Grameen La Riba Model: A Strategy for Global Poverty Alleviation

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Micro-finance can be a powerful tool for a poverty alleviation strategy. But the experiences of the micro-finance institutions (MFI) in 40 years since Dr. Mohammad Yunus started lending small amounts in Chittagong, Bangladesh have demonstrated that micro-finance is not a panacea to poverty and should be implemented alongside complementary development programs. A holistic approach to development that emphasizes the provision of education, healthcare, basic infrastructure, ownership empowerment, and participatory governance can enhance the effectiveness of micro-finance. The conventional micro-finance industry has created access to the financial system for millions of clients who were previously excluded, often because they were poor and/or they did not have the collateral to guarantee the loan. Micro-finance provides finance to these people, many of whom used used micro-finance to increase their income and consumption. This success is not without criticism, however, particularly the use of debt and riba based financing. Creating debt among people with very few assets beyond their unskilled or low skilled human capital (labor) and shouldering them with high interest payments (up to 100% annually as with Compartemos) may not be sustainable if borrowers do not earn enough to repay the principal plus interest and still have enough of income to provide for their families. This problem with conventional micro-finance, as well as limited evidence for clients graduating from micro-finance, leads to a search for better methods of providing business financing which can be filled using products developed by the Islamic financial industry to comply with the prohibitions of riba and the concerns for fairness and justice between parties in business as enumerated in the Quran and the Sunnah. The use of Murabaha provides a way to train clients on record-keeping, screen out clients who do not repay financing, and find those best able to succeed with musharaka financing while incorporating micro-finance best practices. Musharaka financing, which we believe is the essence of Shari'ah based financing, provides a way for an MFI to equitably share its profit and loss with it's clients. Profit-sharing does not have an upper limit on it's profitability like riba-based financing. It also provides poor clients insulation from some of the costs of business failure and will shift some of the risks from poor clients to an MFI which is better able to diversify it's risks. The future of Islamic micro-financing is promising if it can successfully integrate the conventional micro-finance best practices. The poor will support the Shari'ah based micro-finance but, like Islamic macro-finance, this support will depend on whether the products are at least as cost-effective and competitive as the conventional alternative. We posit that the fundamentals of classical Shari'ah concerning (i) equitable risk and return sharing between the lender (MFI) and the borrower (client) and (ii) helping the poor, especially the 'poorest of the poor,' to be self-sustaining, provide the necessary foundation for an Islamic micro-finance model, Grameen La Riba model, that is better suited to help the poor increase their sustainable income and eventually escape poverty.

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Journal of Islamic Economics, Banking and Finance

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