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Shariah Foundation and Applications of Islamic Microfinance

Shariah Foundation and Applications of Islamic Microfinance. What is Microfinance?. By: Abdul Samad AlHuda Centre of Islamic Banking & Economics (CIBE). What is Microfinance?.

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Shariah Foundation and Applications of Islamic Microfinance

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  1. Shariah Foundation and Applications of Islamic Microfinance What is Microfinance? By: Abdul Samad AlHuda Centre of Islamic Banking & Economics (CIBE)

  2. What is Microfinance? • Microfinance is usually defined as the provision of financial services and products to those whose low economic standing excludes them from conventional financial institutions. • Micro-finance offer of financial services • such as loans, savings, insurance, and training to people living in poverty.

  3. Structure of Microfinance Institutions

  4. The Aim of Microfinance Institutions • To focus on people who generally did not have the means to Fund • For example, a farmer needing seeds to plant for produce was given a loan for cash at interest rates • New Business • The people who want to be self sufficient but do not have a ready business idea or skill. This effort gave individuals and families the financial fuel they needed to stand on their own feet. • Borrowers used loan proceeds to buy raw materials to manufacture products for sale in the market; purchase livestock to sell milk/eggs; or open small shops.

  5. Some Very Important Shariah Principle About Islamic Finance • Money is not an asset by itself and can increase in value only if it joins other resources to undertake productive activity. • Fund providers must share the business risk. • Assets must back the transactions and investments may be made only in real, durable assets. • Islamic funds cannot finance activities deemed inconsistence with Shariah such as, business related to alcohol, gambling, any sort of trading of pork etc. • Islamic finance contracts required for mutual agreement and stipulates exact terms and conditions.

  6. Tools of Islamic Microfinance • Charity • Islamic jurists have unanimously held the view that it is the collective obligation (fardkifayah) of a Muslim society to take care of the basic needs of the poor. • Charity occupies a central position in the Islamic scheme of poverty alleviation. • When compulsorily mandated on an eligible Muslim, sadaqa is called zakah. • Zakah is the third among five pillars of Islam and payment of zakah is an obligation on the wealth of every Muslim based on clear-cut criteria. • These funds are meant mostly for the extremely poor and function as a safety net for meeting their immediate and basic needs • In flow of benefits that are expected to be stable and permanent (such as, through endowment of a physical property), it is called sadaqajariya or waqf.

  7. Economic Empowerment • Islam strongly encourages charity from the giver’s point of view, it seeks to minimize dependence on charity from the beneficiary’s point of view. • A man of the Ansar community came to the Prophet (peace be upon • him) and begged from him. (#1) • He (the Prophet) asked: Have you nothing in your house? He (the man) replied: Yes, a piece of cloth, which we wear, or which we spread (on the ground), and a wooden bowl from which we drink water. (#2)

  8. Economic Empowerment • He (the Prophet) said: Bring them to me. He (the man) then brought these articles to him and he (the Prophet) took them in his hands and asked to the assembly of people: Who will buy these? A man said: I shall buy them for one dirham. He (the Prophet) asked twice or thrice: Who will offer more than one dirham? Another man said: I shall buy them for two dirhams. (#3) • He (the Prophet) gave these to him and took the two dirhams and, giving them to the man of the Ansar, 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 Prophet (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 Prophet (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. (#8)

  9. 160 – B First Floor, Ahmad Block, New Garden Town, Lahore - Pakistan. Ph: (92-42) 35913096 - 98, Fax: (92-42) 35913056 Email: info@alhudacibe.com www.alhudacibe.com

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