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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.

3 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 microloans…the 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.
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.
The Real Power of Financial Help
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. 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 well…So 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.
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 instilled”1. It means that financial help can help
someone remain strong on his faith, i.e. financial help has
a power on someone’s beliefs.
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 Grameen’s 16 Decisions, should
be memorized and implementing in people’s lives. We find
statements that come from Grameen’s with some
modifications – and without “we shall keep our families
small”. Besides they give some Islamic reminders to the
borrowers during meetings with them.
1 Surah 9, ayat 60.
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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 Allah’s 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 Allah’s 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 self-sufficient 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 someonelse’s job, that we
are satisfied with giving the poor access to capital and this
is enough. This is why I wanted to 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 non-Islamic organization are doing it, we should be
doing it even more because as Muslims if Allah gives you
the power and capabilities to change people’s 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 du’a 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 Shari’ah 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 Shari’ah-compliant or not ? Of course we
2
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 don’t 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 promote…I 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
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 Shari’ah-compliant than really
Shari’ah-compliant, and we need to go beyond
just saying it, by proposing Shari’ah-based
alternatives.

Third, Shari’ah is too often see – even by
Muslims themselves – as a don’ts list. We
should consider Shari’ah 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
Reported by Al Bukhari.
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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.
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 (let’s 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.
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:
chemistry’s, a restaurant, a delivery company, an afterschool tuition association, a gym…
Each project has a different risk/profitability profile: the
chemistry’s 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.
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.
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 chemistry’s
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.
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
All investors and entrepreneurs will prefer
companies and associations taking part in the
Positive Circle (the restaurant manager goes to
the chemistry’s, students of the association
benefiting from tuition services also go to the
gym, the chemistry’s uses the delivery company,
etc.)
which
strengthens
solidarity
and
brotherhood among the social network.

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…
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.
10) The establishment of a fair economic system, which
respects the environment, does not leave anyone aside
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.
In the microfinance sector you have what others
don’t, 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.
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 microfinance’s 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:
You are the pride of the Ummah and you have the divine
framework others don’t 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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