Microfinance in Islam: new financial reality

According to analysts, at least 72% of people living in Muslim-majority countries do not use financial services provided by banks. Even when these financial services are available, muslims consider them incompatible with the principles laid down in Islamic law. In recent years, microfinance organizations have begun to actively serve Muslim clients, offering them services that comply with the rules of Islam and Shariah which has led to the formation of the Islamic microfinance market as a new market niche. Since 2016, the demand for such products has increased by more than 35% and continues to grow.

Islamic microfinance organizations should cover all their expenses at the expense of profits from their activities, and not at the expense of donations or zakat. Therefore, only a few companies manage to survive in the market. Redirection of microcredits to borrowers' consumption is one of the main reasons for frequent default on loans in traditional microfinance. In addition, charging a high overall interest rate hinders poverty reduction. These main problems of traditional microfinance can be solved if an Islamic microfinance institution is designed in a comprehensive way by combining two traditional institutions of Islam, namely the Waqf and Zakat into a single structure. Such an integrated model can reduce the probability of default on the loan, because otherwise the main tendency inherent in poor borrowers to use the loan fund for consumer purposes will be satisfied. Since their basic consumer needs are met, entrepreneurs may be in a better position to focus on their business.

Islamic microfinance is a merger of two rapidly growing industries: microfinance and Islamic finance. As of today, the total value of Islamic finance products amounts to 500.5 billion US dollars, and the 100 largest banks in the Islamic financial industry show an asset growth of 26.7%. The Islamic finance sector is the fastest growing in the world and has demonstrated exceptionally high growth rates in recent years - 15-20% per year. Islamic banking is practiced by more than 400 financial institutions around the world, and its annual turnover is about $ 750 billion.

According to the ratings agency Standard & Poor's, it has a sevenfold development potential - up to $ 4 trillion.

In 2019, CGAP's global microfinance study collected information on 125 financial institutions and contacted experts from 19 Muslim countries. This study showed that Islamic microfinance services are concentrated in three main countries – Indonesia, Bangladesh and Afghanistan. Here, about 80% of the population use the services of microfinance companies, whereas in Jordan, Algeria and Syria, only 20 - 40% of the population are interested in such financial instruments.

Islamic microfinance generally refers to a financing system based on Shariah standards. Shariah financial standards are based on the basic principle of ensuring well-being by prohibiting acts that are considered dishonest or exploitative.

The following contracts are the most widespread in Islamic microfinance relations. Each of them can operate both independently and in conjunction with other contracts, thus creating a hybrid instrument.

Murabaha is the sale of goods to the customer of purchase at an additional price.
The murabaha transaction is the most widespread of the entire spectrum of transactions that comply with the principles of Shariah. Usually, customers are asked to purchase certain goods that are purchased by a financial institution directly from suppliers, manufacturers of goods and then resold to the customer.

To purchase goods of the required type, quantity, quality, a financial institution may appoint an agent who, acting on the basis of an agency agreement, will conclude contracts for the supply of goods for and on behalf of a financial institution.

The main conditions for compliance with the principles of Shariah Murabaha are the following:
- a financial institution must be the owner of the product before it is sold;
- the goods must be tangible property;
- the customer must agree to purchase the goods at the established premium cost.

Ijara is a lease agreement usually used to finance the purchase of equipment, machinery or real estate. The terms of the lease agreement, which include the term of the contract, the amounts, terms and conditions of lease payments, are agreed in advance in order to eliminate uncertainty during the transaction. In order for the operation to be considered as conforming to the principles of Shariah, a financial organization acquires ownership of the object of the contract, and subsequently repairs are carried out at the expense of the financing organization.

According to the ijara muntankhiya bittamlik agreement, after the expiration of the lease term, the rental object can be sold into the ownership of the lessee.

Musharaka and mudaraba – transactions based on the distribution of profits and losses are most encouraged by Shariah scholars.

Musharaka is a contractual partnership between two or more parties combining assets, labor resources in order to make a profit. The parties share profits and losses in accordance with previously established shares. One of the partnership participants can buy out the other's share on pre-agreed terms.

Mudaraba is financing in which one of the parties acts as a financing organization (provides capital), and the other provides professional skills, experience and knowledge for the implementation of the project. The profit is divided according to the previously established proportions. At the same time, losses are fully covered by the financing organization, if they did not occur due to illegal actions of the entrepreneur. Both transactions require extremely detailed reporting and a high level of transparency in order for profits and losses to be distributed fairly. Financing of these transactions causes certain difficulties, since micro and small enterprises are not always prepared for accounting and reporting on documents in the prescribed form.

Takaful (from the Arabic "kafala" - guaranteeing each other or joint guaranteeing) - the equivalent of Islamic insurance - is a mutual insurance scheme. Each participant makes a contribution to the fund, which is used to support the group at the right time, for example, in case of death, loss of crops or an accident. Paid surcharges are invested in accordance with the principles of Shariah in order to avoid an interest rate.

Islamic finance allows the use of blockchain technologies for the organization and conduct of transactions carried out in accordance with the principles of Islamic law. Islamic financial institutions are not prohibited from using the advantages of blockchain and new technologies if they comply with fundamental moral principles. To conduct transactions used in microfinance, one of the most reliable forms of concluding digital contracts can be used – smart contracts that ensure absolute transparency of transactions and avoid any illegal practices that distort the morality of Islamic finance: maysir (gambling), dharar (harm), tadlis (fraud) and garar (uncertainty). Transactions made using smart contracts are safe and do not carry risks.

The ecosystems of Islamic finance allow the use of blockchain technologies for the organization and conduct of transactions carried out in accordance with the principles of Islamic law. Islamic financial institutions are not prohibited from using the advantages of blockchain and new technologies if they comply with fundamental moral principles. To conduct transactions used in microfinance, one of the most reliable forms of concluding digital contracts can be used – smart contracts that provide absolute transparency and avoid any illegal practices that distort the morality of Islamic finance: maysir (gambling), dharar (harm), tadlis (fraud) and garar (uncertainty). Transactions made with the help of smart contracts are safe and do not carry risks that often interfere with transactions.

HAQQ blockchain can be used to create projects and platforms for Islamic microfinance. This blockchain network fully complies with the rules of Shariah, has its own digital currency and a Fatwa issued by the well-known Shariah scholars.

The Evergreen DAO Fund, funded by the issue of Haqq base tokens and managed by network participants, is designed to support innovative projects for the international Muslim community. High bandwidth makes Haqq an ideal tool for implementing digital crowdfunding campaigns.

IslamicCoin is a digital currency conforming to the norms of Islam and Shariah, functioning in its own blockchain Haqq, which means "Truth". Already at the stage of closed sales, IslamicCoin aroused huge investor interest and was able to raise more than $ 200 million in just a few weeks. Unlike technically outdated Bitcoin and Ether, which have a lot of problems, IslamicCoin uses the full power of the most progressive blockchain technologies and is based on the most fair and reliable ideology and rules of conduct.

Successful investors choose ideologies, technologies and prospects based on something more than minor fluctuations in price charts. For almost 20 years of the existence of a new type of digital money, cryptocurrencies have not brought a drop of real value into this world, have not made people free, independent and happy.

And this means that it's time for a new type of finance based on responsible choices and new values!