The majority of the 800 million unbanked Muslims worldwide are women (Shutterstock).

Islamic Finance

Islamic microfinance must break down barriers to achieve potential

Microfinancing can ease poverty, fits with Islamic charitable traditions.


London: The global Islamic microfinance market has room to grow significantly if it overcomes social and regulatory barriers currently curbing its expansion, say experts.

Given microfinance is a poverty-alleviation mechanism providing credit and other financial resources to poor and low-income households and small-and-medium-sized businesses, it dovetails with Islamic charitable traditions.

Consequently, Islamic microfinance systems offering these services in a Sharia-compliant manner are developing albeit with relatively nascent growth. According to Muhammad Zubair Mughal, CEO of the UAE-based AlHuda Centre of Islamic Banking and Economics, Islamic microfinance makes up just 1% of the estimated $2.7 trillion global Islamic finance market.

US-based market research provider Research and Markets predicts the global market for any microfinance options will reach $304.3 billion by 2026 from an estimated $156.7 billion in 2020. This translates into a compound annual growth rate (CAGR) of 11.9% with Islamic microfinance contributing to this upward trend.

The general development of Sharia-compliant financial products is paving the way to expand Islamic microfinance to reach more financially underserved and unbanked Muslims. Given microfinance is typically accessed by high-risk borrowers with low incomes, conventional products carry high interest rates.

However, charging interest in Islam is haram, but finance providers have developed structures charging fees instead of interest – an approach adopted by Islamic microfinance providers. Countries with large Muslim populations, especially those with emerging economies like Nigeria, are regarded as having the greatest scope to foster the microfinance expansion.


Read -
Lack of good practice solutions hinders development of Islamic social finance
Islamic social finance could help deliver United Nations sustainable development goals
International standards and tribunals being developed to solve global Islamic finance disputes


Nigeria is home to more than 100 million Muslims, roughly 50% of the population, and has active Islamic finance and microfinance markets. The country has witnessed more than 900 microfinance institutions being established since the Central Bank of Nigeria launched its financial inclusion strategy in 2012.

However, the proportion of these institutions offering Islamic finance is low, according to Adnan Opeyemi Salaudeen, a graduate research assistant and Islamic finance specialist at the International Islamic University Malaysia (IIUM), currently researching Islamic finance topics for Forbes Middle East.

Opeyemi said Islamic microfinance can fill in the gaps left by “traditional” microfinance services that leave Muslims adrift from financial systems. Specifically, it can offer Sharia-compliant micro-saving, micro-credit and micro-takaful (insurance) opportunities to financially excluded Islamic consumers who either lack the knowledge or resources to participate in mainstream banking services or choose not to use them, because they are not seen to be Sharia-compliant.

“Providing accessibility to the unbanked community is a key priority for Islamic microfinance,” said Opeyemi.

One of the barriers to the growth of Islamic microfinance in countries like Nigeria was the lack of options. Sharia-compliant providers must access funding from banks and that means using Islamic banks or Islamic branches of standard banks.

“Unlike conventional microfinance services, they can’t (simply) get a loan from a mainstream bank. Another issue is licensing. In Nigeria, obtaining a licence from the central bank to provide Islamic finance services (such as a conventional licence with Islamic operations) can be an onerous and time-consuming process,” Opeyemi explained.

He added the lack of awareness about the availability of Islamic microfinance services; gaps in fintech that should provide simple platforms for consumers to access Islamic microfinance and misconceptions about Islamic finance in general – such as its perceived restrictiveness and lack of commercial application – also hamper development.

Opeyemi argued Sharia-compliant micro-savings and micro-credit services were not enough to alleviate poverty and must be backed up by micro-takaful. An alternative to conventional commercial insurance and a complement to takaful (where group members contribute to a pool system to guarantee each other against loss or damage), micro-takaful provides individuals with protection against the losses and unforeseen calamities that can plunge people into poverty.

“Micro-takaful can provide the safety net for communities and help them improve their standard of living using micro-finance and micro-savings opportunities without the risk of going backwards if and when disaster strikes,” said Opeyemi.

Muslim female consumers are also seen as a route to growth in the Islamic microfinance market. According to DinarStandard’s State of the Global Islamic Economy Report 2022, the majority of the 800 million unbanked Muslims worldwide are women. Faoziya Giwa, assistant director of cooperatives at Nigeria’s Lagos State ministry of commerce, industry and cooperatives, said Islamic microfinance can be more than just a poverty reduction mechanism.

It could spur sustainable economic development and growth if appropriately targeted – for example by focusing on female entrepreneurs.

“Giving women the opportunity to become self-sufficient and make economic choices is good for economies and communities,” she said.

Currently, many Islamic women in countries like Nigeria are economically inactive, partly because they lack access to financial resources, she noted.

Lagos is the country’s commercial capital with a metro area population exceeding 17.5 million, at least 20% being Muslim.

Organisations in other countries with large or majority Muslim populations are also making efforts to expand the Islamic microfinance market. In Malaysia, Peer-to-Peer (P2P) microfinance firm microLEAP has announced plans to add new products to improve access to such finance including car and invoice financing.

In Saudi Arabia local fintech the Tamam Financing Company launched a Sharia-compliant microfinance scheme in 2021 that aims to increase financial inclusion in the kingdom in line with the country’s financial sector development plan Vision 2030.

Indonesia’s e-commerce company Tokopedia and Islamic bank BNI Syariah are collaborating to improve access to finance for small, medium and microenterprises. BNI Syariah provides financing via its micro-financing arm for the e-commerce platform’s merchants and partners.

However, while such products and innovations are welcome, they remain isolated examples and more needs to change structurally if Islamic microfinance is to take off commercially and benefit the poorest communities, said Mughal of the AlHuda Centre of Islamic Banking and Economics.

“We need to introduce more Islamic banking products at the micro level. Those at the extremely poor level can’t do any kind of business activity, so we need to make Islamic microfinance work for this level of society and move them through (the social poverty levels) so they can access different kinds of Islamic finance,” he said.

© 2022. All Rights Reserved


Islamic finance
Islamic banking
Author Profile Image
Rose Pengelly