Financial inclusion through Islamic microfinance

18 August, 2017      400



Exploring Islamic microfinance principles and facilities within Asean would bring significant returns when it comes to engaging the lower income community, writes Tun Musa Hitam.

According to statistics from the World Bank, an estimated two billion adults worldwide do not have access to basic financial services and facilities.

Globally, 59 percent of adults have no access to institutional financial services reported that weak credit as a key reason for them being unbanked.  This proves that the financial system in itself is far from being affordable to all and is not designed to fit the low income population.

Realising this fact and the need to respond to it efficiently and proactively, the World Bank and public and private sector partners collaborated towards establishing the Universal Financial Access by 2020 (UFA2020) initiative to promote financial inclusion. The UFA2020 aims at enabling at least one billion people to gain access to a transaction account via specific targeted initiatives.

Dwelling on this issue, we can see the rise of the microfinance industry to serve the unbanked and underserved demographic to push for better financial inclusion. Financial inclusion is key to inclusive and sustainable economic growth.  Assisting the poor with microfinance services and facilities help them manage risk, build assets, reduce income inequality and this will ultimately contribute to economic growth.

Looking at the broader context in ensuring economic sustainability, income gaps must be reduced as well as the ability to provide economic support to the different demographic sectors. In doing so, financial inclusion stands as the best possible solution and what better way to provide better access to financial inclusivity than microfinancing. The microfinance industry is a fast growing industry and it provides support to the economic system as it is more resilient than the traditional banking sector. 

Banking the unbanked and underserved demographic has paramount implications in the financial policy areas as well. Better financial inclusion would change the way firms, corporates and consumer respond to financial triggers and ultimately impact the efficiency of the monetary policy. As a matter of fact, greater inclusion would push for interest rates to be a more effective policy tool to facilitate the maintenance of price stability.  To use interest rates as a primary policy tool could only happen with greater financial inclusion.

As Asean continues to strengthen its position as an emerging economic powerhouse, its member states must continue to seek out more innovative means of unlocking the economic potential of the region.

Asean is home to more than 60 percent of the world’s Muslim population. The region is ranked as the world’s seventh largest economies, with a good mix of economies that varies in terms of size, stages of development and economic structure.

Exploring Islamic microfinance principles and facilities within Asean would bring significant returns when it comes to engaging and activating the lower income community towards contributing to the economy.

Islamic microfinance serves the two rapidly growing industries – microfinance and Islamic finance.  It has the potential to satisfy the demand of the masses as well as combining the Islamic social principle of caring for the less fortunate in providing them better financial access and options. As the main aim of the microfinance industry is to alleviate poverty, Islamic microfinance is a branch of that with Islamic financial principles.

The growth of Islamic microfinance in the region has been supported by strong, continuous and concerted efforts and roles played by the regional governments. Many of the governments are opening their doors to welcome Islamic microfinance to setup locally. They are also learning as well as sharing knowledge and best practices between each other in terms of how best to launch Islamic microfinance to meet the local demands and respond well with the local policy and regulations.

With the advancement in curating more economic and financial facilities, Islamic microfinance has also broadened its reach to not only serve the poor demographic but also providing assistance to the struggling small and medium enterprises (SMEs).

SMEs are now looking at Islamic microfinance to consolidate its financing ecosystem – more options for the SMEs to boost their activities. SMEs and high-growth start-ups are the backbone of the future economies in terms of employment generation, opportunity, sustainability and economic growth. In Asean, start-ups and SMEs are set to be the rapidly growing economic contributor in the next century and its entrepreneurial ecosystems have already achieved multiple $1-billion startup valuation.

The Islamic microfinance industry is still in the nascent stage in Cambodia.

Growth has been slow albeit the demands for it. Recently, the Cambodian government has opened its doors to two Islamic microfinance institutions into Cambodia namely Amanah Ikhtiar Malaysia (AIM) and Yayasan Pembangunan Ekonomi Islam Malaysia (YAPEIM).

These two institutions are supporting the socio-economic development in Cambodia via micro-credit lending. The recent interest in the Islamic microfinance industry is backed by the huge size of the Islamic finance industry which will reach $2.7 trillion by the end of 2017 globally.

The expanded role of microfinance to also include SMEs is a proof of demands for Islamic microfinance facilities to have more Shariah-compliant products and services.

As the industry blossoms, we can see more and more of these institutions injecting Islamic principles in their services and facilities. AIM is currently setting up its branch office in Cambodia while YAPEIM is slated to come in by the first quarter of 2018.

Many of you must be asking, what do we at WIEF have anything to do with promoting Islamic microfinance in Cambodia as well as in the region?

WIEF provides the platform for nations and financial institutions to promote financial inclusion via Islamic microfinance. This is in-line with WIEF’s intention to elevate its purpose towards being a platform for value-neutral discourse and a vital instrument for multilateral diplomacy between advanced and rising economies.

We believe that the future for Islamic microfinance is unlimited. It is about time for us to push Islamic microfinance to new heights.

Tun Musa Hitam, is currently chairman of the World Islamic Economic Forum (WIEF) Foundation. He was Malaysia’s Deputy Prime Minister until 1986. In the course of his service in the Malaysian government, he held various positions including Minister of Home Affairs, Education, Primary Industries and Trade and Industries and chairman of the Federal Land Development Authority (FELDA).

Original Source:


( No comment has been added. )