Islamic Microfinance System and Poverty Alleviation in Somaliland

Poverty prevalence dates back to the existence of human being and today it has occupied foremost place on human development agendas of virtually all countries of the world. In the Republic of Somaliland it has been a main challenge since the restoration of independence in 1991 and its alleviation is in the first pillar of the National Development Plan (NDP) and National Vision 2030, and also one of the country’s strategic goals to achieve MDGs by 2015 to fight poverty and improve the standard of living of underprivileged population. Nonetheless, actual achievements are still limited. Islamic Microfinance which involves Shari’ah-compliant way of financing and providing credit without collateral or any property for guarantee to the marginally poor (too poor to have access to banks) for their business, is one of the most popular tools employed as part of a poverty reduction strategy, empowering and increasing the productivity of poor, giving social benefits to them in a sustainable way, and aiding economic development. However, in Somaliland it still remains fairly the same effect over the years due to misconceptions in Shari’ah-compliance, the institutions lagging behind and the like. This study determined the role of the Islamic microfinance in poverty alleviation efforts in Somaliland and how this role can be enhanced. It was intended to establish and recommend Islamic microfinance and its principles that could raise poverty reduction and economic development in the country. This was in view of the fact that conventional microfinance that charges the prohibited interest cannot be used by and for the Somaliland population which are 100% Muslims. The study was conducted through descriptive survey research design; data was collected in April 2012 to June 2012, using questionnaire, interview and document review techniques from two Islamic Financial Institutions of Kaaba Microfinance Institution and Salaam Financial Services, data was analyzed using descriptive quantitative methods and presented in tables and figures. The paper finds that the two institutions have envisaged, as their prime objectives, to serve to the vulnerable poor and to have positive impact on their incomes. However, it concludes that the institutions partially address in practice the issue of financial exclusion of the poor. They do not tap the wide variety of financial products and services which comply with Islamic law for the benefit of their clients particularly the hardcore poor and limited attention is paid to targeting the poor with their needs of financial services and products. This research recommends that the government should establish an enabling framework for the institutions providing Islamic microfinance, and K-MFI and Salaam Financial Services should intensify their contribution to poverty alleviation by incorporating new pro-poor financial development policies and by expanding their financial activities into rural areas. Donor agencies including UN and other INGOs to make their income-generating activities in line with Shari’ah and comply with national policies in improving the standard of living of the poor people.