Designing Islamic Microfinance Products for Islamic Banks in Malaysia

Abstract

Microfinance is recognized as a developmental tool to fight poverty. Recent studies have shown positive impacts of the microfinance on the income and health of the clients. It has started in Bangladesh and spread to other continents of the world. However, there is agitation that microfinance has not been able to achieve its objective of fighting poverty.

This is due to the shift that has taken place in the industry from poverty focused to profit oriented business. Above all, microfinance faces other challenges on its way to succeed. One of the major challenges is that the product is not universally applicable or it does not tailor with the belief system of the Muslims.

Since interest (riba) is prohibited in Islam, many Muslims denounce conventional microfinance for fear of violating their religious injunctions even though many others have accepted it out of necessity. The objective of this paper is to propose a shariah compliant microfinance product in Islamic banking operations particularly in Malaysia.