The Forgotten Potential of Islamic Microfinance

By Mohamed El Mehdi Zidani

Seeing microfinance as just

lending money to poor people
is neglecting the real power it
has. As Islamic organizations,
we have the responsibility to
define what is the kind of
economic, social, moral and
spiritual change we want to
make and work for it.

billion people are living below the poverty line, 44%

of conventional microfinance clients live in Muslim
countries, almost half of the 56 Islamic
Development Bank member countries are classed
as United Nations Least Developed Countries
(LDCs), an estimated 72% of people living in
Muslim-majority countries do not use formal
financial services, surveys in Jordan, Algeria, and
Syria, revealed that 20-40% of respondents cite
religious reasons for not accessing microloansthe
economic and reaching potential of Islamic
microfinance is indeed impressive, in terms of
numbers it means billions of dollars and hundred
millions of people. We may actually not really
realize the economic potential of this sector.
However there is another potential, more subtle but
maybe more powerful, less obvious but certainly
not less important. This is the potential Islamic
microfinance has to be a role model in promoting
another model of society.
I will first point out the real power of financial help
and shows that this has been implemented by
conventional microfinance.

This social agenda was summarized in the 16

Decisions. This is a list of statements dealing with
health, education, social and economic behaviors.
Every borrower had to memorize and recite them at
Grameen meetings.
He was aware of the impact he could have on the
poor, and so you have. This is not be neglected,
because doing microfinance is a very powerful way
to influence the habits, beliefs and mindset of the
poor. One example that really struck me when I
went to Bangladesh was a discussion I had with
Rabiya. Rabiya was the oldest (in terms of
membership) member of her center: she joined at
the beginning, 16 years ago. Thank to GB, she
significantly improved her situation. She was the
centre leader of the village. She had several
businesses she and her husband are running. She
was also working at the family planning center. Her
role at the center was to create more awareness
about - birth control, sexual education and
healthcare. She told me that it worked: the
number of children per women has really decreased
since it started.
I ask her if she thinks it is a good thing, she says
yes and when I ask why, she goes: Less babies,
more assets. I smiled, but I was crying inside. I
asked the translator twice if he translated wellSo
this is what is promoted among our Muslim sisters,
less human, more money. You may ask what is
the link with the GB. One of their 16 Decisions is:
We shall plan to keep our families small. We shall
minimize our expenditures. We shall look after our
health.
This is why I said earlier that the 16 Decisions can
influence beliefs, in other words bring ideological
values. I would not develop here why this particular
point of keeping our families small does contradict
Islam and why it is a very materialistic conception
of life. Conventional microcredit and microfinance
does not only contradict Islamic principles because
it uses interests, it is far deeper than that.

The Real Power of Financial Help

My goal here is to point out the fact that there is a

real and strong power to educate and influence
positively or not borrowers behaviors and beliefs,
beyond simply giving them money and helping
them to get out of poverty. This power of money
has actually been recognized by Islam, so much so
that one category Allah has defined for people
receiving Zakat is: those in whose hearts the love
of Islam needs to be instilled1. It means that
financial help can help someone remain strong on
his faith, i.e. financial help has a power on
someones beliefs.

From the beginning microcredit was not only aiming

at giving poor people access to credit, but
Muhammad Yunus with its Grameen Bank had the
intention to change economic and social behaviors.

1 Surah 9, ayat 60.

Then we will dwell on what does Islamic really

mean when we talk about Islamic organizations.
Before concluding I will share with you an
alternative model that tries to fully embody this
Islamic label.

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As Islamic organizations it is of upmost importance

that we realize this potential for educating and
influencing the poorest.
This is what the Islami Bank of Bangladesh did
when they launched an Islamic microfinance
program, managed by an ex-manager of the
Grameen Bank. They defined 18 commandments
that, as Grameens 16 Decisions, should be
memorized and implementing in peoples lives. We
find statements that come from Grameens with
some modifications and without we shall keep
our families small. Besides they give some Islamic
reminders to the borrowers during meetings with
them.
This educational (or social) potential seems to me
to be one of the most important and most
neglected points concerning Islamic microfinance.
But what do mean by education ? and more broadly
how do we define the impact we want to have on
the community ? what is our vision as Islamic
organizations, what do we want to achieve in the
long run ?

We Are On A Mission, An Islamic

Mission
When we think of setting an Islamic vision, we
should remember each other that all the work we
are doing should be for the sake of Allah. If we are
here today, if you are researching on this field, if
you are working face-to-face with the poor in a
village in Bangladesh, Ghana, India, Uzbekistan or
Pakistan, it is because you want to please Him and
worship Him by working for His cause. And this is
not easy, I am sure all of you had many obstacles,
trials and hardships, maybe doubts, but this is part
of any important fight. And you are like warriors.
This not what I think but what the Prophet (peace
and blessings be upon him) said in an authentatic
hadeeth: Anyone who looks after and works for a
widow and a poor person is like a warrior fighting
for Allahs cause, or like a person who fasts during
the day and prays all night.2
You see the enormous reward we can get if we do it
with the right intention. So please do not see
yourself
as
workers
for
an
humanitarian
organization, but you are struggling for Allahs
cause and this is indeed our role on this earth. You
are not on a job position, you are on a mission, an
Islamic mission.
Being Islamic is not a mere label or just the fact
that the products are halal, it should encompass
the whole organization, its objectives, the
relationships with the borrowers, the intention of
the employees. You are working for promoting the
Islamic values and if we want people to be selfsufficient and get out of poverty this is because it is
the means to help them to be better worshippers.
Getting people out of poverty is not the ultimate
goal in itself, we should see higher than that.
Some people may say that this someonelses job,
that we are satisfied with giving the poor access to
capital and this is enough. This is why I wanted to

2 Reported by Al Bukhari.

talk about the social influence of the Grameen Bank

before, to tell you that when you give money to a
poor widow or a father you have a power to change
their lives that goes beyond finance. And if nonIslamic organization are doing it, we should be
doing it even more because as Muslims if Allah
gives you the power and capabilities to change
peoples lives this is a responsibility on your
shoulders, as well as an opportunity to be among
the best of the Ummah as the Prophet (peace and
blessings be upon him) told us: the best of you is
the most useful to others. He also told us that
when we make dua for Paradise we should ask the
highest degree of it, so we must have high
aspirations. You are already changing the world but
you have the abilities to change even more and in a
more comprehensive way. I think it should be a
collective effort from the Islamic microfinance
community to define our vision and what should be
the vision of this sector in serving the Ummah. In
this collective effort it seems to me that the role of
our scholars is crucial and it is indeed a pleasure to
see that we have several Shariah scholars with us
today who realize the importance of this sector. If
the Prophet (peace and blessings be upon him) was
alive today, would you simply ask him to validate
whether your products are Shariah-compliant or
not ? Of course we would ask him, but we would
like to benefit from him beyond that, we would ask
him if we are going the right direction, how to serve
the Ummah the best way, what is the social,
educational and spiritual impact we should aim to
have on the people we work with, in other terms we
will ask him to lead us. And this is exactly what an
imam is: a leader. Now we dont have the Prophet
(peace and blessings be upon him) living with us,
but we have his inheritors, the scholars and we
should seek their guidance for setting our vision
and objectives because they know the right
methodology - when you have the field experience.
As you are noticing I am not saying how we should
educate people and ourselves as well, what are the
social changes we should promoteI am just
pointing out the importance of thinking about our
vision (where are we going) and really thinking of a
well-planned strategy (how to go there) as well as
the models adapted to it, in order to promote and
contribute to establishing a role model society
based on our Islamic principles.

The Positive Circle Model

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I would like before concluding to describe one

practical model that has not yet be implemented
but which responds to this need of creating models
that contribute to building another model of
community and society. Why do we promote this
new model?

First, the problems and drawbacks of

conventional microfinance, like charging
high amounts of interests, putting
pressure on the borrowers - like it
happened in India for instance, or getting
them into capitalism and its ideology,
make us realize the need for another way.
Secondly, models that have been set up
are too often more Shariah-compliant
than really Shariah-compliant, and we
need to go beyond just saying it, by
proposing Shariah-based alternatives.
Third, Shariah is too often see even by
Muslims themselves as a donts list. We
should consider Shariah as a positive
framework, not a set of constraints. This is
what happened in art. Constraints in
drawing human beings was not seen as an
obstacle for artists, but happened to be
the driving force behind the development
of the beautiful Islamic art. What
happened in art should happen in
economics and finance.
Fourth, we should change our look towards
economics if we see economics as a series
of unrelated parts and events. Economics
is a whole composed of interactions
between actors (agents).

These interactions make it possible to think of a

model that will make them positive: this is what the
Positive Circle model is about. This model has been
developed by Marwan Muhammad, a mathematical
engineer (with whom I co-founded an Islamic
finance organization).
This model can be inserted under microfinance,
but it actually goes beyond that. It is an alternative
system: it does not need a bank, and combines
cooperation, social responsibility, brotherhood,
Musharaka and/or Mudaraba, therefore partnership.
It is a complete, autonomous microeconomic
system. It is called the Positive Circle. It can be
developed in rural as well as in urban areas, in the
West or the East, with middle-class or very poor
entrepreneurs.

3) The portfolio is divided in 10 shares of $ 5,000

each (or 5 of $ 10,000, according to what the group
decides).
4) The shares are invested in different projects:
chemistrys, a restaurant, a delivery company, an
after-school tuition association, a gym
Each project has a different risk/profitability profile:
the chemistrys for instance makes more money in
winter than in summer, whereas the restaurant
uses its terrace and makes more profits in summer.
The delivery company has regular clients and thus
has a lower investment risk profile. Finally, the
association providing tuition services does not
make any profit, but has a positive social impact.
Allocation of shares is done taking these
differences of risk/profitability between projects
into account, so that the losses of some projects
are compensated by the profits of others.
5) Each share is invested in a project, according to
a certain kind of partnership:
We choose for example to give a loan at 0% to the
tuition association, for one year, on a Qard Hassan
format (interest-free loan).
We invest in the restaurant by taking shares in
the capital of the company for one year, either on a
Musharaka basis (both investors and the
entrepreneur put money), or on a Mudaraba basis
(the investors brings money and the entrepreneur
his work and expertise). On this format, we will
share profits or losses according to the financial
result of the restaurant during the year.
Therefore we are in a real spirit of partnership and
economic solidarity. The interest (no pun) of the
network
goes
hand-by-hand
with
the
entrepreneurs,
and
the
network
members
(investors) are also here to help and give their
opinions to entrepreneurs during hard times: skills
of the group (marketing, sales, IT, accounting,
mathematics, law) are always available to give
advice.
6) At the end of the year, a review of the projects is
done:
Project A:
Invested share at the beginning of the year: $
5,000,
Share value at the end of the year: $ 5,500,
Result: $ 500 loss.

The Positive Circle model, drawn below, consists in

10 points. We put some figures to make it more
concrete:
1) A group of people (for instance 10 to 15 to start
with) gather a part of their savings (lets say
$50,000 in total). The amount is the investment
portfolio for the network.
2) Some members of the groups are chosen to
manage the fund. We can for example choose: a
lawyer, a tax accountant and a finance expert.

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Project B:
Invested share at the beginning of the year: $
5,000,
Share value at the end of the year: $ 4 700,
Result: $ 300 loss.

Project Z:
Invested share at the beginning of the year: $
5,000
Share value at the end of the year: $ 5,000,
Result: $ 0.
By adding all profits and losses of each project, we
end up with a portfolio of a total value of, for
instance, $ 54,000, and every member of the initial
investment group receives a share in profits
according to what he invested (if I invested $
5,000, i.e. 10% of the total investment, I will
receive a $400 dividend, i.e. 10% of the total
profit).
7) Zakat can also be incorporated in the Positive
Circle model and given to associations for which
Zakat is applicable or directly to the people entitled
to receive it.

Once the initial phase is overcome, the

network can grow, thus enlarging the
Positive Circle, which can be an example
and support for networks in other regions,
even
beyond
Muslims

10) The establishment of a fair economic system,

which respects the environment, does not leave
anyone aside the road and takes part in social
development, makes quiet the capitalistic model
that we are said is the only reliable, the only
possible one. To succeed in fostering such an
initiative, with the help of God and according to
Muslim ethics, is to prove, definitely and
irrevocably, that the economic system in which we
are tried to be locked is really what we thought of
it: an imposture established to make a small group
prosperous on the back of the rest of the world.
By establishing this innovative model, we replace in
a positive way the role of savings and investment
given to the bank today, and we put microfinance
at a higher level.

8) In our case study, entrepreneurs benefiting from

the investment fund help each other throughout
the Positive Circle without even noticing it: the
profits of the chemistrys have for instance
compensated the losses of the restaurant, etc.
Besides, the entrepreneurs who benefited from the
Positive Circle this year could become investors
next year, thus contributing positively to the
system.
9) It is therefore a real virtuous circle that is set up:

Investors
are
given
responsibility
regarding the use of their money, and they
orientate it on purpose towards helping
those in their communities, with whom
they live.

All investors and entrepreneurs will prefer

companies and associations taking part in
the Positive Circle (the restaurant manager
goes to the chemistrys, students of the
association benefiting from tuition services
also go to the gym, the chemistrys uses
the delivery company, etc.) which
strengthens solidarity and brotherhood

among the social network.

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Gym
Deliver
y
compan
y

Restaura
nt

FUND

School
suppor
t

Zakat
al maal
Chemistr
y's

Example of a Positive Circle Portfolio.

Conclusion
We saw that conventional microcredit organizations
from the beginning understood the power they had
to change society habits and customs. As Islamic
organizations it a responsibility to define what is
the kind of economic, social, moral and spiritual
change we want to make and work for it. In this
challenging task we will need our scholars to guide
us and help us define our Islamic vision and
missions. One example of an alternative models
aiming to go beyond giving money to people is the
Positive Circle.
I think that if all people working in the field of
Islamic microfinance realize that they are on a
mission to establish a broader model, which is a
society based on the worship of Allah and if they
consider themselves as servants of this beautiful
cause, Islamic microfinances success will go
beyond expectations. You should be convinced of
this because Islamic microfinance is not just a niche
market
combining
Islamic
finance
and
microfinance, no. It is a niche market that has the
potential to be the model market in both industries,
you have the potential to set the standards and be
the role models of both industries:

In the microfinance sector you have what

others dont, which is the divine guidance
of Islam, so you will avoid the dangers and
injustice other organizations may fall into,
charging interests being the most obvious.

In Islamic finance, you are doing what a

large part of the Ummah is waiting from
Islamic finance, namely promoting social
redistribution, eradicating poverty, helping
the poorest. Muslims are proud to present
their alternative economic and financial
system, especially in this time of
capitalism crisis, and you are the ones on
the field who are showing that the
economic justice of Islam is not only
theoretical.

You are the pride of the Ummah and you have the
divine framework others dont to set up the best
and fairest models. You are changing the world and
you have the potential to become the role model in
this task, showing to the world that indeed the
solution to today injustice is in Islam.
And Allah knows best.

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