The difference between Islamic finance and “regular” finance is this: generally, in Islamic finance, risk and profit are shared between lenders and borrowers thereby tying the success of lenders to borrowers. It has grown steadily since the emergence of large Islamic banks in Saudi Arabia in the 1970’s and opens a new avenue for current cash-only populations (Garrett 2011). This is particularly true for the poor and less educated who face many obstacles to benefiting from modern institutions, including a reluctance to participate in culturally and religiously condemned financial practices.
Mohamed (pictured above) has received two Islamic-compliant loans through the National Microfinance Bank (NMB) in Jordan, which offers both Islamic and regular financing options. “I know that in the end the price is the same, but the Islamic loan is better,” he told me. “The bank makes sure the loan is used for the right purpose. The money doesn’t just disappear”. The National Micro Finance Bank offers Murabaha loans meaning they purchase goods and then sell those goods to the borrower at a higher price which is paid in installments (Mahariq 2014). NMB’s borrowers, like Mohamed, never actually receive cash from the bank.
Concern over loan use is echoed by bank employees. “When you give a regular loan to someone, you never know if he is going to use it the way he said he would. Maybe he will use it for something else,” commented one former NMB loan officer. Islamic financing provides an extra layer of oversight which helps protect borrowers who might be uneducated and have little experience in financial planning. Islamic financing also provides added comfort to the borrower, knowing that the loan he/ she receives is permitted within his/ her faith (or “Halal,” as Mohamed put it.)
While cash flows between regular financing and Islamic financing may be very similar, investors cannot guarantee a return on their capital or even principal repayment because if an investment or a loan is unsuccessful, the burden should be shared by borrowers and investors instead of being born by borrowers alone (Musharakah on Shari'ah Ruling). At the same time, Islamic financing reduces the risk to financial institutions by giving them more power over how financing is utilized.
The ethical obligations of Islamic financing make it particularly compatible with the goals of microfinance institutions. When it comes to increasing the reach of microfinance institutions, Islamic finance seems to be a natural ally.
Works Cited
Garrett, Ken. Introduction to Islamic Finance. 2011.
Mahariq, Sameh. "Islamic Finance." Personal interview. 30 Sept. 2014.
"Musharakah on Shari'ah Ruling." Institute of Islamic Banking and Insurance. N.p., n.d. Web. 30 Sept. 2014. <http%3A%2F%2Fwww.islamic-banking.com%2FMusharakah_sruling.aspx>.
About the author
Nadia Al-Absy
Nadia grew up in Omaha, Nebraska, a city she loves for many reasons, including that driving from one end to the other takes just 25 minutes. While attending the University of Nebraska at Omaha, Nadia earned her BA in International Studies with concentrations in Business Management and Middle Eastern Studies. When she was a student, she studied Arabic abroad in the occupied Palestinian Territories, Jordan, and at the Critical Language Scholarship's institute in Rabat, Morocco. She also spent time studying politics, religion, and economics in Turkey. During her travels, she was inspired by entrepreneurs who managed to create opportunity out of nothing, like a woman she met selling flowers on a street in Rabat's old city. Instead of begging alongside Morocco's large homeless population, this woman took control of her own destiny and runs her own business. Nadia would like to help others do the same. After graduating from UNO, Nadia began managing accounts receivable for a Halal certifier in the US which approves meat and poultry producers to export to the Middle East. She looks forward to shifting her focus to empowering individuals during her Kiva Fellowship. After her fellowship, she plans to pursue a master’s degree. In her downtime, she is an avid runner, reader, and country line dancer.