Responsible Finance Forum

Toward Inclusive Islamic Finance

Natalie Schoon and Matthias Range
01 June 2014
Source:  Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ)

The revolution of Islamic Microfinance is pending. In recent years, the discussion on Microfinance has made significant leaps. Following the 2007 crisis, the industry has reflected on potential areas of poverty reduction and employment creation, the importance of its double bottom line of profit and social impact and, by extension, the need of putting consumer protection principles at the center of attention. The shift from quantity towards quality in supplying access to financial services is vital, especially given the significant proportion of people left without access to finance who will need to be taken into consideration.

How Islamic Finance can play a part in this change remains unclear. The demand for Islamic financial services is manifold. Its demands call for a general wider range of products, for products suitable for start-up finance on a micro-level, for higher levels of transparency and last but not least the demand for products which are in line with the ’clients’ religious beliefs’, conviction. Despite this increasing interest, this part of the industry has been largely neglected both academically and in practice until 2004 when the first research papers emerged and international cooperation projects entered existing, emotionally driven discussions.

This discussion paper aims to summarize the experiences and lessons learned by Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbH and other international organizations over the past 10 years. It identifies hindrances, dares to look forward and, in addition, suggests interventions for much needed support in order for the revolution to finally take off. Targeting colleagues from donor organizations and implementing agencies as well as Government and Non-Government organizations, it provides a basic understanding of the principles and products available.

Finally, this paper outlines the obstacles regarding further development and details some successful cases. This paper also attempts to show how Islamic Microfinance and conventional microfinance overlap. This paper is not, however, based on any professional evaluation, and provides the view of GIZ only; even though several up-front interviews with leading experts of the industry have influenced the outcome.