Financing Microenterprises: An Analytical Study Of Islamic Microfinance Institutions

While conventional microfinance institutions (MFIs) have expanded their operations in the last two decades, poverty-focused MFIs based on Islamic principles are lagging behind. This paper provides the theoretical basis, operational framework, and empirical support for the establishment of Islamic MFIs. After critically evaluating the conventional MFIs, an Islamic alternative is presented. The theoretical part of the paper shows that there is a great potentiality of Islamic MFIs that can cater for the needs of the poor. Islamic MFIs have some inherent characteristics that can mitigate some of the problems faced by conventional MFIs. Empirical evidence from three Islamic MFIs operating in Bangladesh, in general, supports some of the theoretical assertions. The case studies, however, reveal that Islamic MFIs have not yet tapped some of the sources of funds, nor have they used the variety of financial instruments in their operations.