Monday, April 13, 2009

Ever wonder how microcredit works under Islamic law?

How does finance work when falling Islamic law (Shariah)?

A longstanding problem in the adoption of microfinance in the Arab world is adapting the programs to work for followers of Islam. Muslim Law (also called Shariah) has several tenets that contradict traditional financial systems including:
  • Payment of zakat (charity)
  • No riba (interest) paid or earned
  • Socially-responsible investing/saving (Gharar)

In order for microloans (or any loan product) to be Shariah-compliant, it is generally structured through a trust-sale known as a murabaha—a negotiation of profit margin, rather than interest—into the final price. It’s sort of like paying your mortgage in all points, without annual interest. This sort of loan is called a Qard al-Hassan, or benevolent loan.

Naturally, this format is difficult to translate into microfinance, but many organizations and banks which cater to Muslim borrowers are springing up. Currently there are 265 banks operating in 40 countries with assets in excess of $262 billion USD. Even commercial giants such as CitiGroup are adapting to reach this growing population.

Similar to debt, interests are also structured to be socially-conscious and non-interest bearing, looking more like leases of capital.

I hope you’ve enjoyed learning this different financial paradigm. It sure has been an education for me.

Jessica Ward is a freelance writer and blogger in Seattle. She also writes at www.pennywisefamily.blogspot.com.

1 comment:

Tom said...

I recently had the opportunity to hear Dr. Yunus speak about the microcredit. He brought this issue up during his talk.