for a fortnight. (#6) The man went away and gathered firewood and sold it. When he had earned

ten dirhams, he came to him and bought a garment with some of them and food with the others. (#7) The Apostle of Allah (peace be upon him) then said: This is better for you than that begging should come as a spot on your face on the Day of Judgment. Begging is right only for three people: one who is in grinding poverty, one who is seriously in debt, or one who is responsible for compensation and finds it difficult to pay.

(Sunan Abu Dawood, Kitab al-Zakah, Book 9, Number 1637).

7|Page 6. Technical assistance in the form of imparting requisite training to the beneficiary for carrying out the business plan/ income-generating project; monitoring through a time-bound schedule and impact assessment through a feed-back mechanism; and 7. Transparent accounting of operational results and liberty to use part of income to meet higher needs.

In short, the Islamic approach to poverty alleviation is more inclusive than the conventional one. It provides for the basic conditions of sustainable and successful microfinance, blending wealth creation with empathy for the poorest of the poor. There are certain aspects of the Islamic approach that need added emphasis. One, transparency through meticulous accounting and proper documentation is a fundamental requirement of financial transactions in the Islamic framework. As the holy Quran asserts: “O ye who believe! When you deal with each other, in transactions involving future obligations in a fixed period of time, reduce them to writing” and “Let a scribe write down faithfully as between the parties” (2:282) The import and significance of this verse is often not fully understood. Indeed, lack of proper documentation and accounting by beneficiaries is a major challenge confronting microfinance. Two, as discussed earlier, a common feature of successful microfinance experiments is group-based financing and mutual guarantee within the group. This is a highly desirable feature of Islamic societies. Mutual cooperation and solidarity is a norm central to Islamic ethics. The second verse of Surah Al Maida in the holy Quran says: "Assist one another in the doing of good and righteousness. Assist not one another in sin and transgression, but keep your duty to Allah" (5:2)

The following hadith by the Prophet (pbuh) reinforces this principle of cooperation and mutual assistance. “Believers are to other believers like parts of a structure that tighten and reinforce each other."

(AlBukhari and Muslim) The Islamic approach to poverty alleviation needless to say, must also be free from riba, gharar, jahl and darar.

Additionally, IMFIs do not deduct any amount from the principle unlike conventional MFIs which deduct a small amount from the principle as service charge. IMFIs guard against default by engaging the in which the lender belongs Further, the loan can be guaranteed by the spouse of the borrower. Furthermore, Islamic ethics demand that no one should default on his creditors and therefore this principle acts as a deterrent against any urge to default. The final and most unique distinction between IMFIs and conventional MFIs is that 8|Page their products are targeted towards religious groups and social groups (UNDP, 2010). The meaning of this is that despite the absence of discrimination in IMFIs products, it is only Muslims who would feel comfortable borrowing from IMFIs since their products are created in accordance with Islamic practices and values. IMFIs consist of several models tailored to meet the needs of various sections of the poor in the society. .

Implementation of Islamic microfinance in Muslim countries and its impact on poverty alleviation: Here implementation of Islamic microfinance projects in some Islamic countries have been discussed to explore the issues of poverty alleviation through Islamic micro finance: Bangladesh: Bangladesh has leading microcredit programs. A large number of NGOs (Grameen Bank, Brac, ASA etc), state-owned commercial banks, private commercial banks, and specialized programs of some ministries of the Bangladeshi government are involved in providing collateral-free credit and have been able to alleviate poverty of millions of poor households through generations of self-employment over the last few decades. The absence of a distinct regulatory framework for Islamic microfinance is working as an impediment to their growth and development. This is powerfully reflected in the list of

licensed microfinance institutions in Bangladesh, with only two Islamic microfinance institutions (observed by name) out of 689 as of December 27, 2016. Most academic literature on Islamic microfinance progress in Bangladesh address the Rural Development Scheme (RDS), the microfinance program of Islamic Bank Bangladesh Limited (IBBL). The main objective of this scheme is to alleviate rural poverty by providing shari’ah based small capital micro investment nance to the agricultural and rural sector for generating employment and raising income of the rural poor. The scheme also provides welfare, moral and ethical services to the rural people of the country. In 2010, the scheme was implemented through 129 branches covering 10,023 villages in 60 districts. Some 0.52 million group members are covered: 94% are females.

In Bangladesh, The progress of Islamic microfinance is not satisfactory as, despite having a good potential considering its sources and funding uses, the cumulative disbursement of Islamic Bank Bangladesh Limited (IBBL) up to December 2016 under its Rural Development Scheme (RDS) was only US$ 20,492.57 million which was the maximum among all private commercial banks in Bangladesh registering the highest recovery rate of 99.54%. Institutionally the development of Islamic microfinance is confined to IBBL’s RDS programs, and accordingly, most of the studies conducted to 9|Page evaluate the growth and development of Islamic microfinance in Bangladesh employ the data of the IBBL’s RDS programs. In view of the limited access of conventional microfinance to certain low income communities, those lacking collateral and specifically in Muslim communities those in search of Islamic-compliant microfinance, undoubtedly Islamic microfinance in Bangladesh is operating far below its potential.

A number of researches conducted in Bangladesh have reflected that the positive impact of Islamic MFIs, most notably the RDS was significant in achieving the Millennium Development Goals of poverty alleviation, Gender equality and women empowerment, Access to healthcare services, safe drinking water and sanitary latrines. (UNDP, 2012). The changes in income can be shown in a chart (Rahman, 2010) – Household Income per year (In Taka) Change in Income (In Taka) Source of Income

Before Joining After Joining Amount Percent (%) Agriculture 17,470 22,595 5,125 29.3 Business 46,513 60,505 13,992 30.1 Total 63,983 83,100 19,117 29.9 Impact of RDS in income of rural people Two different studies from Habib (2003) and Badiuzzaman (2006) clearly portrayed the positive impact of RDS in poverty alleviation mechanism. What makes this scheme different from any other mechanism is that it offers the clients, who successfully graduated the RDS, to commercial products of the Bank.

This partnership between the Bank and the beneficiaries has been proved to be a win-win partnership, and it helped the bank to make this program a self-reliant sustainable one across the country.

10 | P a g e Pakistan: Islamic finance and Islamic microfinance are emerging industries in Pakistan. The State Bank of Pakistan devised guidelines for Islamic microfinance in 2007 (Karim et al., 2008). These guidelines lay down different types of arrangements for institutions to offer Islamic microfinance services and set forth the requisites concerning appointing Shariah advisors, licensing and separating the funds for Islamic and conventional products if the bank or institution is providing both conventional and Shariah based products. In Pakistan, some institutions like Akhuwat, Farz Foundation, Wasil Foundation, Naymat, and Islamic Relief are disbursing Islamic MF products.

Akuwat foundation is the largest that disbursed Qarzd Hassan to 0.355 million households with 175 branches in 116 cities of Pakistan (Akhuwat 2013). In a research, it was found ( Rehanuddin 2010) that critical financial analysis of Akhuwat indicated that it iwas providing its services for all living below the poverty line including the “extreme poor� and Interest free loans could be used as a powerful tool against poverty. Yet Loan portfolio growth of Akhuwat declined with the sharp decline of equity growth over the last 5 years that might pose some constraints on its financial stability in future. This challenge could be overcome by integrating Islamic microfinance with NGOs, NPOs (non-profit organizations), Zakah, Awqaf and with Takaful well as with professional training and capacity building institutions in

Pakistan to provide Islamic microfinance to the poorest of the poor under one roof. It will help to uplift the living standard of people and ultimately contribute towards the economic development and enriched prosperity of the country.

Indonesia: Indonesia’s first formal microfinance began in the late 19 century with the establishment of the People’s Credit Bank and Lumbung Desa by the Government. There are several types of MFIs in Indonesia. But most of the Micro finance projects are based on conventional microfinance. The MFIs that operate based on the Islamic system (Shari’ah) include BPR Shari’ah (BPRS) and BMT (Baitul Mal Wat Tamwil) (Ismawan and Budiantoro, 2005; Widiyanto, 2007). In an empirical research ( using the sample of 150 borrowers from 20 Islamic micro finance institutions) conducted in central Java ,it was found that Islamic microfinance had a significant role on improving income level, children’s education, and business progress. However, the study did not find any significant role of microfinance in access to health care ( Wahibur Rokhman, 2013).

Malaysia: 11 | P a g e Due to the high number of Islamic Finance educational institutions, notable scholars, product development potential and certification programs, Kuala Lumpur is considered Asia’s Islamic Finance capital. Malaysia, as a whole, takes the lead in the global Sukuk market, standing at US$ 14 billion in 2014 and Malaysia’s Islamic Finance institutions are experiencing dynamic growth each year. A handful of Islamic microfinance programs have been created to alleviate poverty.Malaysia has strived hard towards sustaining economic growth and reducing poverty as indicated by the reduction in country’s poverty rate to 1.7% in 2012 compared to 16.5% in 1990. The mechanism used for poverty alleviation in Malaysia is the establishment of three main Islamic Microfinance Institutions (IMFIs) which are Amanah Ikhtiar Malaysia (AIM), The Economic Fund for National Entrepreneurs Group (TEKUN) and Yayasan Usaha Maju (YUM)(Mokhtar, Nartea, and Gan, n.d.; Mokhtar, Nartea, Zealand, and Gan, 2012). Few researchesjustified that poverty alleviation can be achieved by fulfilling the Social Performance: the ability of extending loan to the more potential loan recipients that are poorer in more geographically hard-to-reach areas; and the financial performance: the performance of IMFIs’ Accounting Information System (AIS) in loan disbursement and loan repayment section (Kauffman and

Riggins, 2012; Weber, 2012). In achieving the aforementioned performances, an innovation recommended by Bank Negara Malaysia (BNM) called Mobile Banking (MB) has the capability to be accessible by all in widening the access of financial services (BNM, 2010).

Challenges: Challenges that confront efforts for Islamic microfinance have been analysed here: 1. Shariah Supervisory boards: Mainstream Islamic financial institutions provide comfort to their stakeholders that they conform to Islamic finance principles by setting up Shariah supervisory board (SSB)s. The members of SSBs are usually distinguished scholars and experts of fiqh who confirm the compliance of financial products and consistency of operations with Shariah. A review of Islamic microfinance institutions reveals that none of them have instituted SSBs. A simple reason may be that this approach is costly.

2. Plurality of juristic opinion: Divergence of views among Shariah scholars on many issues needs no elaboration and continues to be a major challenge to development of Islamic finance.

The problem becomes particularly acute in the context of Islamic microfinance. The local nature of the practices in microfinance allows for many variations from the standardized set of contracts discussed in fiqh literature and can open up rooms for debate.

3. Divergent perceptions of the clients: Client perceptions towards mudarabah, murabahah, qard al-hasan which are predominant forms of Islamic microfinance in the Islamic world show wide variations and this can pose a major challenge for the Islamic microfinance sector. At times, 12 | P a g e such perceptions are rooted in the ignorance of the clients about fiqhi rules governing the various riba-free mechanisms.

4. Lack of product diversification: Islamic microfinance in spite of the richness of fiqh literature remains highly murabahah-centric. Even ijarah has not witnessed many takers unlike mainstream Islamic finance. Profit-loss-sharing, though highly acclaimed as “ideal� is hardly used .

5. Linkages with Banks and Capital Market: If microfinance is to help build inclusive financial systems, it must develop strong linkages with the formal banking sector and the capital markets.

The absence of such linkages except in certain economies like Malaysia and Indonesia is another challenge for the development of Islamic microfinance projects.

Apart from above-mentioned challenges, other issues in Islamic microfinance include the need for coordinating policy and direction, weakness in regulatory and supervisory environments, lack of

awareness and education about Islamic finance, and a severe shortage of qualified and trained human capital.

Conclusion: Microfinance is a well-developed strategy to alleviate poverty around the world. IDB is also working to develop Islamic finance in its member countries including our African member States. Access of the poor to financial services is indeed important for the success of market based and sustainable poverty alleviation programs. In this regard, microfinance has been recognized worldwide as an important policy instrument. However, the Islamic financial services industry although has progressed significantly during the last 3 decades, but has yet to develop Islamic microfinance services to a satisfactory level. But it has also been noted to be growing at an annual rate of 15%. International development experts have been urging investors and international development agencies to turn to Islamic Micro-finance Institutions as way of poverty eradication.