Islamic Banking - more compatible with microfinancing.

Byline: AKRAM KHATOON

Microfinancing has its origin based on universal dictum of economic and social justice, to be brought in all societies so as to arrest the widening gap between the rich and poor and thus eradicate poverty from the globe. Similarly Islamic laws based on Quranic teachings, focusing all financial transactions also uphold ethical values and social justice and make it incumbent on the state to promote equality and equal opportunities for all.

All the modes of financing under Islamic banking wherever introduced to replace Riba/interest are based on following assumptions:

1. That all transactions under Islamic modes of financing involve the concept of risk sharing.

2. Everyone has a right to own assets, whether moveable or immovable.

3. The contractual arrangements between financing bank and the client have legal validity.

   On the other hand, microfinancing promotes micro businesses even amongst the poorest of the poor and contains an element of risk sharing in all financial transactions and above all based on the very philosophy that poor should participate in economic activity so as to share national wealth. This provides compatible and ideological grounds for adoption of Islamic modes of financing to replace interest-based system or other modalities akin to Riba embedded in the systems and procedures of microfinance banks.

   Further guiding principle of microfinance banks/institutions is to become sustainable, side by side with promoting entrepreneurship amongst financially disadvantaged segment of the population with the sole objective of creating enabling environment for them to fully participate in economic process and build up assets of their own. Islamic banking with total focus on basic philosophy of Islam, which allows financial innovations has evolved the strategies and products relating to deposit taking and financing, which are in consonance with the basic principles of social justice and ensure sustainability both for financing bank and client's projects.

   Universally accepted Islamic banking products relating to deposit taking and financing in vogue in the countries, including Pakistan where attempts have been made to eliminate Riba/interest from banking system are:

1. Investment related Musharika/Mudaraba, term finance certificates and equity participation where the concept of profit and loss sharing with equity input by the financing bank and client or by the bank alone prevails.

2. Trade related instruments like Murabaha/Bai Muajjal, based on the concept of sale and purchase of goods and services by the banks required by their customers on term where the price of goods/ services plus margin of profit...