Microfinance in Islamic Banking

Paper Info
Page count 19
Word count 5265
Read time 20 min
Subject Economics
Type Essay
Language 🇺🇸 US


The core aspect of microfinance focuses on providing funding opportunities through loans or grants to marginalized people for investment into income generating activities and therefore, they become self-reliant (Rahim & Rahman, 2007). Many institutions, including the World Bank have identified microfinance models as potential solutions to poverty alleviation, addressing inequalities and raising the living standards of majorities. This observation follows the realization that microfinance models have succeeded in many countries around the world. In most cases, investors and organizations have used microfinance models as tools for poverty alleviation by offering loans to underserved individuals in society.

The main aim of this research is to explore the concept of micro financing and how it can be developed in the Islamic financial system. It also focuses on opportunities and challenges, merits and demerits of the model. Finally, the research highlights some countries that have successfully implemented microfinance models. It shows the future of Islamic microfinance in the UAE.

Given the aim of the research, it will show a strong link between microfinance models and their roles in the economy, as well as socioeconomic development. The study notes that the Islamic financial system has a strong moral and ethical ground that can ensure effective development of microfinance models across the UAE region.

A review of the Islamic financial model shows a closer link to microfinance models because several aspects of the model could support microfinance initiatives and general objective of the Islamic banking model.

The Concept of Microfinance

Valentino Piana notes that microfinance is “a platform to deliver financial products and complementary services reaching the poor in order to get them out of poverty” (Piana, 2008, p. 1). The author observes that microfinance institutions and other sources of micro financing offer “capital, trust, social esteem, information, knowledge, competences, empowerment, networking, social capital, technology and market access with the aim of fighting poverty in all its dimensions and levels” (Piana, 2008, p. 1). The integrated model of microfinance focuses on developing human potential and social networks. The product, therefore, is an innovative financial solution whose low rates of interests and operation costs provide economic advantage to the poor and ensure financial sustainability.

The basic product of microfinance institutions is microcredit or micro financing. It could be exceptionally a small amount of loan advanced to the poor to boost their micro-small enterprises or to start small businesses. The repayment is highly flexible based with cheap interest rates. In addition, the repayment period is relatively short. The models of micro financing vary and therefore, loans can be advanced to individuals or a group with or without collateral or guarantees. The loan advanced to applicants is relatively small in amount as compared to normal loans from large commercial financial institutions. Generally, there is no competition expected or major profits targeted through microcredit. The loan takes into account the financial situation of the borrower to ensure flexible repayment. Lenders do not bear massive financial losses in cases of defaulted loans.

Given the impact of microfinance on the poor (reducing poverty), microfinance institutions could also offer larger loans to the target populations. Individuals who may qualify for slightly larger loans could be already in business, have financial literacy and therefore, require the loan to boost their businesses or productivity.

Microfinance in the Islamic Financial Model

One fundamental challenge that many Islamic nations experience is the high rate of poverty among the majorities. In addition, there are segments of populations that commercial financial institutions have excluded. In other words, the modern banking system does not serve all segments of the market. This implies that the rapid growth of financial institutions in the past decade has not reached many people. As a result, the need to develop a model of banking system that caters for the underserved majorities has emerged. This is an attempt to ensure financial inclusion of the most vulnerable and poor segments of society. Today, it is a matter of policy concern for governments, private organizations, the World Bank and other stakeholders. The developed policies target groups that the conventional banking models have not offered any products to meet their needs (Manzur, Meisami, & Roayaee, 2013).

The emergence of microfinance banking model has upset the traditional banking system globally. Microfinance banking models have focused on designing suitable financial solutions that cater for the poor to allow them to expand their opportunities, increase financial freedom and socioeconomic well-being.

Concerns of reducing poverty and providing banking services to many poor people are also fundamental elements of the Islamic banking system. The Islamic banking model and microfinance institutions are business ventures that operate within the Shariah context. Consequently, microfinance businesses must observe Shariah laws and comply with all requirements as they facilitate economic growth and poverty reduction across Muslim nations.

It is imperative to recognize that the Islamic banking industry is the fastest growing in the world. It has recorded double digital growth rates in the past few decades (Manzur et al., 2013). Today, many conventional banks have created products or pseudo branches to offer Islamic banking products for Muslims and other interested consumers. While it may be difficult to provide the actual figures in the Islamic banking industry due to its segmented nature, one can safely assume that it presently exceeds “200 billion USD and is poised for further growth” (Manzur et al., 2013).

However, as the banking industry became profit-oriented over the past period, the Islamic banking model had also focused on profit maximization and neglected the underserved segments of the society. Consequently, Islamic banks also design products that meet the needs of wealthy clients. In fact, some researchers have asserted that the microfinance model is a missing link in the Islamic banking system (Rahim & Rahman, 2007). This has happened because many financial models have been designed to leave the poor out and provide services for the affluent (Iqbal & Molyneux, 2011). Following the successful growth and the global expansion of the Islamic banking system alongside the exclusion of the poor, it should be now a new beginning for banks. In other words, the Islamic banking system should now adopt microfinance banking models to cater for the poor, alleviate poverty and promote socioeconomic well-being of the majority at the same time.

The Islamic banking industry should strive to embrace community banking that is modeled to provide microcredit and serve at the grassroots with the aim of reaching underserved people in poor rural areas.

Conventional Islamic Microfinance Products

Many terms exist to define microfinance and microcredit within the banking and financial industry. Generally, microfinance also reflects aspects of deposit taking and the provision of loans alongside other important banking services. These services mainly target the poor and marginalized people with low incomes. This implies that microfinance is a financial model that focuses on small businesses, entrepreneurs, unemployed, groups and artists among others. Usually, the conventional banking industry does not account for these segments of consumers because the banking industry regards them as high-risk customers, less credit worth with low lifetime value to the bank. In addition, conventional banks are also reluctant to “advance small loans due to high processing and monitoring cost involved” (Kaleem & Ahmed, 2009, p. 3).

Microfinance has proved to be a critical tool in the fight against poverty. Consequently, many banks, governments and private organizations have adopted it as a socioeconomic tool for empowering the marginalized people.

Professor Muhammad Yunus of Grameen Bank has perfected the concept of micro financing (Hailey, 2009). Today, microfinance is a global concept with many applications in the financial market. The banking industry, including the Islamic banking system has experienced significant growths. However, many countries still ignore the poor because of their inabilities to meet stringent banking conditions, particularly collateral. In addition, many financial institutions consider this segment of the market as risky and lacks high net worth clients and therefore unlikely to repay loans or invest them wisely.

Many micro financing approaches are based on group lending. This has been a major driving force in microcredit developments. These businesses argue that it could be difficult for a group to default on advanced loans compared to individual borrowers. In addition, a group could attract high returns and ensure a larger market share. In most cases, members of a given group have a common financial interest and work together for financial freedom. Members regulate themselves and control or use sanctions against those who fail to participate in the repayment process.

There are microfinance products in the conventional banking system. One major focus is the interest rate. Consequently, many Islamic academics, professionals and researchers have embarked on defining the concept of microfinance from the Islamic banking model’s point of view. In this regard, they have evaluated the available plethora of literature that focuses on Islamic microfinance models. According to Manzur et al. (2013), one “can clearly come to the point that most of the writers on the topic have taken it for granted that Islamic microfinance is nothing more than the conventional microfinance less than interest” (p. 56). In this respect, the Islamic microfinance model excludes interests, but retains all other elements of conventional banking models. However, Manzur et al. (2013) argued that the Islamic microfinance model goes beyond the prohibition of interests alone.

Common Conventional Islamic Microfinance Products

The two major products are murabaha and Qard-Hassan loans (El-Zoghbi & Tarazi, 2013). Murabaha has amark-up fees”. It finances goods required as working capital. Many critics have argued that it is a conventional loan because of the mark-up fee, which is considered as interest (El-Zoghbi & Tarazi, 2013).

Qard-Hassan (or Benevolent) loan is the only type of permissible “loan” (El-Zoghbi & Tarazi, 2013) under Shariah principles.

Salam is an advance payment to farmers for future delivery of farm produce.

There are also musharaka and mudaraba (profit-and-loss sharing models). These products reflect elements of Shariah principles, but they are not widely offered by Islamic microfinance lenders (El-Zoghbi & Tarazi, 2013).

Common Conventional Islamic Microfinance Products
From: El-Zoghbi, & Tarazi (2013).

The Global Spread of Islamic Banking and Microfinance

It is imperative to highlight the global spread of Islamic banking model and microfinance, particularly in Western countries and other Arab states where the model is well established. Although all Islamic financial institutions rely on Shariah law, it is imperative to recognize uniqueness of a given country. In other words, different countries should develop Islamic microfinance models that cater for their specific needs. Nevertheless, they must borrow best practices from other countries.


Malaysia is known for its robust Islamic banking sector among Asian countries. The country developed an Islamic banking model referred to as Ar-Rahnu. The concept originated from the way women use gold to enhance self-worth, status and beauty. It recognizes the stability and appreciation of saved wealth. In addition, it can act as collateral when need arises.

Many microfinance entrepreneurs recognized that Malaysians did not embrace financial products that lacked Islamic elements. As a result, they developed a model that allowed lenders to “accept gold as collateral and get a fee for ensuring safety of the collateral” (Manzur et al., 2013). From the Islamic microfinance model, the practice adhered to Shariah requirements. First, it did not attract any interests; second, the approach was customer friendly; third, it was transparent; fourth, all transaction records remained clear to the borrower; and finally, it acted as a secure place for the collateral. As a result, many poor families embraced Malaysian microfinance practices because it encouraged savings and loan advances.

The approach is benevolent in design. That is, it is based on the agreement between the two parties, but the lender cannot ask for more payment. Nevertheless, the borrower may appreciate through a small token. Today, many Malaysians consider Ar-Rahnu as “an economic tool to improve socio-economic development of the lower and middle-income people because of its flexibility and co-operative principles” (Manzur et al., 2013, p. 57).


Many Muslims in some countries, such as Algeria, Egypt and Jordan among others have rejected microfinance loans because they claim that such loans do not adhere to Islamic religious practices. In Bahrain, a single bank, Family Bank incorporated in 2010 “is the first formal Islamic microfinance bank in the world” (Microfinance Africa, 2010). Although Bahrain is a rich country, many citizens still depend on welfare programs. In addition, many women and youth face financial hardship. Larger banks cannot advance any credit facilities to these segments of customers due to complexity in requirements, high amounts, collateral, insurance and perhaps a requirement for a commercial entity. Thus, the poor Bahrainis do not have access to loan facilities.

The Family Bank entered into the market specifically to serve “the needs of the poor in Bahrain with the Islamic microfinance products” (Microfinance Africa, 2010). The Bank has collaborated with “Grameen Trust to launch products that have merged the Islamic financial and Grameen Trust banking models to fit within the local context” (Microfinance Africa, 2010). The model focuses on “trust; no collateral; commercial entity registration; in case of death or severe disability, the credit is written off; and offered on relatively lower fees” (Microfinance Africa, 2010).

The Family Bank aims to spread this model across the Middle East and the world.

The bank is not-for-profit, and it has three financial products: “group-based financing adopted from the Grameen group-based lending model; microenterprise financing for the expansion of an existing microenterprise and; NGO/MFI financing to support their socioeconomic development projects” (Microfinance Africa, 2010).

The model focuses on income generation, skills development and empowerment. In addition, customers can open savings accounts with mandatory savings every month. This strategy aims to encourage the culture of saving.

There are also other support services such as business mentoring, vocational training and entrepreneurial and professional networking. It has collaborated with other institutions to provide these services.

The Family Bank’s approach to microfinance in Bahrain is unique in the entire UAE region.


Islamic microfinance in Sudan is customized to fit various needs of customers. For instance, there are products to meet the needs of farmers in rural areas who have access to land but lack financial support (Naeem, 2012). The Bank of Khartoum has acknowledged that Islamic microfinance “products can effectively reach small farmers in Sudan when customized to their needs” (Naeem, 2012). The product includes several “capacity building programs and effective group financing, co-operative, production-risk guarantees, and crop-insurance products aimed at small-scale farmers” (Naeem, 2012). One of the products is referred to as Maringa & Jatropha or the Farmers2Makerts project. The product has several features as follow. First, the product highlights different aspects of microfinance markets (Naeem, 2012). The Bank recognizes the role of families in farming in the rural Sudan, but a lack of labor leaves them vulnerable and traps them in poverty and hunger threats. Consequently, the Bank introduced Ijara (leasing product) and Mazaraa for the rural poor farmers. Second, the innovative approach has facilitated the introduction of micro insurance and financing risk guarantees for small-scale farmers. Micro insurance ensures a large-scale protection from losses and cost reduction for all farmers under the scheme.

Therefore, there are insurance products that specifically target poor rural farmers. Banks work with insurance companies as partners in such products. The most important part of the product involves educating the farmer about the whole product, particularly with regard to financing, micro insurance, premium payment and the cost of the product. Third, there are free extension services from the Ministry of Agriculture (MoA) to support the product. In reality, however, such services to do not reach many rural based farmers. In this regard, MoA created large-scale methods of reaching farmers to provide training services. At the same time, the UN used Farmers2Markets project to initiate its Food for Training project, particularly during dry seasons. Fourth, the Bank has recognized that small rural based farmers do not have direct access to larger markets. Consequently, they must link farmers with large farm produce markets. The Bank works in partnership with private firms and the Central Bank of Sudan to promote direct sourcing of farm produce from farmers. It caters for insurance premiums, farm inputs and extension services and ensures high returns for farmers. Finally, the bank has partnered with the Strategic Reserve Corporation of the Government to act as a buyer of last resort for farm produce and promote better prices for small-scale farmers (Naeem, 2012).

It is imperative to note that the concept of Islamic microfinance lies on innovation based on a given country’s needs as demonstrated by the case of Sudan. This model has included the public, private and international bodies to provide financial services to tackle rural poverty among small-scale farmers.

The case of the UK and Other Countries

One must note that it has not been easy for the Islamic banking system to flourish in foreign countries, or even in its countries of origin. However, notable changes have taken place. As a result, today, many conventional multinational banks have focused on providing Islamic banking services either independently or in collaboration with Islamic financial institutions in respective Western countries (Khan & Bhatti, 2008).

According to a study by Owais Khalid in 2011, the large international banks such as “Societe Generale, BNP Paribas, Deutsche Bank and Standard Chartered have all entered the Islamic banking business” (Khalid, 2011). Khalid also observes that even “accounting, consulting, and audit firms like Ernst Young now offer audit services to Islamic financial institutions” (Khalid, 2011). In 2013, Sleiman and French reported that Islamic trade finance had started to attract major financial institutions from the West. Although Islamic trade finance is a small fraction of the global banking business, it has attracted these banks due to rapid expansions and growths associated with the wealthy Gulf economies (Sleiman & French, 2013). The Bank of America Merrill Lynch has expressed its interests in offering Islamic trade finance in the future. Merrill Lynch aims to focus on potential customers from the Middle East, who have improved their businesses and transactions globally. Traditional banking institutions have acknowledged the need to set up Islamic units in order to provide banking services to Islamic clients. This trend has forced several multinational banks to focus on the Islamic banking system and sector.

Although Islamic banking system has experienced rapid growth, banking professionals observe that Islamic banks are “relatively small and lack the expertise and large international networks of mainstream Western banks” (Sleiman & French, 2013). These limitations may hinder rapid progress of Islamic banking systems. The Organization of Islamic Cooperation, “which consisted of 57 member states, conducted foreign trade that amounted to “$3.9 trillion in the year 2011” (Sleiman & French, 2013). However, only a small percentage of this trade received financing in accordance with the Shariah laws in Islamic banking. The Shariah complaint trade finance was worth “only three billion USD as the Saudi Arabia-based International Islamic Trade Finance Corp had approved in 2011” (Sleiman & French, 2013).

This is a clear sign that Islamic banking system is undergoing changes. It is also important to recognize that trade has increased tremendously between the Gulf nations and the Asian countries, particularly in the predominantly Islamic nations. As these trading activities increase and become complex, the Islamic banking system will require specialized trading units to manage global operations. The Kuwait-based Asia Investment has estimated that trading activities between the Gulf nations and emerging economies of Asia has reached a growth rate of 30 percent every year (Sleiman & French, 2013). The institution started trading with $20 million in the year 2012 (Sleiman & French, 2013).

One notable trend concerning the influence of the Islamic banking system on West banks is that some of the Islamic banking institutions have strived to expand their Shariah-complaint model to Western banks by looking for strategic partnerships. For instance, the Dubai Islamic Bank has stated that it would form such a partnership with the “Deutsche Bank’s expertise in order to enhance transactions involving letters of credit across Europe” (Sleiman & French, 2013). The Dubai-based financial institution wants to cater for local clients, who have increasingly focused on international trade. The Bank of America also sees strategic partnership as a viable alternative because trade flows have gained critical positions as they gain international perspectives. Hence, the need to provide trade finance activities to Muslim clients has received attention among Western banks.

The Standard Chartered Bank in the UAE offers Islamic banking services. The bank believes that the demand for “Islamic trade finance has grown because of its structure and religious permissibility” (Sleiman & French, 2013). These are attributes, which provide convenience to the customer. Islamic trade finance relies on additional security from other assets like real estate. Hence, the system is less risky, provides ownership to customers, as well as ethical proposition for users. This has led to the growth of the system across many MENA-based global clients.

MacLean writes that one cannot easily comprehend the growth in the Islamic banking system (MacLean, 2007). He points out that the difficulty arises on whether the system relies purely on halal (a complete complaint with the Shariah law) or it operates as a kosher within another religious context. However, MacLean acknowledges the growth of the Islamic banking system across Europe. Moreover, he shows that financial analysts have predicted a clean growth rate of 20 percent in deposits every year. This shows that Islamic banking system presents huge business for Western banks, and banks, which delay to take the opportunity, may miss out in the future.

Various governments have expressed their interests to support Islamic banking systems in their countries. For instance, in the year 2007, the UK Prime Minister, Gordon Brown noted that it would review its laws in order to accommodate Islamic financial system in London. This approach aimed at making the country a ‘gateway’ for the Islamic financial system in Europe. Japan also showed interests in becoming “the first non- Muslim country to offer Shariah-complaint bonds while Malaysia had proposed substantial tax incentives in its 2007 budget for its Islamic financial sector” (MacLean, 2007). In short, Western banks have noticed that they do not need to be “Islamic in order to bank in accordance with Shariah” (MacLean, 2007). Instead, they only require “a board of religious scholars to approve their operations” (MacLean, 2007). In the UK, the Islamic Development Bank (IDB) embarked on exploring opportunities and potential markets. The IDB focuses on social and financial inclusion of the marginalized individuals with community-based microfinance, small business financing and technical support (Microfinance Africa, 2012).

One major trend has emerged depending on activities of other countries and Islamic financial products. For instance, foreign banks have started to adopt some Islamic banking products to cater for their customers. In most cases, sukuk is the most preferred product but not microfinance products.

The case of the UK and Other Countries
From: El-Zoghbi, & Tarazi (2013).


In the past few years, the UAE has served as a perfect venue for hosting Islamic microfinance conferences. However, there are scanty details on the role, adoption or presence of Islamic microfinance in the UAE. This could imply that the UAE has not embraced Islamic microfinance relative to other countries in the Middle East.

Opportunities for Islamic Microfinance in the UAE

Over 96 percent of the population in the UAE comprises of Muslims, and therefore, there are readily available markets for Islamic microfinance products. The idea of Islamic microfinance observes requirements of Islam and promotes socially responsible spending and investing. Generally, investors have used halal projects to assist the needy. Thus, the use of zakat is widespread with the aim of developing the economy.

Wealth from oil and other minerals has failed to lift all citizens out of poverty in the Middle East region. It is estimated that “22.9% in Iraq, 18% in Iran, 34.8% in Yemen, 13.3% in Jordan, 12.5% in UAE, 28% in Lebanon and 11.9% people in Syria are living below the poverty line” (Mughal, 2012). In addition, majorities in these countries are Muslims, but they have consistently avoided the traditional microfinance model based on the Riba. The solution to alleviate poverty in these countries therefore is adoption of the Islamic microfinance model that adheres to Islamic principles (Mughal, 2012). Poverty is still extremely rampant in the world today and there is no effective solution other than providing funds to help marginalized communities.

Investors will have opportunities to engage in worthwhile business activities by targeting and eliminating poverty in the region. Islamic microfinance businesses can get recognition because of their roles on targeting the poor with financial services. Thus, the UAE can develop the Islamic microfinance sector and the Islamic banking industry. This is an opportunity to increase money circulation, help the poor and facilitate the role of Islamic banks as socially responsible institutions, which highlight the need to care for the poor. Microcredit can encourage such roles.

Islamic microfinance ventures have opportunities to offer the needed financial support to marginalized individuals who have shown no interest in the currently available microfinance products that do not adhere to Shariah laws.

The UAE can create specific products to meet the unique needs of the country and borrow best practices from other countries such as Malaysia, Sudan and Bahrain among others. Islamic banks or any other microfinance institutions could help in supporting the poor.

Many scholars recognized the relevance of the Islamic banking model and microfinance after the global financial crisis. They noted that Islamic microfinance was a transparent and sustainable model and therefore, it would be an effective to avert financial crises in the future (Saleem, 2008).

Given the role of Islamic microfinance in poverty alleviation, it has attracted attention of both international donors and multilateral institutions alike. These include “USAID, IDB, ADB, IFAD, UNDP, the World Bank and IFC among others, which have clearly explained their policies in different countries to strengthen Islamic microfinance” (Mughal, 2012). This strategy would ensure fast growth of Islamic microfinance in the future. The UAE, therefore, has opportunities to form partnership with such institutions and grow its microfinance and microcredit models. Academics and professionals can also engage in the development of effective microfinance models for the UAE.

Finally, there are already existing Islamic financial products such as Murabahah and Musharaka. These products can facilitate the development of the Islamic microfinance model. In addition, they will also facilitate the growth of the entire Islamic banking industry, as well as make financial resources available to many poverty-stricken people.

Opportunities for Islamic Microfinance in the UAE
From: El-Zoghbi, & Tarazi (2013).


While there is a greater need for financial solutions, an estimated “72 percent of people living in Muslim-majority countries do not use formal financial services” (Saleem, 2008). This implies that the current Islamic microfinance models have failed to reach majorities who require microcredit. One challenge has been pricing of Islamic microfinance products. An effective model should not be driven by profit maximization.

Another challenge is the widespread of the conventional Islamic microfinance models, which are based on the Grameen Model. Many Muslims use this model as an alternative due to a lack of Shariah compliant products. In addition, there are many different forms of Islamic microfinance models, which have brought about a state of confusion in the market.

It would be difficult to understand the UAE microfinance market because of insufficient data. The UAE has extremely poor approach to data management. Therefore, there would be extensive research required to understand the market.

For a long time, Islamic education system has not supported microfinance education. Consequently, the target populations lack knowledge in financial issues and could be difficult to train or change.

Inadequate financial and institutional resources could also affect Islamic microfinance initiatives.

Success factors

The Islamic microfinance model must offer microcredit at extremely lower rates relative to other microfinance products and bank rates. The lender must understand credit worthiness of the borrower to develop a mutual and beneficial relationship. Successful repayment will ensure long-lasting trust between the parties.

It is imperative to establish microfinance offices near customers. Many potential clients live in rural area where access to information could be a major challenge. These clients, however, require face-to-face interaction with lenders because of their education levels, trust and financial advice. Microfinance ventures must move to rural areas and work with communities.

Microfinance businesses have recorded high repayment rates because many clients tend to repay their small loans on time. This has been a major strength for many microfinance organizations. Clients understand their vulnerable financial situations and tend to repay their loans to establish good relationships for future borrowings.

The key to success in microfinance business is cost control. Consequently, microfinance institutions tend to advance loans to a group rather than an individual. Group loans have high repayment rates and remain active because members engage in income generating activities. The group bears responsibilities for every member and monitors contributions to ensure successful repayment.

In addition, the UAE can also offer personal loans through its microfinance models. This approach, however, must be classified under the risky portfolio because it attracts high costs of operations, monitoring and risks of repayment.

The UAE must collaborate with international organizations in policy development and financial support. Such organizations have vast experiences gathered over the years from various models globally. In addition, the country must introduce Islamic microfinance education by collaborating with academics and industry experts for best practices. These strategies would provide valuable support that many microfinance models have not experienced before.

The UAE Islamic microfinance ventures should ensure effective recruitment of employees to ensure the success of their models. Employees should focus on the broader goal of their institutions. Moreover, they should engage in training and development programs to increase their financial literacy and adopt best practices in the industry. The UAE culture needs to embrace technology and enhance data collection for project evaluation purposes.

Success factors
From: El-Zoghbi, & Tarazi (2013).

Recommendations for the UAE

  • Design Islamic microfinance products to meet unique needs of the UAE
  • The products should be strictly Shariah compliant to serve the rest of the market that have rejected the existing products
  • Include academics and industry professionals to highlight some of the best practices in the industry
  • Collaborate with international and multilateral organizations to design effective microfinance policies and ensure successful implementation
  • The model must appeal to the target market, offer relatively lower fees and flexibility need in such circumstances due to unique needs of various customers
  • Financial training programs to borrowers


Many countries and private businesses have adopted the concept of microfinance to fight poverty by extending funding opportunities to the poor. Consequently, it has turned into a tool for poverty alleviation and socioeconomic development. There is no single definition of microfinance models, but various models share similar features.

Globally, microfinance models have succeeded because of their appeals to the poor. In this respect, it should complement Islamic banking model. Several countries such as Yemen, Sudan, Bahrain and Malaysia among others have developed different models to meet their market demands. At the same time, other Western countries such as the UK have continued to embrace the Islamic banking model as they explore opportunities for Islamic microfinance models.

Although the UAE has hosted several Islamic microfinance summits, there are hardly any data to support its role in the Islamic microfinance sector. In this respect, many researchers have argued that formal Islamic microfinance is a missing link in the banking sector.

This research has established that the UAE has huge potential to exploit the untapped market of microfinance. This initiative, however, requires effective product policies that strictly appeal to Muslims because the current microfinance products have failed to attract certain segments of consumers because they are not Shariah compliant. The research, therefore, recommends collaboration, development of unique Shariah compliant products that appeal to the UAE customers. Such products must come with support services such as training programs on financial issues.


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Cite this paper


EduRaven. (2022, April 7). Microfinance in Islamic Banking. Retrieved from https://eduraven.com/microfinance-in-islamic-banking/


EduRaven. (2022, April 7). Microfinance in Islamic Banking. https://eduraven.com/microfinance-in-islamic-banking/

Work Cited

"Microfinance in Islamic Banking." EduRaven, 7 Apr. 2022, eduraven.com/microfinance-in-islamic-banking/.


EduRaven. (2022) 'Microfinance in Islamic Banking'. 7 April.


EduRaven. 2022. "Microfinance in Islamic Banking." April 7, 2022. https://eduraven.com/microfinance-in-islamic-banking/.

1. EduRaven. "Microfinance in Islamic Banking." April 7, 2022. https://eduraven.com/microfinance-in-islamic-banking/.


EduRaven. "Microfinance in Islamic Banking." April 7, 2022. https://eduraven.com/microfinance-in-islamic-banking/.


EduRaven. 2022. "Microfinance in Islamic Banking." April 7, 2022. https://eduraven.com/microfinance-in-islamic-banking/.

1. EduRaven. "Microfinance in Islamic Banking." April 7, 2022. https://eduraven.com/microfinance-in-islamic-banking/.


EduRaven. "Microfinance in Islamic Banking." April 7, 2022. https://eduraven.com/microfinance-in-islamic-banking/.